How to Increase Your Credit Score
Jeff Clark, CFP®
Your credit score is a quick way to summarize your creditworthiness. The higher your score, the more likely lenders are to approve you for loans and the better terms you could get.
Why should I care about my credit score?
If you plan to take out a mortgage for a home, finance a car, or apply for a new credit card, having a high credit score can help you qualify for the loan and save money on interest while paying it back. Even if you're not looking for a loan, a high credit score represents financial responsibility and can help in other scenarios, like renting apartments, acquiring utilities, and bragging at cocktail parties.
What's a good credit score?
Credit scores range between 300-850. Anything below 580 makes getting loans difficult. Scores over 700 are great, and peaking over 800 can help you qualify for the best loan terms available. This table from the credit bureau Experian summarizes credit score ratings, what percentage of Americans fall in each range, and how each range impacts applicants.*
|
Credit Score |
Rating |
% of People |
Applicants in this range... |
|---|---|---|---|
|
300-579 |
Very Poor |
16% |
May be required to pay a fee, and may not be approved for credit at all. |
|
580-669 |
Fair |
17% |
Are considered subprime borrowers. |
|
670-739 |
Good |
21% |
Only 8% are likely to become delinquent in the future. |
|
740-799 |
Very Good |
25% |
Are likely to receive better than average rates from lenders. |
|
800-850 |
Exceptional |
21% |
Top the list for best rates from lenders. |
What credit scores are made up of
The algorithm for FICO Credit Scores, which most lenders use, determines your credit score with these weightings.
- Payment History: 35%
- Amount of Debt: 30%
- Age of Debt: 15%
- New Credit: 10%
- Credit Mix: 10%
Notice that 65% of your score is about debt management. Lenders want to see that you are making payments on time and not overextending your credit. Many free credit score tools will check your VantageScore 3.0, which is a FICO score competitor developed by the three major credit bureaus: Equifax, Experian, and Transunion. It is similar to a FICO score but has slightly different weightings.
Ways to improve your credit score
Knowing the areas of your credit score helps you know how to improve it. Based on the above factors, follow these practical steps to increase your score.
Payment History: Pay your bills on time, every time. Missed payments stay on your credit report for up to 7 years. The more recent missed payments are, the more they impact your score.
Amount of Debt: Pay down your existing debts and credit card balances. Try to keep your credit utilization under 30%, so if your credit limit is $10,000, keep balances under $3,000. Start a debt reduction goal in BrightPlan to create a plan.
Age of Debt/New Credit: Avoid rapidly opening new accounts or loans which will reduce your average of debt or increase your inquiries for loans. Carefully consider closing loan accounts or consolidating loans.
Credit Mix: A mix of different loan types can help your score a little, but don't open additional loans just to increase your score! Opening additional loan accounts could work against you by increasing your amount of debt and decreasing the average age of your debt.
Being mindful of your credit score can lead to better loans when you need to borrow, and more money for you in the long-term.
Source: Experian Blog, What is a Good Credit Score?