If you’re like most people, your credit score is something you don’t think about that often.
You probably know that you need a good credit score to qualify for a loan or to get the best rate on a credit card, but those aren’t things you need to do every day. So most of the time, this number doesn’t even cross your mind.
It should, though. The truth is that a bad credit score can affect your life in all kinds of ways. Many types of businesses, from insurers to potential employers, check your credit score to get an idea of how reliable you are.
If your credit score is low, it can hurt your chances of getting a job, an apartment, a cellphone contract, or a decent rate on your auto insurance.
Luckily, a bad credit score isn’t a permanent problem. By following a few simple rules, you can clean up your credit history and start nudging that credit score up. Over time, you can raise your score to a level that will help you, instead of hurt you.
How Credit Scores Work
To understand how to increase your credit score, you need to know how it’s calculated, especially since there are many credit score myths out there. Your credit score is based on five key factors:
- Payment History. The first thing any lender wants to know is whether you will pay back the money you borrow. When you take out a loan and pay it back by the due date, your score goes up. Late or missed payments lower your score. Your payment history accounts for 35% of your total credit score, according to Experian.
- Credit Utilization. It doesn’t bother lenders so much if you already owe some money to other lenders. However, if you’re using as much credit as you can get, that’s a sign that you’re stretched too thin and could miss payments in the future. The amount you owe on credit card balances and unpaid installment loans makes up 30% of your credit score.
- Length of Credit History. Lenders like to see that you’ve been using credit for a long time. If you’ve been borrowing money and paying it back for years, you’re likely to keep doing it. Your credit score factors in the age of all your accounts and how long it’s been since you’ve used them. Your credit history makes up 15% of your credit score.
- Credit Mix. Lenders prefer borrowers with experience paying off several different types of loans, such as a credit card, an auto loan, and a mortgage. Your credit score factors in both current loans and ones you’ve paid off. Together, they make up about 10% of your score.
- New Credit Applications. If you take out several new loans at once, that’s a sign you’re desperate for money. This means you’re likely to have trouble paying back what you borrow. Each time you apply for a new credit card or other new account, it dings your credit score briefly. New credit requests count for 10% of your score.
FICO, the company in charge of credit scores, adds up all these factors to calculate your score. Then it assigns you a number between 300 and 850.
With an excellent credit score — at least 800 — you will qualify for the best rates on most loans. By contrast, a poor credit score of less than 580 means you could have trouble getting a loan at all.
Improving Your Credit Score
There’s no quick fix for a bad credit score.
Building good credit is a bit like losing weight; it takes time to get into bad shape, and it takes time to get back out. However, as soon as you start using credit responsibly, you’ll see a slow, steady increase in your score over time.
Here are a few simple strategies that can help you get your credit back on track.
1. Check Your Credit Report
Your credit score is based on the information in your credit report. This is a summary of your borrowing behavior, put together by one of the three major credit bureaus: Experian, Equifax, and Transunion. You actually have three credit reports, one from each bureau.
However, these companies rely on lenders to report information to them — and lenders aren’t perfect. Sometimes they make mistakes, like saying you still owe money on a loan you paid off years ago. Errors like this can drag down your credit score.
It’s a good idea to check your credit reports regularly. Fixing credit report errors that hurt you is the fastest way to give your credit score a boost. Here’s how to do it:
- Order Your Report. Under U.S. law, you are entitled to a free annual credit report from each of the three bureaus. You can order these from AnnualCreditReport.com. If you spread them out across the year, getting one from a different bureau every four months, you can keep an eye on your credit regularly and spot mistakes quickly.
- Look for Mistakes. Make sure all accounts listed on your credit report are really yours and that all information about what you owe and any late or missed payments is true. Also look for negative items, such as late payments, that are more than seven years old. In most cases, bad marks like this should drop off your report after seven to 10 years.
- Dispute the Errors. If you find any mistakes, contact the bureau to dispute them. All three bureaus have online forms on their websites for filing a dispute. Or, you can send a letter to the bureau giving details about yourself and the error, with a formal request to fix it. Attach a copy of the credit report and any other documents that support your claim.
