If you’re interested in ways to improve your credit score, then you’re probably aware of how important it is to have a good score.
Whether you’re applying for a mortgage, car loan or credit card, your credit score is used to help lenders determine just how risky it is to lend you money.
The higher your score, the more likely you’ll get approved for new credit and the lower your interest rates will be.
Read more: Clark’s credit score guide
What’s a good credit score?
Your FICO score will be anywhere from 300 to 850, and if your score is 750 or higher, most lenders would consider that very good or excellent.
- Excellent credit: 750+
- Good credit: 700 – 749
- Fair credit: 650 – 699
- Poor credit: 600 – 649
- Bad credit: below 600
This graphic from Credit.org is a couple of years old, but it really shows how a low score will result in higher mortgage, auto and credit card interest rates.
How is your credit score determined?
If your credit score isn’t where you want it to be, not to worry. There are some things you can do to improve it over time. First, let’s review what factors determine your credit score:
In the above graphic from MyFico.com, you see that there are five categories that make up your score, but some are more important than others:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- Credit mix in use – 10%
- New credit – 10%
How to improve your credit score
Now that we’ve reviewed what a good credit score is and how it’s determined, here are some of the best strategies to raise your score!
Make your payments on time
We know it sounds obvious, but this is the most important factor when it comes to your credit score. Once you get off track, it can be really difficult to get your score up again.
On-time payments = Positive impact
Late or missed payments = Negative impact
If you’ve missed a few payments in the past, consider setting up bill reminders or automatic payments to never miss another due date.
The longer you pay your bills on time, the higher your score will go.
Keep your balances low
Lenders consider your “credit utilization ratio,” which is the amount of credit you’ve used compared to the amount of credit available.
Example: If you have a $1,000 credit card balance and a $10,000 credit limit, your utilization ratio is 10%.
Keep in mind, you have a credit utilization ratio for individual cards as well as your overall credit card use. Some experts recommend keeping your balance to 25% or below available credit.
Pay twice a month
Paying off your balance in full every month is the best case scenario, but if you can’t do that, consider making two payments a month.
Use caution when opening/closing accounts
Anyone with limited credit history should avoid opening too many accounts at once because it will lower your average account age. Applications for new credit also ding your score, so it’s not a good idea to apply for any type of loan, even a store credit card, when you’re in the process of a big purchase like a house.
Closing any credit card account, or other line of credit, can also have a very negative effect on your score — as doing so also lowers your average account age and also reduces your overall amount of available credit.
The only time it makes sense to close a credit card account is if it has a very high annual fee. Even in this case, though, Clark recommends only closing the account after you’ve secured a new card.
Raise your credit limits
One way to lower your credit utilization ratio is to increase your credit limits, but most people don’t recommend opening a bunch of accounts just for this purpose. If you want to reduce your credit utilization ratio, opening another credit card is a good way to do it, as long as you aren’t applying for any other big loans (again, like a mortgage) any time soon.
Another way to do it is to ask an existing card issuer to increase your credit limit.
Pay off credit card debt instead of transferring
Shuffling your debt from one lender to another won’t do anything to increase your credit score, so make it a priority to pay down your debt.
Have several cards? Pay off the one with the highest interest rate first.
If you’re facing a debt with a high interest rate, transferring the balance to a zero interest card could save you money on interest payments, as long as you can get the total paid off before the terms of the zero interest offer expire.
Mix things up
It’s not just about credit cards. Your FICO score is also calculated based on mortgages, bank loans and retail accounts as well. Having a good mix may give you a modest boost.
Fix any errors on your credit report
Your credit score is determined using information from your credit report.
You’re entitled to a free copy of your credit report every year from each of the credit reporting companies: Experian, TransUnion and Equifax. To get your credit reports for free, go to AnnualCreditReport.com.
It’s important to review your credit report thoroughly because an error could negatively impact your score. If you spot one, contact the credit bureau that reported it.
As the graphic from MyFico.com illustrated, payment history and amounts owed account for two-thirds of your credit score. So if you’re making payments on time and keeping a low balance, you’re well on your way!
And if you don’t know your FICO score, Discover offers it for free, even if you’re not a customer.
Read more: 5 sneaky ways to increase your credit score