How to Raise Your Credit Score
What is a good credit score?
How do I find my credit score?
How do I improve my credit score?
Your credit score is a critical component of your financial health. The better your score, the easier it’ll be to get credit (think: credit cards, car loans, student loans, mortgage loans, etc.) and the better the terms of the loan will be.
If you’re stressed about paying your bills on time during the Covid-19 pandemic and it negatively affecting your credit score, you’re not alone. Millions of Americans who have lost their jobs or seen reduced hours due to the pandemic are concerned with how their credit will be impacted during the crisis.
First things first: If you can’t pay your bills, you need to contact your creditors early and often. After all, late payments can really ding your credit score. Call your lenders and explain your financial situation. Many are offering relief that will temporarily pause or reduce monthly payments, but you have to be proactive. The good news is, the banks and the credit card companies are more prepared than ever before to offer financial accommodations right now.
If your score has already been negatively impacted because you’ve missed payments, for example, we’re going to dive into ways you can get your score back up. If you haven’t seen an impact on your score, you should still read on so you know how to protect yourself in the future. For now, let’s rewind a bit and start with the basics.
What is a credit score?
A credit score is a three-digit number that typically ranges from 300 to 850. It’s meant to give lenders (banks providing mortgages, credit card companies or car dealerships financing auto purchases) an idea of your ability to repay loans. A lender will pull your score before lending you money and, based on what they find, will decide if you qualify for a loan and what interest rate they’ll charge. In general, a higher score means it’ll be easier to get a loan and you won’t have to pay as much in interest.
Your score depends on a variety of factors, including payment history, credit utilization rate and length of credit history. Credit-rating companies will look at your credit file and, based on these factors, assign you a number.
There are many types of credit scores, including FICO, created by the Fair Isaac Corporation and the model used by most lenders. Another well-known type is VantageScore, which was developed by the three major credit bureaus (Experian, Equifax and TransUnion).
What is a good credit score?
Credit score ranges vary on the type of model used (FICO or VantageScore). Here are the FICO Score ranges, according to Experian:
300-579: Very Poor
740-799: Very Good
Here are the VantageScore score ranges, also according to Experian:
300-499: Very Poor
An “exceptional” or “excellent” credit score can help you land the best rates from lenders, which could ultimately save you thousands of dollars. On the other end of the spectrum, if you have a “very poor” credit score, you many not even be approved for credit. If you’re in the “fair” range, you may be approved for credit but won’t qualify for the most competitive rates.
How do I find my credit score?
Most credit card issuers provide credit scores to their customers for free. Some provide free FICO Scores, while others provide free VantageScores. Log on to your credit card’s site to find yours — if you can’t find it, call the company and ask if they have it.
You can also check with your bank or loan company. Your score may be on your bank or loan statement, or you may be able to find it online by logging into your account. Or, you can check your score through free sites like Credit Karma.
How do I improve my credit score?
Now that you know your score, let’s improve it.
The good news is, raising your score isn’t that hard if you know what to do. After coaching thousands of people on fixing their scores, I’ve developed an action plan to get your score up quickly and keep it there. Follow these steps and you’ll be well on your way to bumping up your score.
1. Get you credit report and check it for errors
So you know your credit score, but now I want you to pull your credit report. Your credit report is a more comprehensive view of your credit and breaks down exactly what is actually affecting your credit score. It’ll show if you have a history of late payments, if you’re using too much credit or if you have any other suspicious financial activity.
It’s critical to look through your report and make sure there are no mistakes that are hurting your score. And right now, it’s easier than it’s ever been to check your credit: Everyone is entitled to get free weekly credit reports from the three national credit reporting agencies (Equifax, Experian and TransUnion) for the next year. Go to www.annualcreditreport.com for your free report and comb through it for any errors that could be damaging, like late payments that were actually paid on time or credit limits that are lower than they should be.
If there are errors, you’ll have to send a certified letter to the credit agency, which will be required to correct inaccurate or incomplete information in your report within 30 days after it’s pointed out to them.
