How to Improve Your Credit Score

When you apply for a loan or some form of financing, your credit score will be used to help determine your interest rate and likely be a large factor in approval. This score is reflective of your overall financial health and tells the lender how likely you are to make payments on time.

HOW ARE CREDIT SCORES CALCULATED?

There are three consumer bureaus that collect and analyze credit information on consumers: TransUnion, Experian, and Equifax. These three agencies compile information on your open, closed and cancelled accounts. They also use public records to figure your credit score, including judgments, liens, and other public record items. The two most popular scoring agencies and reports are FICO® and VantageScore. Both scores vary from a range of 300-850 and consider the same five factors into the scoring model: payment history, debt owed, average age of accounts, types of credit in use, and new credit. Typically, the higher the score, the more likely you are to get the loan or financing request approved. Each lending institution has different cutoff scores.

If your credit score isn’t where you’d like it to be, you’re not alone and there are a few changes you can make today to set you up for success in the future.

5 TIPS TO IMPROVE YOUR CREDIT SCORE:

PAY YOUR BILLS ON TIME.

35% of your credit score is calculated with your payment history and even being just a few days behind can have a major negative effect on your score. Take a look at your accounts and determine what you need to do to get current on all of your accounts.

*Pro-tip: Set up payment alerts through your bank or even just monthly reminders on your phone to make sure you don’t miss another due date.

PAY OFF DEBT.

30% of your credit score is calculated with your amount owed on accounts. Reducing the amount of debt you have will help you avoid letting this debt grow exponentially. If you’re up to your elbows in credit card debt, stop using them. Take a look at all of your account balances and make an aggressive payment plan towards the credit card bills that carry the highest interest rate – these grow the fastest!

*Pro-tip: Don’t forget to make payments towards the smaller interest rate accounts as well. Ignoring the minimum payment on these will be a hit against payment history.

Be aware that paying off a collection account, or closing an account on which you previously missed a payment, will not remove it from your credit report and will stay there for seven years. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.

DON’T OPEN A LOT OF NEW ACCOUNTS RAPIDLY.

New accounts will bring down your average account age and have a larger effect if you don’t have a lot of other credit information built up. This can also look particularly risky to a lender.

BE DELIBERATE ABOUT RATE SHOPPING AND INQUIRING ABOUT CREDIT LINES.

If you’re looking for rates on a particular loan, try to keep this search in a focused period of time. FICO distinguishes between a search for a single loan and a search for a bunch of new credit lines partly by the length of time over which the inquiries are occurring.

BE DELIBERATE ON HOW YOU HANDLE CURRENT AND NEW CREDIT.

Closing unused credit cards as a short-term strategy to raise your score will not work. Similarly, opening a number of new credit cards that you don’t need, just to increase your available credit, won’t work either. Apply for new credit only as needed. This, combined with managing payments responsibly and paying off your debt, will help you re-build your credit score in the long term.

A few other important things to know:

• Avoid credit repair agencies that charge a fee to improve your score.
• It’s OK to request and check your own credit report. If you are ordering your credit report directly from the reporting agency or an authorized organization, it won’t affect your score.

WHAT GOES INTO MY FICO CREDIT SCORE?

Payment History – This comprises approximately 35% of your FICO Score.  It includes your payment history on numerous types of accounts such as credit cards, retail accounts, installment loans, and finance company accounts. It also looks at public records and collection items such as bankruptcies, foreclosures, wage attachments, and liens; gives the details on late or missed payments, and the number of accounts that show no late payments. 

The Amounts You Owe – Approximately 30% of your score is based on this. Credit utilization evaluates how much you owe compared to how much credit you have available. This takes into account the amount owed on all accounts, the amounts owed on different types of accounts, the number of accounts you have, the total credit line being used, and how much is owed on installment loans.

Length of Credit History – Approximately 15% of your FICO score comes from this. This includes how long your credit accounts have been established considering the age of your oldest, newest, and average age of accounts.  Also, how long specific credit accounts have been established and how long it has been since you’ve used certain accounts.

New Credit – This category comprises approximately 10% of your credit score. FICO research shows that opening several credit accounts in a short period of time represents greater risk–especially for people who do not have a long credit history. Some things FICO considers is how many new accounts you have opened, how long it has been since you opened a new account, how many recent requests for credit you have made, length of time since credit report inquiries were made by lenders, and whether you have a good recent credit history which would follow any past payment problems.

Types of Credit in Use – Approximately 10% of your credit score comes from this.  This is your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and you should not open a credit account you do not plan to use. Instead, it takes into account what kinds of credit accounts you have and how many accounts of each type you have.

WHAT A FICO SCORE IGNORES

A FICO score considers a wide range of information, but does NOT consider:

• Race, religion, color, national origin, or marital status
• Age
• Salary, occupation, title, employer, date employed or employment history
• Where you live
• Any interest rates charged on credit cards or other accounts, or
• Any items reported as child/family support obligations

WHAT INFORMATION IS ON A CREDIT REPORT?

Earlier, we discussed a little about how credit scores are developed based off of credit reports that are developed by the three main consumer bureaus, TransUnion, Experian, and Equifax. All though they are all separate entities, the credit reports they produce will have some common categories of information:

• Identifying personal information like name, date of birth, social security number and employment information. This isn’t used to determine your credit score.
• Trade lines, or credit accounts that you have established. These are bank cards, car loans, mortgages, etc. They will show the type of loan, when you opened the account, your credit limit, account balance, and payment history.
• Credit inquiries from loan applications or other involuntary means, like the pre-approved credit offers you receive from a bank in the mail.
• Public records, like bankruptcies and lawsuits, and information on overdue debt from collection agencies.

Now that you know what goes into a credit score and how to improve yours, go check out your current accounts and see what you can do to set yourself up for financial success in the future.