Your credit score is a numeric summary of your credit history, and plays a vital role in your financial future. A good score will help secure lower interest rates and better terms when you need a loan. Conversely, when your credit score goes south, it can be disastrous. Lenders will charge higher interest rates, costing you more and more money every time you need credit.
It is worth knowing that it takes more time to repair a bad credit score than it does to build a good one. Losing ground with your credit score could cost you hundreds or thousands of dollars in higher interest rates, and add considerable time to paying off your debts. It also can be a roadblock to renting an apartment, setting up utilities, and maybe even getting a job!
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.
If you make some mistakes with credit and find yourself stuck with a less-than-ideal score, there are steps you can take to improve things. Some quick fixes may help you improve 10 points and reach a new level, but if you need to add a significant number of points to your score, know that it will take time.
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 600 as problematic.
The average credit score in 2015 is somewhere around 690, according to the Fair Isaac Corporation (FICO), which produces the FICO credit score that is the most widely accepted one in the industry.
Credit scores are derived from credit reports, which document your borrowing and repayment history. This information is what’s used by Experian, Equifax and TransUnion, the three major credit reporting companies.
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.
So 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 you 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. A job change or loss, moving to a new city, medical costs and any other number of reasons 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.
12 Tips to Improve Your Credit Score
It takes time to fix your credit report and your credit score. They are snapshots of a history, and history can’t be changed instantly. This could mean months or even years of responsible credit use.
But here are 12 things you can do now to improve your credit score:
- Review Your Credit Report – 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 can affect your score as soon as the false information is removed.
- 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 eventually improves.
- Set Up Payment Reminders – Write down payment deadlines for each bill in a planner or calendar, or 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.
- Reduce Your Total Debt – Rather than shifting balances to different accounts, cut back on spending and apply that money to existing bills. This will reduce your debt and increase your credit score.
- 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.
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.