2. Automate your bills so you never miss a deadline
This may be the most important step. Missing payments, even just one, can really hurt your credit score, so I want you to set up autopay on all of your bills, including rent or mortgage payments, utilities, internet, phone bill, car payments and credit card bills.
You may be able to do this online. If not, pick up the phone and tell your credit card company or cable or phone provider that you want to automate your payments. This way, you’ll never miss a payment again. Plus, you’ll free up valuable time by not having to sit down and write a check for your bills every month.
3. If you have missed payments, make them as soon as possible
It’s never too late to clean up your act. Get yourself current as quickly as you can and then stay current. Your score will begin to improve within a few months — and the longer you keep it up, the more noticeable the increase will be.
4. Keep your balance well below your credit limit
Of all the factors you can control and improve quickly, how much you owe is probably the most powerful. It’s important to know what your credit limit is — then, keep your usage below 30% of your available credit.
For example, if your credit limit is $10,000, you want to keep your balance below $3,000 at all times. Anything over that and your credit utilization is getting too high.
5. Beware of the credit card transfer game
For years, people have been saving money by transferring high-interest card balances to low-interest cards. This can be helpful, but be aware that using one credit line to pay off another sets off credit-score alarm bells, even if all you’re doing is consolidating your accounts.
All other things being equal, your credit score will be higher if you have a bunch of small balances on a number of different cards rather than a big balance on just one or two.
6. If you rack up high balances, pay your credit card bill early
The “amounts owed” part of your credit score is based on the balance due listed on your most recent credit card statements. So even if you pay your bills in full each month, running up high balances can still hurt your score. You can avoid this problem by paying down all of, or part of, your bill before the end of your statement period, thus reducing the balance due that will be reported to the credit bureaus.
7. Hang on to your old accounts, even if you’re not using them
Part of your credit score is based on how long you’ve had credit accounts. Closing old accounts shortens your credit history and reduces your total credit — neither of which is good for your credit score. If you have to close an account, close a relatively new one and keep the older ones open. Also, closing an account will not remove a bad payment record from your report. Closed accounts are listed right along with active ones.
Along the same lines, you want to continue using your old cards, even if it means putting just one charge on each of them every month. This will keep the account open, which will keep your credit history nice and long and, ultimately, raise your score.
9. Show that you can be responsible
The best way to raise your score is to demonstrate that you can handle credit responsibly. That means not borrowing too much and paying back what you do borrow on time.
Don’t open new accounts just to increase your available credit or create a better variety of credit. This is especially true if you’re just beginning to establish a credit history. Adding a lot of new accounts may look risky, and it will definitely lower the average age of your accounts, which can hurt your score if you don’t have much of a track record. You should only open new credit accounts if and when you need them.
10. When you’re shopping for a loan, do it quickly
When you apply for a loan, the lender will “run your credit” — meaning, they’ll send an inquiry to one of the credit-rating agencies to find out how creditworthy you are. Too many of these inquiries can hurt your credit score, since that could indicate you’re trying to borrow money from many different sources.
Of course, you can generate a lot of inquiries doing something perfectly reasonable, like shopping for the best mortgage or auto loan by applying to a number of different lenders. The scoring system is designed to allow for this by considering the length of time over which a series of inquiries are made. Try to do all your loan shopping within 30 days, so the inquiries get batched together and it’s obvious that you’re loan shopping.
11. Know the difference between a “soft inquiry” and a “hard inquiry”
The credit bureaus recognize the difference between you checking your own score (what is called a “soft inquiry”) and the banks or lending organizations checking your score (a “hard inquiry”). Too many hard inquiries can lower your score, but soft inquiries don’t count against you at all. So feel free to check your credit score as often as you want.
My final piece of advice: Beware of companies that say they can “fix” a bad credit report or give you a new “clean” one overnight. There are no quick fixes. It takes time and a consistent record of responsible bill-paying to clean up your credit.