Credit / Credit Score
7 min Read
By Brian Hill
Your credit score can have a big impact on your finances–particularly the amount of credit available to you. Credit scores are used by lenders of all kinds–including credit cards and mortgage companies–when they decide to lend you money.
Your credit score is not a static number, and it changes frequently based on financial behavior. Late or missed credit card payments, foreclosures, and maxed-out credit cards all negatively impact your credit score. The good news is that you can take certain actions to raise your credit score. You can take proactive steps to improve your credit score relatively quickly by following some tips to bump it up to 100 points above where it currently stands.
1. Get Your Free Credit Report
Get your free credit report from the three credit reporting agencies: Experian, TransUnion and Equifax. Your score is based on what is included in the reports–factors such as length of credit history, payment history, credit inquiries and more affect the score’s fluctuation. Each agency determines your report slightly differently, so review the reports and correct any errors in your credit report by sending a letter and documentation of the error to the credit agencies.
2. Know How Your Credit Score Is Calculated
Once you have your score, know what that number means so you can take the steps to raise it.
“Your payment history accounts for about 35 percent of your score,” said Carrie Schwab-Pomerantz, a certified financial planner at Charles Schwab. “Increase the length of your credit history. This accounts for about 15 percent of your score.”
She advises an easy solution: Keep your credit card balances low.
“Ideally, you should keep the amount you borrow below 25 percent of your available credit limit,” she added. “This accounts for about 30 percent of your credit score. Minimize the frequency of new card requests. This accounts for 10 percent of your score. Keep a combination of different types of installment debt–such as car loans and mortgages–and revolving debt–like credit cards. This makes up the remaining 10 percent.”
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3. Improve Your Debt-to-Income Ratio
The next step to improve your credit score is by improving your debt-to-income ratio, otherwise known as your DTI. You can improve your DTI by calling your credit card company to ask for a credit limit increase, working to pay down the balance or even using any cash-back rewards to pay down the balance.
“I always advise clients who want to bump their scores to pay their credit cards to below 30 percent of the limit,” said Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage. “Being close to the limit can tank your score. I have seen this strategy boost scores 30 or more points.”
The math is easy: pay down that balance = pump up your score!
4. Keep Your Credit Information Up to Date
Another good strategy for how to raise credit scores involves updating credit card companies with any increases in your income. Higher income improves your ability to make payments on time, according to lenders. Informing lenders of your higher income makes it easier for them to grant you a credit line increase, which in turn increases your available credit, decreases your DTI ratio and can raise your scores. It’s a win-win solution all around.
5. Don’t Close Old Credit Accounts
Don’t close old consumer credit accounts–even those you haven’t used in a while. Closing those accounts reduces your available credit shown on your credit report, as well as lowers the length of your credit history, which in turn can hurt your overall score.
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6. Make Payments on Time
If your payment history shows you’re consistently late with your payments, check with the lender to see if it’s possible to remove one or more incidents from your credit report. But take it from an expert: punctuality is the name of the game. “Always pay on time,” suggests Byron Ellis, a certified financial planner with United Capital Financial Advisors. “Late payments can really damage your credit score.”
7. Monitor Your Credit Report
You should regularly keep a watchful eye on your credit report to make sure it’s consistently accurate. “If you regularly monitor your credit, keep an eye on what dates your creditors actually report your balance,” explains Michael Dinich, founder of Your Money Geek. “This is especially important for people trying to boost their scores quickly. If a lender has already reported the balance for the month, a borrower may want to focus on another balance.”
8. Keep Your Credit Balances Low
“A strong and almost secret trick to improve your credit score is keeping your balance at zero,” said Natasha Rachel Smith, chief strategy officer at Cryptolytx. Although that might sound nearly impossible, make it a point to pay off charges as soon as you can.
“If you get paid once a week or twice a month, pay off your balance when you receive your paycheck,” Smith said. “For new credit card users with a low spending limit, it is easy to exceed the recommended 30 percent to maintain a good or excellent credit score without realizing it.”
9. Utilize Balance Transfers
Banks and credit card companies are constantly trying to lure new customers by offering 0% interest on balance transfers for new credit card customers. J.R. Duren, a terms editor at The Balance, says one trick to increasing your score fast is to use balance transfers to make sure all your credit card balances are under 30 percent of their respective credit limits.
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10. Make High-Impact Payments
Not all debt is created equal. Paying off certain things before others can net you a valuable credit score increase, even if your total debt is the same. “As you evaluate options for repaying debt either through debt consolidation or other forms of cash raise, keep in mind that paying off $20,000 of credit cards might boost your score 100 points, whereas paying the same amount of student loans or mortgages will barely bump your credit score, if at all,” said Sahil Gupta, CEO and co-founder of Patch Homes, a provider of debt-free, home equity loan financing.
“In general, revolving debt and some forms of unsecured debt are more high-impact than secured debt. So, prioritizing credit card and personal loans payment above other loans is a good strategy,” Gupta said. “The way to make a higher impact via secured loans like mortgages etc. is to re-cast them. Ask your lender to redo the principal and other terms of the mortgage. That could help bring down payments and boost credit.”
11. Become Someone’s Authorized User
“Find a relative or friend with good credit who is willing for you to become an authorized user on their card,” said Paul Lightfoot, president of Optima Asset Management. “Once authorized, their account will show up on your credit report. You are essentially ‘inheriting’ the credit history of that account,” he added. “The other person’s account must have a good history of payments and an excellent balance ratio for this to succeed. This approach is ideal for young adults who do not have a long credit history.”
12. Obtain Both Types of Credit
“Have both installment and revolving credit on your file,” said Cody Green, CEO of USA Drives, an auto loan site. “Installment credit is paid off over a period of time that you can’t access again (i.e., auto financing or personal loans). Revolving credit is any credit that once you pay off becomes available to you again (i.e., credit card or line of credit).”
“Apply for credit thoughtfully–don’t make too many inquiries,” Green said. Soft credit inquiries are used for informational purposes, and hard credit inquiries occur when lenders pull your credit when you apply for any loan. The hard credit checks can knock points off your score, so do it sparingly.
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Jake Arky contributed to the reporting for this article.
