How to improve your credit score (2024)

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If you want to buy a house or a car, rent an apartment or even apply for a new job, your credit score matters.

Lenders, landlords and employersview your score as a snapshot of your creditworthiness. They all want to know if you're responsible with money.

If you have a good credit score, you'll get better offers for loans: lower interest rates on mortgages, car loans, credit cards and the rest. With an iffy credit score, it will cost you more to borrow, and it may lead employers to wonder if you're in financial distress, and therefore more likely to be a theft risk.

There are some 220 million consumers with credit files in the United States, according to VantageScore, a credit scoring company. It said approximately 36 billion pieces of credit data are recorded - every year. That comes out to more than 15 charges per consumer per month.

That gives consumers lots of opportunities to improve - or to mess up - their scores.

What makes up my score?

Before you try to improve your score, you have to understand what it's made of.

There are many different kinds of credit scores. Some are used by landlords and employers, and even your car insurance companyits own version of a credit score.

We're going to focus on the scores that are primarily used by lenders.

The most commonly known is the FICO score. Its highest score is 850 and the lowest is 300. Competitor VantageScore uses the same scale as FICO. (Note older versions of VantageScore ranged from 501 to 990.)

There are others you've never heard of, but they all work basically the same.

Let's dissect the FICO score as an example.

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Your FICO score is made up of several components that take into account different parts of your credit report, and each component makes up a different percentage of your score: Payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent) and new credit (10 percent).

Let's look a little closer and see how you can improve your score by improving your standing in each category.

Payment history (35 percent)

Your payment history is the largest part of your credit score, and it's no wonder.

Lenders want to know if you're going to pay them back, and pay them back on time. The best way for them to see this is by looking at your past payment history.

Paying on time, even if you can only afford to pay the minimum, is the most important thing you can do to improve your credit score.

Over time - and yes, it will take time - any negative payment history will be outshined by on-time payments. In the meantime, the score will consider how late your payment was, how much was owed, when it happened and how often.

In addition to your payment history on mortgages, credit cards and other items, your payment history will also consider bankruptcies, lawsuits, liens and wage garnishments.

Amounts owed (30 percent)

Even if you pay all your bills on time, your credit score can be hurt if you owe too much money.

How much is too much? That depends.

Rather than set a dollar figure as the bar, instead, your credit score will compare how much you owe with how much credit is available to you.

This is what's known as your credit utilization ratio. The lower the number, the better.

Credit utilization ratio

Let's say Jane owes $50,000 between her car loan and credit cards, and her total available credit is $100,000. That gives her a 50 percent credit utilization ratio, and that's not too good.

But Anne owes the same $50,000 on her car and credit cards, but she has $200,000 of available credit because she also has a home equity line of credit. Her credit utilization ratio is only 25 percent - pretty good.

If lenders see you using too much of your available credit, they might think you're overextended and you rely on credit too much. That would make you a bigger risk for the lender.

Credit experts say you should keep the balances below 30 percent.

"But if you're trying to raise your score in a hurry, keep your utilization ratio below 10 percent," said Beverly Harzog, a credit card expert with U.S. News and World Report and author of "The Debt Escape Plan."

One way to boost your score is to pay down your balances, or even increase your lines of credit but not use more of what's available to you. (We don't recommend raising your lines of credit to improve your credit score unless you know for sure you won't use them.)

Length of credit history (15 percent)

Who would you rather lend to? Someone who has never borrowed money before, or someone who has taken several loans over the years and paid them all back?

You'd rather lend to the experienced borrower with a positive track record of repayment.

That's why credit scores look at your length of credit history - how long you've successfully been paying back your debts.

So a longer credit history will be good for your score.

Credit scores will look at how long your oldest account is, how long it's been since you've used your accounts and the average age of all your accounts. If a lot of your credit is new, lenders may wonder if you're in financial trouble.

There are several ways to use this to increase your credit score.

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One strategy is to see if a family member or friend would open a new credit account with you or if they'd add you as an authorized user on one of their credit cards. You'll inherit that person's credit history in part, and that will help you improve your score.

Another way to keep your score higher is to keep open your oldest credit card. It's common, over time, for consumers to accumulate many cards, and sometimes, they may decide it's time to cull the cards they no longer use.

But canceling your oldest card - or any account - can hurt your score.

"If you close the account, you lose the available credit you had with that card," Harzog said. "This can increase your credit utilization ratio and drop your score."

One way to get around this, she said, is to get a new credit card that meets your needs before you close out the old account. Depending on the credit limit you receive, this could help to offset the "available credit" that you'll lose when the old card is cancelled.

Credit mix (10 percent)

Lenders want to know that you can handle different kinds of borrowing: credit cards, installment loans, mortgages, finance company accounts and retail accounts.