- Wait for Results. The agency should get back to you in 30 days with the results of your dispute. If it finds there was an error, it will correct it and send you a copy of your updated report for free. It will also pass on the information to the lender who made the mistake, as well as to the other two bureaus.
This lets you monitor your credit report year-round and catch errors right away.
2. Pay Bills on Time
On-time payments are the single biggest ingredient in your credit score.
If you’re just a few days late paying your bill, it can make a serious dent in your credit rating. And the later you are with your payment, the more it hurts your score.
If you’ve been late paying bills in the past, you can’t wipe out that mistake. However, you can outweigh it by getting on top of your payments and staying on top of them.
Your recent behavior counts more heavily in your credit score, so old mistakes will gradually fade into the background. The longer you keep paying your bills on time, the more your score will increase.
If you have trouble remembering to pay your bills, setting up payment reminders can help. Many banks offer this service as part of their online banking. When you have a bill coming due, the bank sends you an e-mail or text message to remind you to pay it.
You can also set up an automatic bill payment plan that just pays your bill as soon as it comes in, with no action from you.
However, these plans don’t give you a chance to check your bill for mistakes before you pay it. Also, they only make the minimum payment on your credit card bill, which doesn’t help you pay down your balance.
3. Pay Down Debt
Next to paying on time, the biggest factor in your credit score is how much credit you use. The portion of your available credit that you’re using is called your credit utilization ratio or credit utilization rate.
For instance, if you have a card with a credit limit of $3,000, and your balance on that card is $1,500, your credit utilization rate is 50%.
The credit bureaus say it’s best to keep this rate no higher than 30%.
In the example above, you’d want to get your balance on that $3,000 card down to $900 or less. You could do this by paying off $600 of your $1,500 balance. The more of it you pay off, the more you’ll raise your score.
However, your credit score isn’t based only on your total credit use.
According to MyFICO, it also reflects the number of different accounts you owe money on. If you have a lot of cards with small balances — $100 here, $50 there — paying them all off is a good way to give your score a quick boost.
Once you’ve dealt with the small balances, focus on the big ones. Make a plan to pay off your credit cards by tightening your belt and setting aside a fixed sum each month to put toward the debt.
If you can’t manage a fixed payment each month, try debt snowflaking. Each time you save a small sum, even just $10 on groceries, add it to your debt payment for the month.
Finally, if you have a large balance that’s more than you can handle, see if you can negotiate with your creditors. Sometimes lenders are willing to settle for less than you owe rather than risk losing the money completely if you go bankrupt.
This approach can also work with old debts that have gone into collections. Just make sure you get any agreement in writing.
4. Keep Your Balance Low
Once you’ve managed to get your balance down to 30% of available credit or less, you need to keep it there. Here are a few ways to do that:
- Charge Less. Don’t run up your credit card bill paying for stuff that isn’t essential. You don’t have to quit using your cards — in fact, having cards and paying them off on time is good for your score. Just stick to a budget, and try not to push your cards past the 30% limit.
- Pay in Full. When you get your bill, pay it — all of it. That will knock your balance down to zero, so you start over with a clean slate. Otherwise, you just keep piling new debts on old ones, and the balances creep up. Plus, you have interest payments piled on top of what you already owe.
- Pay Twice per Month. Most lenders report your balance to the credit bureaus when they send your bill — not when you’ve just paid it. If you charge $1,000 on a card with a $1,000 limit, it looks like your card is maxed out, even if you pay it off right away. To get around that problem, break up that $1,000 payment into two $500 payments, and send one two weeks early. That way, the amount on your bill will never be higher than $500.
- Raise Your Credit Limits. There are two ways to lower your credit utilization ratio. You can make the balance lower or make your available credit higher. If you have $1,000 charged on your card and then you raise its credit limit from $1,000 to $3,000, suddenly you’re only using 33% of your credit. Of course, this only works if you don’t use any of your new, higher credit.
