“There are a lot of tips and tricks on how to improve your credit score – and we’ll get to those in a moment – but nothing you see, hear or read about the subject will impact your credit score faster or more effectively than paying bills on time and using your credit cards judiciously”
“If you are trying to give people advice for improving their score, pointing them toward those two components – things that are relatively easy to change – is a very good start,” said Tatiana Homonoff, an assistant professor of Economics and Public Policy at New York University, who did a two-year study on credit scores and published a paper on it in April of 2018.
Homonoff, who is affiliated with the Robert F. Wagner Graduate School of Public Service at NYU, added: “There are some parts of the credit score algorithm that are very hard to effect, but paying bills on time and being aware of credit utilization are things people can do with some ease, even if they’re in a tough financial position.”
Consumers are becoming more aware of how improving their credit score improves their financial outlook and Homonoff’s study has evidence of it. She found consumer behavior improved dramatically when people were aware of their credit score.
“Many people thought they had a great score, but then found out they overestimated it,” she said. “They realized they had to start changing credit behaviors, so they stopped making late payments, they paid off cards with a balance and their scores improved.”
It is worth knowing that it takes more time to repair a bad credit score than it does to build a good one. Mistakes penalize your credit score and end up costing hundreds or thousands of dollars in higher interest rates when borrowing. A poor credit score also can be a roadblock to renting an apartment, setting up utilities, and maybe even getting a job!
12 Tips for Improving Your Credit Score
If you are like many consumers and don’t know your credit score, there are several free places you can find it. The Discover Card is one of several credit card sources that offer free credit scores. Discover provides your FICO score, the one used by 90% of businesses that do lending. Most other credit cards like Capital One and Chase give you a Vantage Score, which is similar, but not identical. Same goes for online sites like Credit Karma, Credit Sesame and Quizzle.
The Vantage Score comes from the same place that FICO gets its information – the three major credit reporting bureaus, Experian, TransUnion and Equifax – but it weighs elements differently and there could be a slight difference in the two scores.
Once you get your score, as Homonoff suggested, you might be surprised if it’s not as high as you expected. These are ways to improve the score.
Here are 12 things you can do now to improve your credit score:
- Review Your Credit Report – You are entitled to one free credit report a year from each of the three reporting agencies and requesting one has no impact on your credit score. Review the report closely. Dispute any errors that you find. This is the closest you can get to a quick credit fix. Notifying the credit reporting agency of wrong or outdated information will improve your score as soon as the false information is removed.
- Set Up Payment Reminders – Write down payment deadlines for each bill in a planner or calendar and set up reminders online. Consistently paying your bills on time can raise your score within a few months.
- Pay More Than Once in a Billing Cycle – If you can afford it, pay down your bills every two weeks rather than once a month. This lowers your credit utilization and definitely improves your score.
- Contact Your Creditors – Do this immediately to set up a payment plan if you miss payment deadlines and can’t afford your monthly bills. Quickly addressing your problem can ease the negative effects of late payments and high outstanding balances.
- Apply for New Credit Sparingly – Although it increases your total credit limit, it hurts your score if you apply for or open several new accounts in a short time period.
- Don’t Close Unused Credit Card Accounts – The age of your credit history matters, and a longer history is better. If you must close credit accounts, close newer ones.
- Be Careful Paying Off Old Debts – If a debt is “charged off” by the creditor, it means they do not expect further payments. If you make a payment on a charged off account, it reactivates the debt and lowers your credit score. This often happens when collection agencies are involved.
- Pay Down “Maxed Out” Cards First – If you use multiple credit cards and the amount owed on one or more is close to the credit limit, pay that one off first to bring down your credit utilization rate.
- Diversify Your Accounts – Your credit mix — mortgage, auto loans, student loans and credit cards — counts for 10% of your credit score. Adding another element to the current mix helps your score, as long as you make on-time payments.
- Quick Loan Shopping – If you have bad credit and can’t find any other way to improve your score, you could consider taking a “quick loan.” These are typically loans for small amounts — $250 to $1,000 — that get repayment history reported to credit agencies, and can become a positive on your credit report. This is a last resort.
