If you’re struggling to get a credit card or are disappointed with the rates lenders are offering you, it’s time to take a detailed look at your credit score. Your credit score is a determining factor in any loan or credit card application. Your score tells a lender how risky it is to give you credit. If you have a high score, it’s easier to get loan approval and favorable rates. But if your credit rating is lower, it can work against you with lower loan terms and higher interest rates. There are ways to improve your score though.
What Is a Credit Score?
A credit score is a three-digit number calculated using a credit scoring model and various aspects of your credit history and usage. There are dozens of different credit scores and scoring models that financial institutions use to determine how creditworthy a potential client is. Each model uses slightly different algorithms to come up with credit scores. Generally, scoring models use the same factors to determine a score:
- Payment history
- Amount of debt versus available credit—called debt usage
- Credit history or how long you’ve had and used credit
- Mix of credit accounts
- Credit inquiries, which show how many loans and credit cards you’re applying for
The most common scores come from FICO, originally known as the Fair Isaac Corp. Even within the FICO scoring system, you have dozens of credit scores, because the company has several versions of its basic score and creates custom scores for lenders.
Other scores include VantageScore, Experian PLUS and the Equifax Credit Score, among others.
Basically, there are many types of credit scores and you have many scores. While you don’t need to worry about checking all of them, it’s important to know how to make sense of them and where you stand.
What Is a Good Credit Score?
In all cases, higher numbers are better. If you have a high credit score, loan approval is easier and you’re also more likely to get favorable interest 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:1
- 800 to 850: Exceptional
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Very poor or bad
And how Experian breaks down VantageScore ranges:1
- 750 to 850: Excellent
- 700 to 749: Good
- 650 to 699: Fair
- 550 to 649: Poor
- 300 to 549: Very poor or bad
How to Get Your Credit Score and Credit Reports
Before you can improve your credit score, you have to know what your score is. You can get a free credit score from a variety of places. And no matter what credit score you’re looking at—FICO, VantageScore, etc.—you can use the lists above to you understand where you fall on the range. For example, you can see your Experian VantageScore 3.0 credit score for free on Credit.com.
When you sign up with Credit.com, your dashboard shows you what range your score is in—excellent, good, fair or poor. You also get a free credit report card that shows where you stand in each of the five areas that go into calculating your score—payment history, debt usage, credit age, account mix, credit inquiries. Your report card also gives you tips on how to improve in each of the five areas.
Your score and factors are updated every two weeks so you can see how you’re progressing toward improving your score.
Because your credit scores depend on your credit reports from the three major credit reporting bureaus—Equifax, Experian and TransUnion—you want to check your credit reports too. Once a year is enough for most people. You’re entitled to a free annual copy of your credit reports, which you can get on AnnualCreditReport.com.
When you get your reports, you want to check them for accuracy and signs of fraud. Resolving credit report errors can improve your credit scores. Read more about how to fix credit report errors.
If you’ve checked your reports within the last year and need to do a spot check and ensure errors were fixed, you can get your Experian credit report as well as your FICO score from Credit.com for just $1. Along with your report, you get personalized alerts when your credit report or FICO® Score changes and ID theft protection.
How Else Can I Improve My Credit Score?
Improving your credit score takes time. The necessary steps aren’t complicated, but improving your score involves re-evaluating how you use credit and adjusting your lifestyle accordingly. It takes planning, commitment and time.
In some cases, it can be better to hold off applying for a loan until you’ve improved your credit score because the savings associated with better rates puts you in a much stronger financial position.
To improve your credit score, you’ll want to focus on the five main factors that go into your credit score:
Payment History—35% of Your Credit Score
The best way to take care of your payment history is to make your payments on time. An account that’s 30, 60, 90 or more days past due has 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 keep current. If you have the option to set up automatic direct payments, that’s a great approach.
Paying bills regularly and on time doesn’t just apply to your credit card bills. You need also to be paying your utilities, rent and phone bill on time as well. If you do fall behind on payments, bring the accounts current as soon as you can. Late or missed payments stay on your credit report for up to seven years.
Keep your credit card balances low relative to your credit limits—this is known as your debt usage or credit utilization ratio. For a good credit score, try to use less than 30% of your available credit. The best ratio is less than 10%.
You want to pay down existing debts. The closer your outstanding loan balance is to the full amount of the loan, the worse it is for your credit score.
When you maintain a low credit utilization ratio, lenders see that you don’t make a habit of maxing out your credit cards. This tells them you can manage your credit accounts responsibly. All these factors positively affect your credit utilization ratio.
You can also contact the credit card issuer try to get a limit increase on your current card if you need to lower your utilization ratio as well.
If all that sounds easier said than done, getting the assistance of a credit counselor might help. Such counselors analyze your financial position and work with you to make positive changes that improve your credit score and therefore your creditworthiness.
Having accounts and keeping old accounts open and in good standing helps you establish a history of good credit. People who haven’t 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.
If you have an account you paid in full and then closed or you have unused credit cards, don’t close these accounts or remove them from your credit file. Keeping them on your credit file helps lengthen your credit history which can positively impact your credit scores.
When you close an account you aren’t using, it can have a detrimental effect on your credit utilization ratio because it increases your ratio and fewer accounts show on your credit report. That said, it can be good to have a credit card that you don’t use, just to show credit age.
It’s good to maintain a mix of installment loans and revolving credit accounts. All of one and none of the other can hold your credit score down.
A good credit mix includes credit card accounts, student loans and car loans or other loans. Instead of trying to reach a good credit mix quickly, maintain different credit accounts over time for longer periods, so it goes further to show your financial responsibility and affect your credit in a more positive way.
New Credit or Credit Inquiries—10%
Try to limit how often you apply for new credit cards and loan because if you apply for multiple accounts in a short period, you’re seen as a greater credit risk. A credit application puts a hard inquiry on your credit file. Hard inquiries have a small, negative effect on your credit score, particularly within the first six months. Several hard inquiries in a short period of time can add up to serious credit score damage.
Only apply for new credit accounts as needed and not to obtain a more diverse credit mix. Too many credit accounts may also tempt you to overspend and accumulate more debt which also has negative consequences for credit scores. Keep the accounts you have in good standing and check your credit to find other ways to boost your credit.
Hint. If you need to shop for a loan, apply for them all within a two-week period. When you do, the inquiries left on your file are seen as a single inquiry instead of several.
A New Option—Experian Boost
Experian Boost is a new tool you can use to phone and utility payments to your Experian credit report in real-time. You can use it to connect your online bank account to your Experian credit report and report your on-time payments on your own credit report instantly.
Experian says that anyone with a lower score, for example between 580 and 669, can really benefit from increasing their scores quickly with Experian Boost. The benefit of a better credit score that Experian gives is that someone with a FICO ® Score of 720 can pay $4,020 less for a $10,000, 5-year auto loan than someone with a 500 score. That saves the person with a higher score $67 a month over the person with the lower score. That’s just one example of why you want to improve your credit score.
There’s no quick fix to increase your credit score. Negative items generally stay on your credit report for up to seven years. They have less of an impact on your score as they age, but you 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 changes over time based on the information in your credit report, which is based on our credit habits. 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.
This article was last published December 16, 2016, and has since been updated by another author.