If you’re struggling to get a credit card or you’re disappointed with the rates lenders are offering, it’s time to take a detailed look at your credit scores. Your credit score is a determining factor in any loan application because it tells a lender how risky it is to give you credit, based on your history of using credit. If you have a high score, it’s easier to get loan approval and favorable rates, but if your credit rating dips, it could be a very different story. Learning how to raise your credit scores puts you in a strong position to take control of your finances and make yourself a more appealing client for lenders. Changing your credit rating doesn’t happen overnight, so it’s a good idea to get started immediately — and well in advance of when you actually require a new line of credit.
What Is a Credit Score?
A credit score is a three-digit number based on various aspects of your credit history. There are dozens of different credit scores financial institutions use to determine how creditworthy a potential client is, and they all use slightly different algorithms to come up with their scores. Generally, they’re based on the same things: your payment history, amount of debt, length of credit history, mix of credit accounts and history of applying for credit.
The most common scores come from FICO, originally known as the Fair Isaac Corp. Even within the FICO scoring system, you can have dozens of credit scores, because the company has several versions of its basic score and creates custom scores for lenders. Other systems include VantageScore, Experian PLUS and the Equifax Credit Score, among others. All of this is to say you have many credit scores, and while you shouldn’t worry about checking them all, it’s important to know how to make sense of them.
What Is a Good Credit Score?
In all cases, higher numbers are better. If you have a high credit score, you’re more likely to be accepted for a loan, and you’re also more likely to get favorable rates. Credit scoring models have various scales, but a common range is 300 to 850 (FICO’s general score uses that scale, as does VantageScore 3.0). On that scale, a FICO score of 670 or more is “good,” according to Experian, one of the three major consumer credit reporting agencies. Here’s how Experian breaks down FICO score ranges:
- 800 to 850: Exceptional (19.9% of all people)
- 740 to 799: Very good (18.2%)
- 670 to 739: Good (21.5%)
- 580 to 669: Fair (20.2%)
- 300 to 579: Very poor (17%)
How to Get a Credit Report & Credit Score
Before you can improve your credit score, you have to know where you stand. You can get a free credit score from a variety of places, but no matter what kind of credit score you’re looking at (FICO, VantageScore, etc.) take care to find out the scale, so you understand where on the spectrum you fall. For example, you can see two of your credit scores for free on Credit.com (including a VantageScore 3.0). You can see where on the scale your score falls, as well as information about how to improve your credit score.
Because your credit scores are based on your credit reports from the three major credit reporting agencies — Equifax, Experian and TransUnion — you’ll want to review those regularly. You’re entitled to a free annual copy of your credit reports, which you can get on AnnualCreditReport.com. Check your reports for accuracy and signs of fraud, because resolving credit report errors can improve your credit scores. (You can read more about how to fix credit report errors here.)
How Can I Raise My Credit Score?
Improving your credit score takes time. The necessary steps aren’t complicated, but making the difference often involves re-evaluating how you use credit and adjusting your lifestyle accordingly. It takes planning, dedication and time, so it’s a good idea to make every effort as soon as possible, ideally well in advance of when you need to apply for a loan. In some cases it can be better to hold off taking out a loan until you’ve improved your credit score because the savings associated with better rates put you in a much stronger financial position.
To improve your credit score, you’ll want to focus on the five main factors of credit scoring:
Payment History (35% of Your Credit Score)
Make your payments on time. An account that’s 30, 60, 90 or more days past due will have an increasingly negative effect on your credit score. Setting payment reminders so you know when your next payments are due is a useful way to stay on top of payments. If you have the option to set up automatic direct payments with the lender, you can avoid forgetting to make payments.
Amounts Owed (30%)
Keep your credit card balances as low as possible relative to your credit limits (aka credit utilization rate). For a good credit score, try to use less than 30% of your available credit or, even better, less than 10%. You’ll also want to pay down existing debts, because the closer your outstanding loan balance is to its original amount, the worse it is for your credit score.
To really take control of your spending, it’s a wise idea to make a list of all of your credit accounts and the associated interest rates. This makes it easier to develop a plan that focuses on paying down the debts with the highest interest rates, while also ensuring you continue to make payments across all of your credit lines to avoid incurring additional fees. If that sounds easier said than done, getting the assistance of a credit counselor is a possibility. Such counselors analyze your financial position and work with you to make positive changes.
Length of Credit History (15%)
Keeping old accounts open and in good standing will help you establish a long history of good credit. People who have not had an active credit account within the last six months may see their credit scores suffer or may not have a credit score at all.
Credit Mix (10%)
It’s good to maintain a mix of installment loans and revolving credit accounts.
New Credit (10%)
Try to limit how often you apply for new credit, because if you apply multiple accounts in a short period, you’re a greater credit risk. A credit application generates a hard inquiry, which can have a small, negative effect on your credit score, particularly within the first six months it’s on your credit report. Several hard inquiries in a short period of time can add up to serious credit score damage.
There’s no quick fix for improving your credit score. Negative marks generally stay on your credit report for up to seven years. They’ll have less of an impact on your score as they age, but you’ll want to focus on good-credit practices going forward while you wait for the negative information to age off your credit reports. (Here’s a guide to how long things stay on your credit report.)
A credit score isn’t a static number. It’s a snapshot that has the potential to change over time based on the information in your credit report. Turning around a low credit score can seem like a daunting prospect, but with practical thinking and a strong plan of action, it’s possible to take control of your finances and improve your score. Bear in mind that closing accounts and paying off debts doesn’t make them vanish from your credit report, and they can factor into any subsequent loan application, so it helps to be patient as you wait for your actions to reflect positively in your credit score.