Good credit can improve your quality of life if you use it responsibly and don’t rely on it to pay for things you can’t afford.
When you have good credit, you gain access to perks such as lower interest rates on mortgage loans. At first glance, that might not sound like a big deal – so let’s take a quick look at the math:
Imagine you take out a mortgage loan on a $300,000 home and end up paying 4.5% interest instead of 3.5% due to a low credit score.
On your home mortgage alone, this one percent difference adds up to more than $170 more per month –$62,252 over your loan’s lifetime.
On the flip side, a good credit score means you get better interest rates and earn cash back and other rewards each time you use a credit card.
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While there are no shortcuts or “miracle cures” to improve your credit, there is a defined path to success that we outline for you below.
But first, let’s go over what some loan officers will use to evaluate your credit and what exactly constitutes a good score.
What Is A FICO Score?
FICO is the most common credit score system and the one used by 90% of top lenders. For this reason, we use FICO scores as a compass for credit goals.
FICO uses information from your credit reports to assign a three-digit number that evaluates how trustworthy you are when entering into a business agreement, such as borrowing money or renting a home.
FICO credit scores range from 300 to 850, representing the following credit grades:
- 300 – 579 Very Poor
- 580 – 669 Fair
- 670 – 739 Good
- 740 – 799 Very Good
- 800 – 850 Exceptional
Here’s a sample of what average FICO scores you need for different types of credit (requirements vary per lender):
- Mortgage loan with the best interest rate: at least 740
- Auto loan: 700
- Personal loan: 600
- Low-interest credit card with perks: 750
If you’re looking to improve your credit rating, setting a goal to achieve “very good credit” (740 – 799) is an excellent first step, with “exceptional” being the ultimate goal.
While there are no shortcuts to building good credit, you can achieve your credit goals more quickly by understanding what actions have the most significant impact and in what order you should execute those steps.
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Follow the steps below to improve your credit in the fastest way possible.
1. Improve Your Payment History (35% of Credit Score)
35% of your FICO score relies on your payment history. Your track record of paying bills and debts is the top way lenders evaluate whether you’re worth the risk.
Understand The Factors That Affect Your Payment History
Credit reports take several types of payments into account, including:
- Credit cards, including major credit cards and retail accounts
- Finance company accounts
- Loans, including mortgage loans
- Public records such as bankruptcies, lawsuits, and wage attachments
For each of the credit types above, FICO states that the following types of behavior influence your score:
- Payment information
- How badly overdue payments have been, or currently are
- How much debt is presently overdue on delinquent (including collection accounts)
- How many overdue items and negative public records are on your credit report
- How much time has passed since delinquencies
- How many accounts are paid on time as agreed
While you can’t go back and undo the mistakes of the past, there are several proactive steps you can take to offset any poor payment history, such as:
- Bring past due accounts up to date.
- Pay every single bill on time, all the time.
Some communications with creditors may help (such as payment arrangements or balance negotiations), keep in mind that your primary goal is to pay off the overdue accounts.
Lowering the amount due on your monthly payments will only prolong the time it takes to get your accounts current.
Pay Off Outstanding Debt Aggressively
If you have outstanding debt such as credit card bills and student loans, the best approach is to tackle it head-on.
Rather than making minimum monthly payments, find a way to raise the money you need to get your debt paid off quickly.
Instead of letting debt run your life and dictate your future, take a proactive approach by earning more money:
- Budget every dollar you earn before you get paid — and stick to it!
- Cut living expenses.
- Downsize your car or living situation.
- Pick up an extra job or side hustle.
- Start a business.
- Sell things you don’t need.
Debt can feel overwhelming, but the best approach is to tackle it aggressively and work toward a clean slate.
For example, Ryan and Courtney Luke of Phoenix, AZ, went from $50,000 in debt to $350,000 saved by reevaluating how they spent their money.
With careful budgeting and some motivating perks like a jarful of marbles, the couple began working toward a California beach house and comfortable retirement, instead of spending their money on the latest model phone, new cars, and eating out.
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2. Lower Your Total Debt
30% of your FICO score is based on the total amount of debt you owe.
FICO recommends not using more than 30% of the credit card limits available to you.
However, research shows that people with credit scores of 800 or higher use only 7 percent of the credit available to them.
Debt includes current credit card charges.
Even if you have no overdue bills and you pay off your credit card balance in full every month, you still need to keep the total balance due to less than 30% within each billing cycle.
For example, if the total credit available to you through all your credit cards is $5,000, be sure to spend less than $1500 (30%) on your credit cards each month.
Lowering your total debt ratio can help improve your credit score and maintain a good rating.
To improve and maintain your credit score, lower your debt ratio to well below 30% within each billing cycle.
3. Pay On Time. Every. Single. Time.
15% of your credit score is based on the length of credit history.
Most people with perfect credit scores (850) have more than 25 years of spotless credit history.
Once you pay off outstanding debt and lower your total debt ratio, focus on paying every single bill on time – every time. Over the years, this has a massive impact on your credit score and will allow you to keep improving your rating over time.
If you’re used to being in debt, you’ll need to focus on learning new spending habits so you don’t get into debt again.
For example, when Seattle resident Emily Rogers fell on hard times, she developed a habit of pulling out a credit card when she couldn’t afford to purchase something. Within a short time, she accrued $10,000 in credit card debt with outrageous interest rates between 18% – 25%.
Feeling buried in debt with no way out, Rogers took out a personal loan to pay off all her bills, thinking it would solve her debt problem.
Unfortunately, she didn’t focus on changing her spending habits. After getting the loan, Rogers kept spending as she did before, using credit cards to buy things she didn’t have the cash to purchase.
Because she didn’t fix her spending habits, Emily quickly ended up in debt all over again.
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The #1 most-effective thing you can do to improve your credit score is to change your spending habits.
Cutting your budget and spending within your means can be as simple as understanding that things like new phones and fancy cars are luxuries, not needs.
Luxuries are great when you can afford them. However, when you’re using credit cards to pay for things you can’t afford, you’re headed down the wrong road.
You’ll have plenty of $$$ for luxuries once you pay off your debt!
The Quickest Path Toward A High Credit Score
The quickest way to improve your credit is to pay off your debt, keep an eye on your total debt, develop good money habits, and pay your bills on time — all the time.