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Whether you like it or not, your credit score is something that has a big impact on your life.
I learned that the hard way, when I was refused a mortgage even though I had the money for a down payment and earned a decent income.
Lucky for me, and for you, a credit score doesn’t stay at one number forever.
To game the system, I will show you what is the credit score and how is it calculated. Additionally, I‘ll teach you how to improve your credit score and work your way up to that iron-clad number of 850.
Let’s get started!
What Is A Credit Score?
Credit is basically the measurement lenders use to determine whether you are a trustworthy borrower.
This three-digit number tells them whether you are likely to repay the money that they allow you to borrow. Scores range from 300 to 850 with higher numbers signaling a better score, making you more attractive to lenders.
- 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
How Is Your Credit Score Calculated?
90% of the top lenders use your FICO credit score which looks at five key areas of your financial health:
- Payment history (35%) – Every time you make an on-time payment that is reported to the credit bureaus, securing a higher credit score for yourself. Of course, the opposite applies as well.
- Credit utilization (30%) – This is a fancy term for comparing how much you owe to how much borrowing power you have. For example, let’s say that your credit card has a $2,000 limit. If you carry a balance of $1,000, then you have a 50 percent credit utilization rate. Most lenders like to see you have a 30 percent credit utilization rate or less.
- Length of credit history (15%) – If you are just starting out, there is a possibility that you do not yet have any credit because you don’t have a long enough history.
- Credit mixture (10%) – Credit mixture refers to the types of loans or credit lines that you have open. Lenders want to see that borrowers can handle a variety of debt including installment loans like a car loan and revolving credit like a credit card.
- New lines of credit (10%) – Seeing that you have recently applied for multiple credit lines in a short span of time sends up too many red flags to lenders. It shows that you might be having a hard time paying your bills, which doesn’t bode well for the lender who wants to be repaid.
10 Tips To Help You Improve Your Credit Score
Understanding your credit score and how to improve it is important if you have financial goals you would like to achieve.
Lenders rely on your credit score to determine if and how much you can borrow from them. Fortunately, boosting your credit can be easy, but it will be a long process to prove that you can be responsible over time.
If you are ready to improve your credit score so that you can borrow more, here are 10 ways to improve your credit score.
1. Check Your Credit Report
The very first thing you should do when you’re trying to repair your credit is to make sure that it’s accurate.
To do this, download a full copy of your credit report and check it over for mistakes.
You can always get a free copy from any of the three major bureaus once per year.
Inside, you’ll find records of every credit card or loan you’ve ever had, their status, notices if you were ever delinquent on payments, and a lot of other information that’s important to lenders.
The most important goal is to make sure that they are all in fact your accounts and that there aren’t any on the report by mistake or falsely opened under your name and info due to identity theft.
If there are mistakes, you have the right to file a dispute and request that they are removed from your report.
2. Leverage Autopay For Timely Payments
The biggest portion of your credit score is your payment history.
Even a single missed payment can cause significant damage to your overall score. Fortunately, with the convenience of the internet and online banking, missing payments can be a thing of the past.
One of the easiest ways to ensure a good credit score is to enroll in autopay for as many bills as you can so you never even have to think about whether you made the payment or not.
Not all bills will allow you to enroll in autopay though. For these types of bills, I like to set a recurring alarm on my phone for a few days before the due date.
I always set it up for the evening hours when I’m at home and can easily hop online to make the payment or cut a check to put in the mail.
3. Pay Down Your Debt
At least 30 percent of your FICO score is determined by how much debt you owe to all creditors.
This is known as revolving debt, which is any money that you borrowed or financed from a lender or other institution.
Your credit cards, mortgage, auto, college, and personal loans are all revolving debt, for example.
Not only will it be good for your credit score, but it could also save you tens of thousands of dollars in interest payments over your lifetime.
4. Get A Secured Credit Card
A secured credit card is one where you make a deposit to the bank to hold in exchange for limited borrowing power.
My first card required me to put $200 down to secure the credit line for the same amount.
This gave the bank some recourse in the event that I would have defaulted on the payments.
They weren’t really taking a risk by allowing me to borrow because I was really only using the money I had already put down as a deposit.
Eventually, your secured credit card might give way to an unsecured card with a greater credit limit.
Unsecured just means that the line of credit isn’t backed by any collateral, so failure to pay back the money that you borrow will only result in a negative credit score.
Another example of a secured line of credit would be a mortgage, because your home is the collateral, and if you don’t pay your mortgage, the lender can repossess your house.
5. Limit Your Spending
A lot of people view their credit cards as free money. I know I sure felt that way when I was just starting out. It was so easy to swipe my card at the register and worry about the payment later (or not at all).
This is how so many people end up maxing out their credit cards. And if you are looking to improve your credit score, maxing out your cards is the last thing you want to do.