You don't have to have them all to have a solid credit score, and of course, we'd never recommend you open a credit account that you don't need.

Just be aware it's part of your score, though only 10 percent and won't have the biggest impact on your score.

New credit (10 percent)

Having too many new credit accounts won't be great for your score.

Lenders will wonder why you applied for so much credit at once. Were you worried about not having resources to buy what you need or pay your bills? Are you a greater risk for the lender?

It's never a good idea to open several accounts close together, especially if you think you'll soon apply for a mortgage, car loan or other borrowing.

What's not part of your credit score?

There's a lot your score does not look at, according to FICO:

• Your race, color, religion, national origin, sex and marital status.
• Your age.
• Your salary, occupation, title, employer, date employed or employment history.
• Where you live.
• Any interest rate being charged on a particular credit card or other account.
• Any items reported as child/family support obligations.
• Certain types of inquiries (requests for your credit report).
• Any information not found in your credit report.
• Any information that is not proven to be predictive of future credit performance.
• Whether or not you are participating in a credit counseling of any kind.

Keep in mind that some other kinds of credit reports, such as those used by landlords and employers, may include some of this information.

Why are my credit scores different?

You'll probably find that your credit scores with the three bureaus - Equifax, Experian and TransUnion - are slightly different.

This is because while they may all use the same credit scoring formulas, they may be looking at different data.

For example, you may have one credit account that was never picked up by one of the bureaus. Perhaps you're married, and one of the credit bureaus doesn't list the accounts that were opened under your maiden name.

Or, perhaps your credit report was merged with someone else's, or there may be other inaccuracies on your reports, something that's quite common.

Fixing those inaccuracies is one of the best ways to improve your score.

How do I check my credit report?

Every consumer, by law, can get one free credit report from each of the three major credit bureaus every year.

You can get that at AnnualCreditReport.com.

This won't supply your credit score, only your credit report.

When you check your credit reports, take a look at all the entries and make sure they're accurate. If you find an error, the bureau is required by law to investigate and make a correction.

Learn more about how to do that from the Federal Trade Commission.

To dispute an item on your report, contact the credit bureaus directly. You can reach Equifax online or at (800) 535-6285, Experian online or at (888) 397-3742 and TransUnion online or at (800) 680-7289.

Once the corrections are made, you may see your score rise.

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Warnings

Be wary: many companies, including the three credit bureaus, offer to sell you your report bundled with your score. But these are often "subscription" services or credit monitoring services that most consumers don't need, while others are only free for a trial period. The fine print is often tricky, so read carefully.

There are several online companies that offer free credit scores for consumers. These services do show you a credit score, but it may not be a FICO or VantageScore.

Still, the free scores have value.

"These 'educational' scores come with an analysis of how you're doing in each category related to your credit," Harzog said. "If you got a 'C' on the payment history part of the score, then you know you need to improve in that area."

She said all of these websites disclose what credit score version was used and which credit bureau supplied the information.

Or, you can buy a FICO score at myFICO.com for about $20.

What's a good credit score?

It depends on the lender because each will set its own criteria for what "good" means.

Generally, scores above 700 are considered good, while scores closer and over 800 are considered "excellent."

If you're considering a new loan or credit account, ask the lender what cutoffs it uses for "good," "excellent," and other categories. The lender's cutoffs are ultimately what will determine what kind of interest rates and terms you'll be offered.

A few more tips

Here are a few more ways you can improve your payment history, and ultimately, your credit score.

Consider setting up payment reminders with your online bank, or better yet, set up automatic monthly payments. If you don't want to go that far, many lenders and banks will send you emails or texts as a reminder to pay on time.

If you get a tax refund, a bonus from work or another lump sum - even if it's from a garage sale - direct those funds to pay down your balances. This will improve your credit utilization ratio and raise your score.

Also remember the faster you pay down your debt, the less you'll pay in interest overall - this will help your bottom line more than it will your credit score.

Take this example from our recent story about how to pay off holiday debt:

Let's say you spent $1,000 using a credit card with a 15 percent interest rate. Most cards set the minimum payment at 2 or 3 percent of the balance. Let's use 2 percent for this example.

Your minimum payment in the first month would be $20. If you stay on that course, it will take you 79 months, or more than six-and-a-half years, to pay off the card.

In all, you'll spend an extra $579 on interest, bringing up your actual holiday spending to $1,579.

Take the same example but for a 22 percent interest rate. It will take you 137 months, or more than 11 years, to pay off the debt by paying the minimum only.

Your interest cost would be a whopping $1,735, making your total holiday purchase cost $2,735.

Costly, for sure.

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Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com. Stay informed and sign up for NJMoneyHelp.com's weekly e-newsletter.