- See If You Qualify for a 0% Interest Card – Several companies offer cards with 0% interest on balances, but there are caveats to this. There can be a fee for transferring the balance and the zero-percent offer is only good for an introductory period, typically 12-18 months. It usually takes a very good credit score to qualify for one of these.
- Consider a Debt Consolidation Plan – There could be a temporary drop in your credit score if you enroll in a debt consolidation program, but as long as you make on-time payments, your score quickly improves and you are eliminating the debt that got you in trouble to start with.
How Long Does It Take to Rebuild Credit?
Typically, it takes at least 3-6 months of good credit behavior to see a noticeable change in your credit score. It is difficult to make a change any faster, unless the negative information on your credit report was a minor blip, like being late with bill payments one month.
While it is impossible to put a specific time frame on credit repair, it is safe to say the less negative information you have on your report – late payments, maxed out credit cards, constant credit applications, bankruptcy, etc. – the easier it is to repair your credit score.
You are not going to lose nearly as many points if you are late with one payment as you will if you are delinquent for several months to the point where your account has been turned over to a collection agency. The severity of the second situation is far greater than the first and your score will reflect that.
Here are some time frames for negative information that detracts from your credit score.
- A delinquent account remains on your credit report for seven years.
- Car repossession stays on your report for seven years.
- Chapter 7 bankruptcy is on your report for 10 years. Chapter 13 remains for seven years.
- Credit application inquiries remain on your report for two years.
- Public record items such as property liens are on your report seven years.
It is very important to remember that the damage to your credit score diminishes over time. So, for example, a Chapter 13 bankruptcy in Year Six has negligible impact when compared to its effect in Year One.
What to Look for on a Credit Report
One way to improve your credit score that won’t cost you a thing is to examine your free credit report and search for errors. Each of the three major credit reporting bureaus, Experian, TransUnion and Equifax is required by law to give you a free report once a year.
A government study found that 26% of consumers have at least one potentially material error that makes them look like a bigger risk than they really are. Some are simple (but costly) mistakes like a misspelled name, address, or accounts belonging to someone else with the same name.
Some less obvious errors that can really be costly include accounts that incorrectly are reported late or delinquent; debts listed twice; closed accounts that are reported as still open; accounts with an incorrect balance or credit limit.
Your reward for conscientiously examining your credit report? About 20% of consumers who identified mistakes saw their credit score increase.
So, What Is a Credit Score?
A credit score is a numeric summary of your credit history, a commonly used method for lenders to predict the likelihood that you will repay any loans they make to you.
The FICO credit score (so named for the Fair Isaac Corporation) is used by 90% of the businesses in the U.S. to determine how much credit to offer a consumer and what interest rate to charge them for that credit.
FICO uses five major components in the equation that produces your credit score. Those five include:
- Payment history (35% of score): Do you pay on time? Do you pay the full balance, the minimum or somewhere in between?
- Amounts owed (30%): How much of the credit you’re allowed, do you use? If you exceed the limit, you are seen as a high risk and penalized. If you use less than 30% of your credit, you’re consider a safe borrower and get a positive rating.
- Length of credit history (15%): The longer you have an account, the better the scorekeepers like it.
- Credit mix (10%): FICO likes to see a mix between credit cards, mortgages and auto loans … as long as you can afford them! Don’t take out another loan in hopes it will improve your score. This category doesn’t’ count enough in the overall equation.
- New credit (10%): It’s OK to occasionally open a new account, but if you are applying for several accounts in a short period of time, you are a risk and your score will reflect that.
As you go through life, your credit score will fluctuate. How much it fluctuates depends on how reliable you are at repaying debt on time, especially credit cards and installment loans. When you use credit more often, whether it’s by taking on more credit cards, getting a mortgage, taking out a student loan or auto loan, your credit score changes to reflect how you deal with the responsibility of more debt.
Some Credit Score Basics
Credit scores range from 300 (poor) to 850 (excellent). Higher scores illustrate consistently good credit histories, including on-time payments, low credit use and long credit history. Lower scores indicate borrowers may be risky investments because of late payments or overextended use of credit.
There are no exact cutoffs for good scores or bad scores, but there are guidelines for each. Most lenders view scores above 720 as ideal and scores below 630 as problematic. The average credit score in 2018 hit a record 700.
