How to Improve Your Credit Score

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How can I improve my credit score?

HIGHLIGHTS
  • Review the steps to take to raise your credit score.
  • Understand how your credit score is calculated.
  • Pay your bills on time and manage your credit utilization.
Jan 29, 2012

Your credit rating and credit score are not things you should take for granted. If you do not pay attention to your credit score, you may let a small problem grow into a bigger one. Bad credit can cause serious repercussions and can follow you throughout your life. If your credit is not as strong as you want it to be, here are a few ways how you can improve your credit rating.

Establish Credit History

Your credit rating is established partially on your credit history. Your credit history is based on the information that your creditors have reported to credit bureaus, including the history of how you handled your credit cards, loans, and even some utility bills. If you have little to no history, the creditors are leery about offering you credit. They do not have enough information from your past to view you as a good credit risk, so your credit will be established at a lower rate. If you want to build your credit, get a credit card, charge a few things, and pay off the majority of the balance. Financial experts recommend keeping your account balances less than 30% of your available credit. It shows that you have the ability to pay back your debt, without letting it grow out of control.

If you have no, very limited, or a bad credit history, you may be turned down when you apply for credit. If so, consider applying for a secured credit card.

Secured Credit Card

Secured credit cards require you to deposit cash in an account with the credit card bank and the credit line available on the card is equal to the amount of cash you have on deposit, less any fee that the issuer charges you to establish the account. Make sure that your secured card issuer reports your card activity to the credit bureaus.

Co-signer

If you can find someone willing to co-sign for you on a loan or credit application and the account is kept in good standing, this will help your credit score improve. It can be hard to find a co-signer; because,i f you default on a payment, the co-signer is fully responsible for the debt and any fees and interest tacked on and the co-signer's credit will suffer, too.

Make Payments on Time

If you pay your bills late, you are not only incurring late fees and exposing yourself to a hike in your interest rates, but you are also damaging your credit. If you miss a payment entirely or are 30 days late on a bill, your credit will suffer serious harm. Your payment history, even for minor items such as utilities and cable television, can be reported to the various credit bureaus. Any missed or late payments are recorded and reported on your credit report. If you want to build and maintain your credit rating, pay your bills on time and do not miss any payments. If you have missed payments in the past, get back on track. Your recent payment history counts more than ancient history, so do not let a past problem be an excuse to let the problem continue to reoccur.

Pay Off Your Debt

If you have debt, pay it off. Do not transfer your debt from one credit card to another to card, even when lowering your interest rate, without making a concerted effort to pay down the debt. Start budgeting to pay off your debt. Pay off that credit card and your other debt payments until nothing remains. The longer you continue to carry debt on which you are paying interest, the more you will end up spending to pay it off.

Control Your Credit Utilization

The amount debt you carry compared to the maximum size of the credit lines you have been granted results in how creditors view your credit utilization.  Credit utilization is measured at the close date (typically monthly) and then reported to the bureaus. A reporting period is typically 90 days, so a charge and then quick payoff should not hurt your credit utilization.

FICO, the main credit scoring system, measures utilization at the individual card level (and possibly in aggregate). Be aware that if you have an individual credit line or credit card that has a balance that is more than 30% of the credit limit, this could negatively impact you. If you have a maxed out card, this will certainly hurt your credit score. You should examine all your credit lines and work to pay down each one so that it is not more than 30% of the maximum credit line you were issued.

Don't Apply For or Take on Too Many Credit Cards

Having and using a credit card wisely will improve your credit rating. A standard guideline is to maintain least three active trade lines in good standing. A trade line is credit industry jargon for a type of account, such as a department store credit card, a card issued by a oil company, a student loan, and so on. Ideally, they should be a mix of different types of accounts, such as a home mortgage, car loans, bank credit cards, store credit cards, unsecured personal loans, or loans for furniture or electronics.

However, if you constantly apply for new credit cards, it can hurt your rating, especially if you repeatedly are turned down for them. Applying for too many credit cards, in a way, shows that you do not have enough capital to afford your cost of living. If you are getting turned down by creditors, that is an indication that your credit standing just is not up to par. Other creditors will weigh these rejections against you.

