Whenever you apply for a loan, your credit score is checked. You probably know this. But it’s not just lenders who are interested in your credit score. Insurance companies, landlords and employers now check credit histories in order to decide what sort of a risk you will be. Even utility companies, satellite TV providers and cell phone retailers might check your credit score. A great credit score also saves you lots of money over the years. If you want the best possible terms – or just to avoid being rejected – you will need a good credit score, built on a good credit history. Here is a brief guide on how to raise your credit score.
What Goes Into a Credit Score?
There are actually a number of factors that go into a credit score. Each major credit bureau has its own method of weighing different factors, and many banks and insurance companies have their own specific formulas. But most credit scoring formulas are based on the original breakdown put out by the Fair Issac Company (hence, your FICO score). You can get a good idea of what is important in your credit score by using the following as a guide:
- Payment history: 35%
- Outstanding debt: 30%
- Length of credit history: 15%
- New credit and hard inquiries: 10%
- Types of credit you have: 10%
As you can see, the most important factor related to your credit score is your payment history. Paying on time, and paying the full amount you should be paying, is the single most important thing you can do. After that, the most important thing you can do is to keep the amount of debt you have low. While other factors have some bearing on your credit score, you will find the most success in raising your credit score if you focus on making your payments on time, and reducing the amount of debt you have.
Raising Your Credit Score
The most effective way to improve your credit score, and keep it consistently high, is to cultivate good credit habits. This means that you should start making your payments on time, and start right now. You should also make sure that you are paying at least the minimum payment required. If you are over the limit on your credit cards, you need to do what you can to pay your fees and get your balances down.
Next, you should start paying down your debt. Outstanding debt also takes into account the percentage of the available debt that you are using. This means that if you have a credit card with a limit of $3,000, and you have $2,600 on it, you are dangerously close to your capacity. It is vital that you reduce your debt to a point where it looks more manageable, especially to creditors. You can see an improvement in your credit score even if you drop down to 50% of your capacity, and if you keep your utilized credit to 25% to 30% of what you have available, you are likely to even better results – and maintain a higher score overall.
After you are on track to pay down debt, and you are making all of your payments on time, you can fine tune with the other aspects of your credit score. Keep credit accounts that you have had a long time. I have one credit card that doesn’t have a rewards program, but it has a reasonably low interest rate, and I’ve had it for 12 years, since I was in college. The longer your credit history, the more accurate your score is likely to be, and it could bump you a little higher. So think twice before canceling that venerable credit card.
Finally, limit your credit opening activities to situations that you are really interested in, and take care to consider the types of credit you are getting. Creditors like to see revolving accounts (major credit cards) mixed with installment accounts (auto loans) and mortgages. However, too may payday loans and department store credit cards can weigh a little bit on your credit score.
Using Credit to Build Up Your Score
Because your credit score is based on your credit history, you need a credit history. It seems kind of obvious. This means that in order to build up your credit score, you will need to use credit. One of the fastest ways to do this is to use a credit card. You might be wary of credit cards, and with good reason. You will have to make a plan and show discipline. One way to do this is to buy one or two things with your credit card once a month, and then pay it off. If it is a small amount, you can even take two months to pay it off, in order to make installment payments. Don’t get too comfortable carrying a balance, though, since you don’t want to pay a great deal of interest.
Improving Your Credit Score Fast
There are companies that claim that they can repair your credit score fast. Be wary of these claims. You can raise your own score in 30 to 90 days, just by paying down debt quickly and making on time payments. Many credit repair places employ shady methods to give your score a short-term bump, but the effects wear off after a couple of months, and then you are back to where you started.
It is also worth noting that, by law, these credit repair companies cannot do anything for you that you cannot do for yourself. So if a company is claiming that it has some super-secret method that no one knows about, show extreme caution. A legitimate company can’t do much more for you than challenge negative items, help you fix errors, and encourage you to improve your credit habits — all things you can do for yourself without having to pay a cent.
Bottom line: Your best bet is to check your credit history, and then fix errors that appear on the credit reports at the three major credit bureaus. Then, begin to make all of your payments on time and reduce your debt. Consistently good credit habits will have their effect by helping you raise your credit score.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.