5. Sign up for Experian Boost
Experian, one of the three credit reporting agencies, offers a feature called Experian Boost. It can boost your credit score by giving you credit for cellphone and utility payments.
When you sign up, you’ll connect the bank account you use to make your payments. You will then be able to choose and verify the payments you’ve made that will help boost your payment history.
Because payment history is the biggest piece of your credit score, Experian Boost can help improve your credit score fast.
6. Don’t Close Old Accounts
Some people think having old debts on their credit reports is a bad thing. As soon as they pay off a credit card, they rush to close the account. If they pay off a car loan, they call up the credit bureaus to try and get that debt off their record.
This is entirely backward. Any debt that you’ve paid off on time is good for your score. And the longer those good debts stay on your record, the more they help you.
In fact, keeping an old credit card open can be a good idea, even if you never use it anymore.
For one thing, it increases your available credit. All that credit sitting unused keeps your credit utilization rate low. The higher the credit limit is on the card, the more it helps your score.
Second, an older card is a helpful part of your credit history. The older your oldest open account is, the better it is for your credit score.
Canceling that old card will only shorten your credit history and hurt your score. The longer you’ve had the card, the more useful it is to keep, even if it just sits unused in a drawer.
7. Try a Credit Builder Loan
In order to improve your credit score, you need to borrow money and then pay it back on time. The problem is, when you have poor credit, companies are reluctant to lend you money.
This creates a Catch-22: you can’t improve your credit without borrowing, and you can’t borrow without improving your credit.
Credit builder loans fare a way around this problem. With this special type of loan, you don’t actually gain access to the money you borrow right away.
Instead, it goes into a bank account held by the lender. Then you make regular monthly payments for a set period, usually six to 24 months. Once you’ve paid off the full amount, the lender gives you the money in the account.
A credit builder loan poses no risk for the lender. If you fail to make your payments, it can get the money back at any time.
For the borrower, it’s a way to build credit while also building savings. The money you “borrow” could become a mini emergency fund, the start of your child’s college fund, or the down payment on your next car.
Despite these benefits, not all banks provide credit builder loans. If you can’t find a local bank or credit union that offers one, try online companies like Self.
Just check before you borrow to make sure the lender will report your payments to the three major credit bureaus. After all, that’s the whole point of this type of loan.
8. Avoid Other New Loans
Each time you apply for a new loan of any kind, the lender pulls your credit report to check it. This “inquiry” causes a small dip in your credit score because seeking new credit can be a sign that you’re short of cash.
(Only “hard inquiries,” or credit inquiries from lenders, have this effect. Requesting and checking your own credit report doesn’t hurt your score.)
Usually, the ding to your credit is minor. According to MyFICO, in most cases, a single hard inquiry takes less than five points off your credit score. Also, only inquiries in the past 12 months affect your score, so even this minor drop doesn’t last long.
However, if you apply for a bunch of new loans in a short period, that’s a different story. Applying for lots of credit raises a red flag for lenders, and it can seriously hurt your score.
Fortunately, this is only true if you apply for several different loans at once. If you’re just shopping around for the best rate on one loan, that’s no problem.
When calculating your score, credit bureaus don’t look at hard inquiries for mortgage, auto, or student loans made within the past 30 days. Thus, any inquiries made in the past month don’t affect your loan while you’re rate shopping.
Even for inquiries older than 30 days, the credit bureaus consider these types of loan applications differently.
If it finds a bunch of them within a typical shopping period — which is 45 days according to the latest model for FICO scores — it treats them as only one inquiry. As long as you only take out one actual loan, your credit will only be dinged once.
Taking out new loans frequently can also hurt you in another way. Just as keeping old accounts is good for your score, having lots of newer accounts hurts your score.
If you open one or two new credit cards each year, you will always have a “young” credit history. Having fewer accounts and keeping them longer gives your credit report time to age, helping your score.
