5 Easy Ways to Improve Your Credit Score

by Sherry Hao, Controller at U.S. Money Reserve

Photo by Startup Stock Photos

Understand Your Credit Score

First, it’s essential to understand the basics that make up your credit score. A credit score is a number that the major credit bureaus assign you based on your credit utilization or how much credit you’re currently using, whether you pay your bills on time and in full, and the length of time you have had your credit open, among other things. It is different from your credit report.

Payment History

Both companies use this factor to determine how likely you are to pay back any debt you take on. This factor significantly impacts your credit score. Your credit history shows whether you have consistently paid your bills on time, for the length of time you have had your credit open. FICO says that credit history makes up 35% of their credit score, and Vantage Score says that it weights payment history as “moderately influential” in the creation of their credit scores.

Total Credit Utilization, Amount of Debt, and Available Credit

Both FICO and Vantage Score take your credit usage or utilization, amount of debt, and available credit into consideration when creating their credit scores. Amounts owed make up 30% of the FICO score. Vantage Score says that the combination of amounts owed, total credit usage, and available credit are “extremely influential” in creating your credit score.

The Other Factors

Outside of these two main categories, the credit scoring agencies are largely mum about what goes into your credit score, but there are a few other things to know that can impact your credit score both positively and negatively. They include:

  1. Your credit “mix”: The types of credit you carry matter. There are two types of credit that credit scoring companies look at: revolving credit, which is open-ended with payments due each month, like credit card debt, and close-ended or installment credit, like car loans or mortgage debt.
  2. Credit inquiries: Credit scoring companies like to see a good balance of new and old accounts. Hard credit pulls ding your credit, while soft credit inquiries do not. According to Mint.com, credit inquiries (the hard ones) remain on your report for up to two years.
  3. Total balances and debts: The credit scoring companies also take your total debts and balances into consideration. This can include things like your mortgage and auto loan debts as well as your credit card debt.

How Can You Improve Your Credit Score?

Once you have a grasp of what goes into your credit score, you can work toward improving it. Think of improving your credit score like preparing to run a marathon: Each small step builds you up to complete the full 26-mile haul. While you can improve your credit score in a few weeks, it typically takes months or years to see significant changes in your credit score.

Pay your debt on time, every time

As I mentioned above, payment history matters tremendously when it comes to managing and improving your credit score. Both FICO and Vantage Score use your debt repayment information as a significant portion of your score.

Stay on Top of Your Credit Utilization

Credit utilization is a fancy way of saying how much of your available credit you are using at any given time, and it plays a significant role in your credit score for both FICO and Vantage Score. The best rule of thumb, according to Bankrate, is to try to keep your credit utilization between 7 and 10% of your total available credit. In general, credit utilization focuses solely on revolving debt or credit card debt.

Don’t Go Crazy with New Credit and Keep Old Credit Open

Another trick to boosting your score is to keep your new credit inquiries to a minimum and maintain older credit accounts.

Keep your Debt-to-Income Ratio Low

It isn’t rocket science, but it bears repeating: Don’t overspend. Keeping your debt-to-income ratio low is the best way to keep your spending under control. Your debt-to-income ratio is the amount of debt divided by your gross monthly income. If you apply for new credit, you’ll be asked for your income, and that can impact how much credit you will be permitted to take out, which will, in turn, impact your credit score.

Be Patient

It takes time to improve your credit score, and while you can see some improvement over a period of weeks, building up a good credit score can take years. Making payments on time, paying off debt, and waiting for hard credit pulls to fall off your report can all help improve your credit score. Know that each small step you take will eventually have a positive impact on your credit, but it is going to take some time for those benefits to show up.