One of the biggest mistakes you can make with your credit is not paying attention to it until you actually need it. If you don’t focus on building credit early on, you might be in for an uncomfortable surprise when you try to take out a mortgage or car loan.
Improving your credit score before you need it is one of the best things you can do for your future self, because a little bit of intentional planning can potentially save you large amounts of money down the road.
With the US currently facing some of the highest interest rates in recent history, many people are realizing that even a 1% rate change on a 30-year mortgage might make their payments unaffordable. Plus, some employers and landlords may need to see a good credit score before hiring or approving you.
There are steps you can take right now to help improve your credit score quickly, though the size of the change and how fast it happens will depend on where you’re starting from.
1. Understanding credit and credit scores
Before you can make a plan to increase your credit score, understanding how it’s calculated can help you evaluate what areas need improvement. Here are the five factors that make up your FICO credit score (the most widely used score by lenders), and how much weight each category is worth:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Paying down high card balances and reducing your amounts owed (30%) will have a larger impact than improving the mix of credit accounts you have open (10%). Paying off balances is one of the best ways to build credit fast, as those new balances will get reported to the credit bureaus at the end of your billing cycle.
2. Checking your current credit score
Your credit score is a three-digit number that represents a thorough snapshot of your financial history. Two people might have the exact same numerical credit score despite having different numbers of accounts open, average ages of accounts, utilization ratios (percent of available credit currently used) and other factors.
Checking your current credit score, and the factors that contribute to it, is one of the easiest ways to identify areas for improvement. It’s also a great way to make sure you aren’t missing something important, like a bill you forgot to pay before moving or an old credit card account you forgot to pay off that’s now dragging your score down.
Many banks and credit card issuers now offer free credit score monitoring services through their websites or mobile apps. You can also get a copy of your credit report from each of the major bureaus, although that won’t usually show your score — just your credit history.
3. Establishing a solid credit history
The only word that appears more than once in FICO’s list of factors that affect your credit score (other than credit, of course) is “history.” Taken together, payment history and length of credit history account for half of your score, so establishing a solid credit track record is a great way to achieve the results you want.
If you’re just starting your credit journey, payment history is one of the easiest things for you to work on. Simply opening a credit card and responsibly paying the bill in full every month will give you high marks in the category with the heaviest weighting. The best part is you don’t need to spend a large amount of money to see improvements in your payment history. Since this category focuses on how often you make your payments on time, versus making them late, paying a $5 bill on time every month will improve your payment history just as much as paying a $5,000 bill on time would.
4. Making timely payments
Payment history carries the largest weight of the factors that make up your credit score. At its core, creditworthiness is a question of whether you will repay the money you’ve been lent, and the best way to prove you will is by consistently making on-time payments. Not only will this help you build your credit score, but it will also save you from racking up expensive interest charges or late fees that only add to the balance you owe.
5. Maintaining low credit utilization
The next largest category is amounts owed, often referred to as your credit utilization ratio. Amounts owed are the total balances you owe on the accounts that appear on your credit report. Utilization ratio, however, is the ratio of your total balances over your total available credit limit. So if your credit card statement closes with a balance of $1,500 and your total credit limit on that card is $10,000, your amounts owed would be $1,500 and your utilization ratio would be 15%.
These numbers can diverge if you have a card that requires payment in full every month like the American Express® Gold Card*The information for the American Express® Gold Card has been collected independently by CNN Underscored. The card details on this page have not been reviewed or provided by the card issuer. . These types of cards don’t come with a preset spending limit; instead, your spending power adjusts based on your usage. This means that you can’t actually calculate a utilization ratio for this card since there’s no denominator in the equation, but your balances will still show up on your credit report and affect your amounts owed.
All information about American Express® Gold Card has been collected independently by CNN Underscored.
Keeping your utilization low can help boost your credit score, as it shows lenders that you have sufficient credit to meet your needs and are considered less risky. A general rule of thumb is to try and stay under 10%, but counterintuitively, you may want to avoid keeping your cards with a zero balance at all times. Chris Hardiman, a Producing Area Manager with Guaranteed Rate Inc, says “Oftentimes when running models to help borrowers improve their credit score, we find that very low utilization, such as 3%-5% on a revolving credit line, results in a slightly higher overall score than zero utilization, as long as it’s paired with timely payments.”
6. Diversifying credit types
Another paradox of credit scoring is that having multiple types of credit accounts open, such as credit cards, car loans and a mortgage, can improve your credit score. You might think that having more credit lines would be a bad sign as it would signal to lenders that you’re less financially secure, but proving that you can handle several types of accounts with different payment dates and terms signals that you are more creditworthy. This is why some people are shocked and disappointed when they pay off their mortgages or student loans and see their credit scores drop because their credit lines lose some diversity.
7. Length of credit history
Length of credit history, sometimes referred to as the average age of accounts, makes up 15% of your credit score. This bucket serves as a nice complement to your payment history. Sure, you’ve made 100% on-time payments, but there’s a difference between doing that for one year and one decade. This is an important variable for longer loans or mortgages. Banks may have no problem giving out a college credit card to a student with no credit history, but before approving you for a 30-year mortgage, lenders are likely going to want to see a longer history of on-time payments.
