You may be able to improve your credit score by paying bills on time, keeping credit card balances low and only applying for credit when needed. Checking your credit report for errors and keeping older credit accounts open, when appropriate, may also help support your credit profile over time.
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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 |
|---|---|
|
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
The time it takes to improve a credit score can vary based on your credit history and the information in your credit report. Consistently paying bills on time and managing your credit responsibly may help your score over time.
A missed payment may affect your credit, but one setback does not necessarily define your credit history. Getting current on payments and continuing to pay bills on time may help you build a stronger payment history over time.
You can monitor your credit score through your bank, credit card issuer or other credit monitoring service. Checking your credit report regularly may also help you spot changes or information that may need to be reviewed.
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