In fact, if you plan to take out a big loan soon, such as a mortgage, you should probably avoid applying for any new credit for at least six months beforehand. That’s because even a small, short-term dip in your credit score could drop you below the cutoff for better rates.
For instance, if right now you have a “good” credit score of 670, a single inquiry could drop you down to only a “fair” credit score of 665. You could end up paying a higher rate for your loan or even be denied completely.
9. Consider Credit Counseling
All the tips above can help you show that you have healthy finances. By correcting errors, paying down your balance, keeping old accounts, and avoiding new ones, you can avoid giving the impression that you’re in financial trouble when you’re not.
But what if you really are having trouble making ends meet? How can you dig yourself out without hurting your credit score too badly?
Your best bet, in that case, is a credit counseling service. These services can help you set up a plan to pay off your debts in manageable monthly payments. In some cases, they can also negotiate with your creditors to lower the interest and penalties you have to pay.
Going to a credit counselor won’t help your score immediately. However, as you make payments and reduce the size of your debt, your credit score will gradually improve. And in the short term, seeking help from a credit counselor won’t harm your credit rating.
Be careful, though. While there are many real credit counselors who can help you, there are also a lot of phonies who are just trying to squeeze money out of desperate people. You can find a legitimate credit counselor in your state through the U.S. Trustee Program run by the Justice Department.
10. Watch Out for Scams
You’ve probably seen those ads for services that promise to “fix” a bad credit rating. Many claim they can “erase” bad credit, wipe bad debts off your record, or even give you a whole new credit identity.
These claims sound too good to be true — and they are. While there are some legitimate credit repair services out there, the ones that promise to make bad credit disappear like magic are nothing but scams.
Steer clear of any service that does any of the following:
- Promises a Quick Fix. Many credit repair companies say they can simply make all your late payments, liens, and even bankruptcies disappear. This is a lie. You can remove mistakes from your credit report, but there’s no legal way to wipe out your real credit history. All you can do is wait for the bad marks to drop off your report on their own.
- Won’t Put It in Writing. Legally, a credit repair company must give you a written contract that spells out what it will do for you, how long it will take, and what it will cost. It must also tell you what you can legally do to repair your credit on your own. Finally, it must give you the chance to cancel the service at no charge within three days. Any service that won’t do all of this is a scam.
- Asks for Payment Up Front. Under the law, a credit repair company can ask for payment only after performing a service for you. A company that insists you must pay first before it takes any steps to help you is probably planning to take your money and run.
- Offers You a New Identity. Some companies offer to clean up your credit by giving you a new “credit profile number,” or CPN, to use in place of your Social Security number (SSN). It looks just like a real SSN, and sometimes it is — one that’s been stolen, possibly from a child. This scheme is a form of identity theft and could land you in jail.
- Gives You an EIN. Rather than give you a phony CPN, some companies urge you to apply for an Employer Identification Number (EIN) from the Internal Revenue Service and use that number to apply for new credit. EINs are real numbers used by businesses, but it’s against the law to apply for one for personal use.
- Tells You to Lie. Some companies don’t bother setting you up with a fake identity. They simply urge you to lie on new loan applications or use the wrong SSN. These tricks are also illegal and can lead to fines or jail time.
The truth is, no service can do anything to repair your credit that you can’t do yourself.
They can help you remove mistakes from your credit report or negotiate with lenders, but these are also things you could do for free on your own. Paying for a service to handle them can save you some time and hassle, but it’s no magic bullet.
Many people think being judged by their credit score is unfair. After all, your credit score only shows one thing about you: how good you are at paying off debt. If you’ve never had much debt in the first place, you won’t have a high score — but that certainly doesn’t make you irresponsible.
Some people are trying to change the system. For instance, Consumers Union has an online petition to state insurance commissioners urging them not to let insurance companies set their prices based on credit scores.
But for now, fair or unfair, your credit score is bound to have a significant impact on your life. It only makes sense to game the system and get your credit score as high as you can.
Many of the moves you can make to improve your score, like reducing debt, are good for your financial health anyway. And most of the ones that don’t help you can’t hurt, either.