Want to improve your credit score? While it may seem impossible now, anyone can improve their credit score. It will take time and diligence, but anyone can do it. And I'm going to teach you how.
I'm not selling you a course or asking you to pay for some platform that will "boost" your credit score. I am going to teach you how to organically improve your credit score, through your spending habits and your actions. For absolutely free. Because I believe everyone should have access to this information and knowledge.
Before we can begin improving your credit score, we must first understand what a credit score is and how it is calculated. A credit score is a number between 300 and 850 that depicts a consumer's credit worthiness. Essentially, a credit score tells lenders if you can be trusted to pay back a loan. A higher score means you have a high probability of repaying a loan in a timely manner, where a lower score says you may be a liability as a borrower. The scores are grouped in ranges:
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
The idea is pretty straight forward, but how is that number calculated? The chart below shows the five main factors that determine a credit score:
Payment History - 35%
The largest factor is your payment history. This shows whether or not you pay your obligations on time. So, if you've missed payments or defaulted, it will have a huge effect on your credit score.
Total Amount Owed - 30%
The second largest factor is total amount owed. This takes into account total amount owed vs. the amount of credit available to you. This is known as credit utilization rate. If the amount owed is a high percentage of the credit available, it will negatively affect your credit score. Rule of thumb says to use less than 30% of your credit limit.
Length of Credit History - 15%
The longer you have had credit and paid on time, the better. Sure, if you opened a credit card one year ago and haven't missed a payment, it will look good. But imagine someone who has had credit card for 10 years and never missed a payment.
Types of Credit - 10%
Mortgages, car loans, student loans, credit cards. It's important to have a mix to show lenders than you can handle multiple types of loans. While exactly how different types of credit are factored into credit scores is unknown, having a mix of credit and paying them off helps to show lenders you are responsible.
New Credit - 10%
Taking out a few loans at once or opening multiple credit cards at the same time does not look good to lenders. Be very cautious when applying for new credit.
Improving Your Credit Score
Alright, now that you understand how your credit score is calculated, let's see how we can improve that score.
Step 1 - Know Your Sore
First things first, before you can change your credit score, you need to know what your score actually is. The three credit agencies, Experian, Equifax and TransUnion, are all required to provide you with a credit report upon request. You are only allowed to request once every 12 months. This applies to each agency individually, so you could request a report every 4 months from a different agency.
Many credit card issuers now offer free credit scores as well:
There is no need to ever have to pay for your credit score. In fact, if you don't have access to any of these cards, you can even use Credit Karma to get your free score and monitor it regularly.
Do not ever pay for your credit score.
Step 2 - Pay Down Debt
As we know from above, the amount you owe and your credit utilization rate make up 30% of your credit score. And remember, the rule of thumb is to keep the utilization rate below 30%.
Ideally, it is advised to pay off credit card balances in full and on time every month. This will keep your utilization rate low and have a positive impact on the payment history aspect of the score as well.
I understand paying off the cards in full every month may not be possible, but you should always be striving to pay as much as possible each month. Not only will carrying a balance affect your credit score, but credit cards have insanely high interest rates, making it even more difficult to pay off as time goes on.
Lastly, do not, under any circumstances, miss a payment. This will hurt your credit score dramatically. Just six months of paying your bills on time will have a tremendous impact on your score. Imagine what a few years will do.
Step 3 - Increase Your Credit Limit
There's another way to bring down your credit utilization rate; by increasing your credit limit. If you pay off your card consistently and already have a decent score, this may the best way to further increase your score. You will have to request the limit increase from your card issuer.
Another option may be to open an additional credit card which will also increase the amount of credit available to you. I don't recommend having more than two-three credit cards, so be careful with this option. As we know, new credit can also has a negative impact on your score.
Step 4 - Keep Unused Credit Cards Open
While it may be tempting to cancel a credit card that you no longer use, it is not beneficial to do so. By closing an old card, you are effectively decreasing your average credit age which accounts for 15% of your credit score.
Step 5 - Consolidate Debt
If you have a number of outstanding debts, it may be beneficial to consolidate these into one loan. By doing this, you may be able to get a better interest rate, making it easier to pay off the debt faster.
Step 6 - Use a Secured Credit Card
If you have a poor credit score or are just starting to build your credit score, lenders or credit card issuers may not be willing to offer you credit. A secured credit card works like a debit card, where you are only allowed to spend the deposit available. It helps build credit scores back up and allows young adults to begin establishing credit history.
Eventually, when your credit score is higher, you can ask your card issuer to convert the card to a normal credit card. This will give you a higher limit and you can receive your initial deposit back.
Credit Karma
Get access to your scores and reports, with weekly updates. Credit Karma will make recommendations that could save you money or improve your credit score. If you happen to use a product they recommend, the bank or lender pays Credit Karma and the service remains free to you.
If improving your credit score is the goal, Credit Karma is a great tool.
Personal Capital
Since your goal is to improve your credit score, tracking your financial situation is crucial. A great personal finance tool for tracking net worth, investments, expenses and most importantly, debt, is Personal Capital:
The tool is absolutely free and will help you track your finances and improve your credit score. Get the free tool here.
Truebill
Managing money can be hard. Don't do it alone. Truebill empowers you to save more, spend less, see everything, and take back control of your financial life. Best of all, you can track and understand your credit score.
Oh, and did we mention - Truebill is a free to use app!
Conclusion
Your credit score is very important. A high score will allow you to borrow money at lower interest rates, which results in paying less money in interest over the life of the loan. A low score results in a higher interest rate and more money being paid in interest.
Credit scores can also affect your ability to obtain an apartment, a car loan, or even utilities. Credit affects so much in your financial life, so it is imperative that you do what you can to improve your score. I can't stress enough how difficult it is to escape the effects of having a low score.
If you follow the steps above, you can maximize your credit score over time. Who knows, you may even be able to obtain an excellent rating of over 800. I certainly believe it's possible.
I hope this blog helps you increase your credit score. You've taken the first step in your journey by navigating to this blog. With anything, starting is always the hardest part. And you've officially started. Congratulations and best of luck!
Thank you for reading!
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Disclosures
I am not a licensed financial advisor or financial professional. This is not investing advice. I am simply sharing my research and opinion based on that research. It is very important that you do your own research and make investments based on your own personal circumstances, preferences, goals and risk tolerance.
This blog contains some affiliate links. If you purchase any service through one of these links, I may earn a small commission at no extra cost to you.