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Tips and tools to improve your credit score
Key takeaways
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Improving your credit score takes time, but it can result in better loan approvals and significant interest savings
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Payment history may account for 35% of your score, making on-time payments the single most important factor in building good credit.
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Keep credit card balances low, keep old accounts open, and avoid opening multiple new accounts quickly to help your score
Good things take time, and improving your credit score is no exception. The benefits of having a good credit score can make it well worth the effort.
A good credit score can help you get approval for loans with better terms. In the case of a major loan that'll take some time to pay off, the savings on interest charges could be worth thousands of dollars.
Improving your credit score is not very difficult or complicated. One of the main ways to do this is to use credit responsibly, especially by always making your payments on time.
What's a good credit score?
Before we can work on improving your credit score, it helps to know what a good one is.
This chart shows the range of scores for two of the most common credit scores: FICO® and VantageScore®.
|
FICO® Score |
VantageScore |
|---|---|
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Poor: 300 to 579 |
Very Poor: 300 to 499 |
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Fair: 580 to 669 |
Poor: 500 to 600 |
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Good: 670 to 739 |
Fair: 601 to 660 |
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Very Good: 740 to 799 |
Good: 661 to 780 |
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Exceptional: 800 to 850 |
Excellent: 781 to 850 |
FICO and VantageScore use different criteria to categorize credit scores, which is why the same numerical score may fall into different rating categories. For example, a score of 661 is “good” in the VantageScore® model, but “fair” in FICO®.
How are credit scores calculated?
The three major credit bureaus provide credit scores based on information in an individual’s credit history and a formula used to analyze it. As we can see from the previous section, one consumer can have different credit scores from different bureaus. The score that is used most often comes from FICO® and is based on these five factors:
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Payment history - 35%. Your record of paying bills on time is the biggest factor in this credit score
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Amounts owed - 30%. This reflects the total amount of debt you have. This category includes your credit utilization, which is the amount of available credit that you use, expressed as a percentage
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Credit history - 15%. This reflects the length of time that you've had credit, including how long you've had each account
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Credit mix - 10%. Managing different types of credit responsibly is seen by lenders as a positive sign
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New credit - 10%. FICO® says research shows that opening several new credit accounts in a short period of time is a sign of risk to lenders
Why lenders use credit scores
Lenders use credit scores to quickly assess the risk of lending money to an individual. A higher credit score reflects a history of responsible borrowing behavior and indicates a lower risk of default on a loan.
The score helps lenders decide whether to approve a loan or credit application. It also helps them determine what interest rate to offer and/or what credit limit to set. Credit card companies also use credit scores to identify consumers who may be likely to be approved for an account and send them a pre-approval or pre-qualified offer.
VantageScore® models, FICO® models, and credit scores from similar companies help lenders make decisions efficiently and offer terms that are appropriate to each applicant.
The best ways to build credit
Your credit score is not etched in stone. It changes as your credit history changes. If you're just starting out or want to improve a low score, there are many steps you can take. Here are some effective options:
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Make payments on time. Possibly the best thing you can do to keep your credit score up or improve it is to make all your payments on time. It’s one of the most important, if not the most important, factors in your score. You can set up automatic payments or reminders, where possible, to avoid late payments
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Pay down revolving balances. A big part of your credit score is based on the amount of available credit you are using. That’s why it’s important to try to keep your credit card balances low. Lenders may see someone who is close to maxing out a credit card as a potential risk
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Keep old accounts open. Part of your credit score is the length of your credit history. That’s why it can help to keep old accounts open. They help to strengthen this part of your score. If we're talking about a credit card with an annual fee, then you might have to weigh the fee against the impact on your score because this accounts for only 15% of your score
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Have a good mix of credit. 10% or your credit score is based on the variety of credit you have managed. This part of your score rewards you for managing different types of accounts, such as installment loans, credit cards, and retail accounts.
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Limit new credit applications. When you apply for credit cards, auto loans and other forms of credit, the lender can perform a hard inquiry on your credit report. Space out applications by six months when possible. One hard inquiry might have a slight, temporary impact on your score. However, a larger number of hard inquiries at one time could have a bigger impact
FAQs
Rebuilding credit can take 3 months to 10 years, depending on your credit profile and what damaged your score. On average, credit repair takes about 3 to 6 months to take effect, with your score gradually improving each time a creditor makes a change in your favor. Minor issues like a single late payment may improve relatively quickly with consistent on-time payments. However, major negative events like bankruptcy can take years to fully recover from, though you can start seeing improvements much sooner by establishing positive payment habits.
Becoming an authorized user on a family member's or friend's credit card is one effective way to build credit without applying for your own card. Many lenders offer credit cards specifically designed for those with no credit history, which have easier qualification standards. Another option is getting a secured credit card, which requires a cash deposit that helps to establish your credit limit. Making on-time payments and not using too much of your available credit are two key ways to maintain a positive credit history.
The average credit score in the United States is 715, according to FICO®. Younger people typically have average scores in the good range of 670 to 739, while the average older person has very good scores in the 740 to 799 range.
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