Pay Attention to Credit Utilization
Credit utilization makes up 30% of your credit score and is often the most overlooked method of improving your score. Understanding how it works — and how to make it work for you — is one of the easiest ways to improve your score.
Credit utilization is the percentage of available credit used during a billing cycle. In mathematical terms, it is calculated this way: amount owed divided by the card’s credit limit. The optimal use is less than 30% of available credit.
For example, if you have one card with a $1,000 credit limit, and you spend $300 a month on it, your credit utilization is exactly where it should be (300 divided by 1,000 = .30 or 30%). Any spending under 30% credit utilization is considered a good thing.
The damage to your score starts when your utilization rate goes over 30%. If you spend $500 a month with the same card, your credit utilization soars to 50%. That is an indication to credit agencies that you are taking on more debt than you can afford, thus your credit score drops.
If that happens, there are two solutions: cut your spending or consider applying for a second credit card.
Cutting spending is the most sensible choice, but circumstances might not allow for that. If you change or lose a job, move to a new city, incur unforeseen medical costs and any other number of reasons, it may cause your bills to increase and credit utilization to go up with them.
If that happens, you can consider a second credit card to help improve your credit score.
A second card with a $1,000 credit limit increases your available credit to $2,000 a month. If you split the $500 you spend each month between the two cards, your credit utilization drops below 30% for each of them.
In this scenario, your problem is solved, but only if you are disciplined about tracking card use. That means keeping constant tabs on how much is spent on each card, setting up alerts to check spending totals and even paying down the bills in the middle of the month so you’re sure to stay under 30% usage.
If you do all of that, you can petition the card companies to raise your credit limit to $2,500 and make it easier to stay under 30% utilization. You might even be able to go back to using just one card.
Adding credit cards to your wallet normally is frowned upon, but if you’re having problems with credit utilization, it’s worth looking into.
If You Don’t Have Credit
If you don’t have any credit history, get started! A positive credit history helps out nearly every aspect of your financial future, whether it’s purchasing a car, renting or buying a home, or even applying for a job.
The easiest way to start is to apply for a line of credit. Credit cards for gas stations or department stores are generally easy to obtain and are good ways to build solid credit. Use them responsibly, being careful not to overcharge. The key is to pay your bill on time each month.
If you can’t get approved for a traditional credit card, sign up for a secured credit card. These cards require a deposit, often equal to the credit limit you will be extended with the card. For example, a $500 deposit will get you a secured credit card with a $500 spending limit.
These cards act the same as unsecured cards in that you receive a monthly bill and payment is expected each month. Be sure that the spending on the secured card is reported to the credit reporting bureaus.
In most cases, as long as you pay each month, your deposit will be refunded when you are finished with the card. Your deposit can’t be used to make the monthly payments.
If you have a job, another way to start a credit history is take out a loan, perhaps to buy a used car. Making regular payments will help establish your credit history in a positive manner.
Become an Authorized User
Being an authorized credit card user is the best position possible in the credit world: you get all the benefits and none of the responsibility. You spend, someone else pays, and everybody’s credit improves.
This obviously-lopsided arrangement usually happens with a spouse, parent, sibling or a close friend. It takes nothing more than a phone call to the card issuer by the cardholder giving permission to use the card, but not pay the bill.
That is the sole responsibility of the cardholder.
In the meantime, you not only acquire the purchasing power of a credit card, but also have the cardholder’s credit history added to yours.
That provides an opportunity to add three positives right away to your credit report: an increase in the number of years using credit, an increase in the average age of credit cards you use, and an increase in the credit utilization available on your cards.
The combination of those three elements alone could raise your credit score anywhere from 50–100 points.
On the other hand, if the cardholder is late with payments, maxes out the card every month or does anything else negative, it will have a negative impact on the credit scores of both the cardholder and authorized card user.
And any negative activity you create can impact the cardholder’s credit score. If you max out the card and the cardholder is late with payments or can’t make them, it is a negative on their account — and at some point, on yours too.
That can cause friction, and, in some cases, destroy relationships, so be careful about this arrangement. Both sides need to know the boundaries for using the card and not go over them. Call your bank or card company and be sure the authorized user’s activity will be reported to the credit bureaus.
Done responsibly, this should be a positive experience for both parties’ credit scores.