Summary

Your credit score can have a large impact on your ability to achieve your life goals. Your credit rating dictates the interest rate you will receive on loans and whether or not you qualify for a loan or additional credit. Most Americans plan to buy a home or car sometime. If you have bad credit and do not take steps to improve it, you will pay the price, by paying higher interest and by having your choices limited. A credit problem that is left to grow will severely harm your ability to purchase a home, a car, or even get basic cable television or a cell phone.

If you want to improve your credit score, make sure to take the necessary steps. Pay off all debts, control your credit utilization, have a mixture of accounts, and pay everything on time. Most anyone, even someone who has just completed a bankruptcy, can build a good credit score in a couple of years by taking the proper steps.

Comments (8)


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Rachel W.
East Troy, WI  |  January 29, 2012
my husband and i went through credit counseling. All debts are paid off... my credit was hurt the worst since every card was in my name except for one. I've gotten a new card pay it off every month just wodering how long until we could possibly get a house this next year 2012 we plan on saving up for a down payment and looking in 2013 just wondering if a house will not be in the plans yet??
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Bills.com
January 29, 2012
Rachel, how fast your credit score will rebound depends in large part on what other accounts you have that were not enrolled in the credit counseling program. For instance, if you have a car payment and student loans that are in good standing, then your score will rebound faster than if all the accounts on your report were in the credit counseling program. All that is in your control are the steps you take moving forward. Make sure that you pay every account on time, work to get three active tradelines in your name, and keep your monthly balances below 30% of the maximum credit line you are granted.
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Max R.
Brooklyn, NY  |  August 25, 2011
I am in my late 20s with no credit whatsoever. I have enough money saved for a down payment on a house but obviously with no credit I can not be approved for a loan. My bank advised me to open up a secure account card through them which I did and I just use it to make small purchases ever month which I immediately pay off. I have no problem with paying for my day to day purchases and the only reason I need credit cards right now is to build credit. What are the fastest ways for me to build credit without getting pulled into some sort of agreement that might end up hurting me in the long run? Do I just set up the different credit lines, make all my payments on time and NEVER close them out?
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Bills.com
August 26, 2011
What you are facing is building your credit pretty much from scratch. A secured card is a good start, but you want to get at least three active tradelines and keep them in good standing. Ideally you want a variety of the types of accounts you have. For instance, if you financed a car purchase, that would diversify your tradelines, as opposed to having only three credit card accounts. A gas station card is a good first unsecured card; they seem to have lower credit restrictions, though I can't tell you that you will qualify for one with your limited history.

Having someone co-sign on a loan is another way to build your score, though the co-signer takes on full risk if you default.

The way to build credit is to take on debt and pay it responsibly. You can't get hurt by getting "pulled into some sort of agreement," as long as you pay the account as agreed and don't use too much of the credit line (aim to never owe more than 30% of the credit line limit, once you pay the monthly bill). Keep accounts open and use them occassionally, to maintain good credit hygiene.
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Kelly L.
Chicago, IL  |  February 11, 2011
I have a few credit cards and store cards that I originally opened because of a special promotion or discount that came with the card. I no longer use some of these cards. Will closing them help or hurt my credit rating?
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Bills.com
February 11, 2011
The algorithm that the Fair Isaac & Co. uses to calculate credit scores is proprietary and therefore it is impossible to say with certainty how much a certain activity will increase or decrease an individual's credit score. I suggest that you read the bills.com article about when to close credit cards and post any follow-up questions on that page.
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Sharon J.
Maynard, MA  |  June 09, 2011
I closed my credit card accounts myself, but they all had zero balances. I did this quit a few years ago so how do I get them off my credit report? I wish I had known they would just mess up my score but I thought that I was doing myself a favor by closing them and ended up hurting my credit in the end. Thanks for all the info! Sharon
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Bills.com
June 09, 2011
Even if you could delete the accounts in question, I doubt it would help you. One aspect of a person's credit score is the length of their credit history. Deleting or closing a consumer's oldest account with a long history resets the consumer's history to the next oldest account. Deleting or closing all of your accounts sets you to zero. Your best course of action is to gradually open an array of accounts (called tradelines), and keep payments in all current.

Please see the Bills.com resource Close Credit Card Account for a discussion of this issue.
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