A credit score can give you insight into your financial health, even though it’s designed to show lenders your risk profile as a borrower, meaning how likely you are to pay back what you owe on time. The higher your score, the more likely you seem to be financially responsible.
If your score is lower than you want, there are some straightforward steps you can take to improve this number.
Why should you improve your credit score?
Improving your credit score shows prospective lenders you're able to manage debt responsibility. That means the higher your credit score, the more the better rates you’ll qualify for on loans and credit cards. Considering lower interest rates can save you thousands of dollars over time, it's worth it to aim for this perk.
On the flip side, a low credit score could increase the chances of you being denied for financing, or if you do get approved, you’ll be offered higher interest rates. In other words, having a low credit score can cost you money.
How to improve your credit score
The good news is that there are several ways to improve your credit score. While some of these you can work on within a few days, some may take weeks or months. What’s important is that you consistently work towards these methods over time.
Open a credit account
If you’re new to credit, you will need to have an account in your name that reports to the credit bureaus. That way, you can start to build your credit history. If you’re worried about having no or limited credit history, do not fear: there are various products aimed at those who are looking to build their credit.
Some of these options include:
- Secured credit cards: These types of credit cards ask you to put down a refundable deposit that acts as collateral. Your credit limit is usually the same amount as your deposit amount. As you make small purchases, the credit card issuer will report your payment activity.
- Credit builder loans: This type of loan usually requires you to pay the loan off before you get the money. Instead of receiving the loan proceeds right away, it’s held in a savings account for you until you pay the loan off, at which point the funds are disbursed to you. Brigit is a financial wellness app that offers a credit builder loan touted by celebrities like Ashton Kutcher and Kevin Durant.
- Credit reporting services: There are several kinds of services that take your cell phone, rent, and other types of utilities accounts and report payment activity to the credit bureaus. Some, like Experian Boost, may charge a small fee, though it may be worth it if you're not interested in taking out a loan or opening a credit card.
Become an authorized user
Sometimes it may be worth it to ask a relative or a trusted friend who has good credit to add you as an authorized user on their credit card. They're still the primary cardholder, but your name will be added on and included in that card’s credit history. Doing so can help you establish credit and benefit from the primary cardholder's positive credit history.
You don’t need to use the card if you don’t want to. As long as your relative or friend agrees to add you on, that’s all that is needed to help improve your credit score.
Check your credit reports
Looking at your credit reports can help you see where you stand with your credit profile. For example, if you have a few missed payments and it negatively affects your score, you can improve it by making consistent on-time payments.
It’s also a good idea to check your credit report, as it can sometimes have errors. In fact, these erroneous marks can have negative impacts. You can get your credit reports from all three credit bureaus — Experian, Equifax, and TransUnion — for free at AnnualCreditReport.com.
When you get your reports, look them over. If there are any errors, make sure to dispute them.
Lower your credit utilization
Your credit utilization compares your credit limit and the amount you have charged on your revolving accounts, like your credit cards and lines of credit. To calculate your credit utilization, take the balance on all your revolving accounts and divide it by your total credit limit to arrive at a percentage.
For example, say you have five credit cards with a combined $30,000 credit limit, and all your balances add up to $7,000. Your credit utilization is 23%.
Having a lower credit utilization will improve your score, as it shows you’re able to handle revolving credit responsibility. If it’s too high, you pose a higher risk to the lender because it appears you may be stretched too thin financially.
Many experts recommend keeping your credit utilization to 30% or less, though the lower the better. To improve your credit utilization, pay down your balances and aim to keep it as low as possible.
Pay your bills on time
Your payment history is one of the most important factors when calculating your credit score. So much so, that one missed payment could have immediate consequences.
Yes, it means making sure you pay your bills on time, as payments more than 29 days past due could have negative consequences. To help you remember payments, consider setting up alerts.
You can also set up automatic payments, though it’s important to check your bank account regularly so you have enough funds.
Deal with past-due payments
If you have accounts with missed payments or are in collections, you’ll want to address them right away. The longer you wait, the worse it can get.
Having all your accounts current can boost your score, even if late payments tend to stay on your credit report for up to seven years. It can also help to stop more negative remarks about late payments.
Limit your requests for new credit
There are two different types of inquiries into your credit report: hard and soft inquiries. The latter won’t affect your credit score, such as when you want to get pre-approved for credit, or to check what rates you may qualify for.
A hard inquiry is when you submit a full application for lending or credit products, such as auto loans and mortgages. The financial institution reviewing your file wants to look at your full credit report. In this instance, your credit score could temporarily be negatively affected.
While the occasional hard inquiry won’t necessarily be a major deal, having too many all at once can. It may signal to lenders that you need money because you may be experiencing financial hardships and could pose a bigger risk to them.
There are exceptions, such as if you’re shopping around for a mortgage — several hard inquiries within a span of a few weeks, for instance, may only count as one hard inquiry. Otherwise, it’s best to err on the side of caution and limit how many applications you submit at once.
How credit scores are calculated
Credit scores are calculated through different scoring models based on your credit history from the three major credit bureaus.
Two of the most popular ones are FICO and VantageScore, which most lenders use. Each scoring model has various factors that it uses to calculate your credit score. There may also be different scoring models depending on loan types. For example, FICO has credit scoring models for credit cards and auto loans.
While the specifics tend to differ, most of these credit scoring models will have credit scores ranging from 300 to 850, with a higher score indicating a borrower poses less risk. Many of the weighted factors are also similar, including payment history, credit utilization, and age of accounts.
As you exhibit positive behavior, all of your credit scores should go up. Yes, there may be variations. In general, if your FICO score goes up for instance, the chances are your VantageScore will as well.
Frequently asked questions (FAQs)
How long does improving your credit score take?
How soon it takes to improve your credit score will depend on several factors, including your current credit score, and what actions you’re taking. In general, those with lower scores could see more drastic changes within a shorter span of time. The same goes for those who improve influential factors to credit scores, such as making on-time payments.
Raising your credit score does take some patience, because it can take anywhere from a few weeks to several months.
Does paying the minimum payment on my credit card improve my score?
The short answer is no, paying the minimum payment won’t automatically improve your credit score. The truth is that you're required to pay at least the minimum balance each month so you can make on-time payments. It’s the fact that you’re making payments on time that will build or improve your credit score.
Of course, paying more of your credit card balance could lower your credit utilization. Ideally, you’ll pay off your balance each month so that not only are you lowering your credit utilization, you’re also avoiding interest charges.
Is a Credit Privacy Number (CPN) legal?
A CPN is illegal. It is a number that is created similarly to a Social Security number (SSN) and is marketed as one. Scammers will market these as ways to hide poor credit or bankruptcies by using a CPN instead of your SSN when applying for a new loan.
If you use a CPN, you could face serious consequences such as identity theft, or losing all your money.