Most lenders want to see your credit utilization hover right around 30%. This means that you should never be borrowing in the upper limits of your credit card.
For every $1,000 you can borrow, you should never spend more than $300 of it. But if you have already maxed out your cards, do your best to pay them down until you get to a revolving balance of just 30 percent.
6. Ask For A Credit Limit Increase
Asking for a credit limit increase if you have been a responsible borrower for a while is another way to improve your credit score.
Call your bank and state your case for why you think you deserve a higher credit limit.
Although, I found that I rarely had to even ask. My bank sends me a letter in the mail every couple of years letting me know that they raised my credit limit.
How does this improve your credit score? A credit limit increase actually lowers your credit utilization rate. Let’s take a closer look at how this works:
Pretend you have a credit card with a $2,000 limit and you currently have a $1,000 balance.
That means you have a credit utilization rate of 50 percent. Now, your credit limit has been increased to $5,000 but you still maintain the $1,000 balance.
With this change, you have a credit utilization rate of just 20 percent.
7. Avoid Closing Credit Accounts
This might be counterintuitive, but being responsible and closing down credit cards you no longer use can actually harm your credit score.
How’s that possible?
Again, it falls back to the fact that 30% of your credit score is determined by how much you owe, one key component in that equation is how much credit you have available to you which then leads to the credit utilization ratio.
So the more cards you have, the more credit you have available, and the lower your utilization ratio.
Adversely, when you close your unused cards, you have less credit available, and therefore that makes your utilization seem higher.
If you don’t owe an annual fee on your credit card, then it actually does you less harm to simply keep it open.
You could even throw it in your dresser draw and never use it, and it would still be helping increase your credit score.
Here’s a fun fact: Guinness World Record title holder, Walter Cavanagh of Santa Clara, California a.k.a. Mr. Plastic Fantastic has 1,497 credit cards in his name amounting to a $1.7 million line of credit.
And he has a nearly perfect credit score! Out of all of those cards, he only really uses one and he pays it off every month.
8. Keep Your Oldest Card
Speaking of not closing your cards, one little trick to raising your credit score is to keep your oldest card open for as long as possible.
Why is that helpful? Because 15% of your FICO score is determined by the length of your active credit history.
So to use this to your advantage, the longer you keep your oldest card open, the longer your history appears on your credit report.
That’s why I still have the very first credit card I ever applied for. I don’t use it much these days and I don’t carry a balance with it.
However, it is my longest-running line of credit that lenders can look to when they want to see that I am a good candidate for a future loan.
9. Stop With New Inquiries
New accounts make up 10% of your credit history, but this does not mean that you should go out and apply for a bunch of loans.
Seeing too many applications for credit or new accounts actually sends up a red flag to lenders.
It looks like you might be overextending yourself financially which could spell problems for the lender when they go to collect their money.
10. Change Your Credit Mix
Finally, your credit score isn’t always just about your credit cards.
Mixing up the types of credit you use now can improve your credit score in the long run. A good chunk of your score, 10%, is actually determined by your overall credit mix.
This means that lenders want to see that you can responsibly borrow in more ways than one.
If you can afford it, try to apply for several different types of loans. For example, you might want an auto loan (an installment loan) and a credit card (a revolving line of credit).
By showing that you know how to pay your bills responsibly in every way, you are sure to see some type of increase in your credit score over time.
Why Is It Important To Have A Good Credit Score?
A good credit score is your ticket to being able to borrow money from lenders.
And sometimes, you need to borrow money for things like a mortgage, car, education, or another major purchase.
The higher your credit score is, the more likely they are to approve you for a new loan with better terms. Individuals with higher credit scores will be charged lower interest rates than those with fair or bad credit.
Moreover, a higher credit score will qualify you for more loan products. For example, you might be a prime candidate for a credit card with perks like cash back or airline miles.
For example, my credit card gives me 2 percent cash back on food and 3 percent cash back on gas.
It may not seem like it, but good credit can also influence where you live and how much it costs. When I first moved out, my apartment complex checked my credit score before they would offer me a lease.
Because I had little to no credit at the time, it cost me more to move into my new apartment than it would cost me now.
On top of that, I had to pay a higher security deposit and two months of rent to cover the first and last month.
While a good credit score is important, you don’t necessarily need a perfect 850.
This score can be extremely difficult to achieve, and it may not come with that many additional advantages after the 720 mark.
Anyone with scores in the excellent range will receive the same benefits as someone who is just a few points shy of a perfect score.
How To Improve Your Credit Score – The Verdict
Overall, the best way to improve your credit score is to just be as sensible as possible.
Pay your balances off every month, don’t accumulate any new debt, and maintain a reasonable mixture of loans.
Start doing these steps right away, and with a little patience, you’ll surely see your credit score improve over time.