8. Becoming an authorized user
Trying to increase your length of credit history when you’re just starting to build your credit can be frustrating, because there’s nothing you can do to speed up time. Or is there? One of the best tricks to boost your length of credit history when you’re just getting started is to have a family member or friend with a good credit score add you as an authorized user on their credit card, causing it to appear on your credit report. The older the card is, the bigger the benefit to your account. In fact, arriving for your first day of college at 18 years old with a 25+ year credit history is entirely possible thanks to this strategy.
Have an honest conversation with your family members before doing this, because if there are derogatory marks on their credit such as missed payments, you wouldn’t want to accidentally inherit those as well. Some people might be nervous about adding a college student to their credit accounts, but you don’t even need to give them the card for this to work. As long as they are added to the account, you can keep possession of the physical card so you don’t have to worry about your children or other family members racking up charges.
9. Handling new credit responsibly
Your credit score can be like a game of chutes and ladders. You work so hard to build it up, but one small mistake, oversight or missed payment can set you back significantly. This is why it’s important to make sure that you don’t open any new credit lines unless you’re sure you can handle them responsibly.
For credit cards, make sure you have checks in place so you don’t spend more on the card than you can afford to pay off at the end of the month. For car loans or mortgages, ensure the purchase is comfortably within your budget and that you won’t have trouble making payments over the life of the loan.
10. Monitoring your credit progress
Building your credit score is a marathon, not a sprint, and you shouldn’t expect to see your credit score going up or down by a meaningful amount every single day. However, you should still make sure you’re regularly checking your score from a reliable and safe source so you can monitor your progress and adjust your goals as necessary.
The three credit bureaus— TransUnion, Equifax and Experian —may show slightly different information on your report (for example, some banks will only pull from one bureau when you apply for a credit card) leading to slight variations in scores between the three, so you should pick one system to track and use that consistently to evaluate changes over time.
11. Dealing with negative items on your credit report
It can be challenging to build credit with bad credit, so if you have negative marks on your credit report it’s important that you make a plan to deal with them. Some might be more minor, like a cable bill that you forgot to pay that ended up in collections, and some might be more serious like a streak of missed payments or a bankruptcy filing. These derogatory items usually stay on your credit report for seven to 10 years.
In this case, you may benefit from speaking to an accountant or financial professional to craft a plan that’s realistic for your circ*mstances and tailored to your needs. But addressing those negative items head-on and doing what you can to clear them is important, or if that’s not possible, demonstrating that you are now more creditworthy than you were in the past.
Credit repair companies may promise a quick fix, but before you sign up make sure you understand what you’re paying for. These companies generally offer a mix of credit monitoring services and legal services (like writing cease and desist letters to collection agencies). They may be able to help you find and remove mistakes on your credit report, but no amount of money can remove information that’s correct, even if it’s hurting your score. Some credit repair companies are shady, so use your judgment and watch out for anyone making promises that sound too good to be true. Reading reviews and checking BBB ratings is a good first step.
12. Don’t confuse no credit with bad credit
Having no credit is not the same thing as actively having bad credit. A lower credit score or a shorter length of credit history might mean that you’re not able to get approved for premium credit cards, but there are still plenty of options available including no-annual-fee cards that are often easier to qualify for. Another option is a secured credit card that functions as a hybrid between a debit and a credit card, helping you build credit with bad credit while limiting risk to the bank.
Frequently asked questions (FAQs)
How quickly you improve your credit score depends on many factors, including your current score, negative marks on your credit report and how much you’re looking to increase your credit score. Generally, it’s easier to improve when you’re starting from a lower score, but unless you’re able to pay down large balances to drop your utilization ratio, it’ll probably take a couple of months to see results.
Yes, having too many inquiries on your credit report can signal to banks that you need more credit to get by, which may suggest your financial situation is precarious. It takes two years for credit inquiries to fall off your report, so a large number of recent inquiries clustered together can bring your score down.
The easiest way to monitor your credit score is through your bank or credit card issuer, if they offer that feature. Just make sure to check what bureau is being used. If your bank doesn’t offer this, there are plenty of third-party credit monitoring services you can sign up for, although some will charge you a monthly or annual fee. You can also get a free copy of your credit report directly from the bureaus on a weekly basis.
One of the best things you can do to improve your credit score in 30 days is to pay down any large balances you have, trying to get your utilization ratio under 10%. You can also use this time to look for any negative marks that are bringing your score down and make a plan to address them.
Yes, closing an old or unused credit card may cause your credit score to drop. Your utilization ratio will change when you close a card because it reduces the total amount of credit you have available. If possible, try and transfer the limit to another card from the same issuer before you close it to avoid this. Another option to consider is switching to a no-annual-fee card to preserve your credit line and increase your average age of accounts.
Canceling an old card will also negatively impact your average age of accounts. Generally, you want to try and keep your oldest credit cards open, even if you’re not using them much anymore. Just keep in mind the bank may close your card due to inactivity, so try to put a small charge on it every few months.
