Your credit score—a three-digit number lenders use to help them decide how likely it is they’ll be repaid on time if they grant you a credit card or loan—is an important factor in your financial life. The higher your scores, the more likely you are to qualify for loans and credit cards at the most favorable terms.
If your credit history is not where you want it to be, you’re not alone. Improving your credit scores takes time, but the sooner you address the issues that might be dragging them down, the faster your credit scores will go up.
How Credit Scores Are Calculated
You likely have dozens, if not hundreds, of credit scores. That’s because a credit score is calculated by applying a mathematical algorithm to the information in one of your three credit reports, and there is no one uniform algorithm employed by all lenders or other financial companies to compute the scores.
You don’t have to get hung up on having multiple scores, though, because the factors that make your scores go up or down in different scoring models are usually similar.
Most scoring models take into account your payment history on loans and credit cards, how much revolving credit you regularly use, how long you’ve had accounts open, the types of accounts you have and how often you apply for new credit.
Steps to Improve Your Credit Scores
To improve your scores, start by checking your credit scores online. When you get your scores, you will also get information about which factors are affecting your scores the most. These risk factors will help you understand the changes you can make to start improving your scores. You will need to allow some time for any changes you make to be reported by your creditors and subsequently reflected in your credit scores.
Of course, certain credit score factors are typically more important than others. Payment history and credit utilization records are among the most important in many critical credit scoring models, and together they can represent up to 70% of a credit score.
Focusing on the following actions will help your credit scores improve over time. A credit score reflects credit payment patterns over time, with more emphasis on recent information.
1. Pay Your Bills on Time
When lenders review your credit report and request a credit score for you, they’re very interested in how reliably you pay your bills. That’s because past payment performance is usually considered a good predictor of future performance.
You can positively influence this credit scoring factor by paying all your bills on time as agreed every month. Paying late or settling an account for less than what you originally agreed to pay can negatively affect credit scores.
You’ll want to pay all bills on time—not just credit card bills or any loans you may have, but also your rent, utilities, phone bill and so on. It’s also a good idea to use resources and tools available to you, such as automatic payments or calendar reminders, to help ensure you pay on time every month.
If you’re behind on any payments, bring them current as soon as possible. Although late or missed payments appear as negative information on your credit report for seven years, their impact on your credit score declines over time: Older late payments have less effect than more recent ones.
2. Pay off Debt and Keep Balances Low on Credit Cards and Other Revolving Credit
The credit utilization record is another important number in credit score calculations. It is calculated by adding all your credit card balances at any given time and dividing that amount by your total credit limit. For example, if you typically charge about $2,000 each month and your total credit limit across all your cards is $10,000, your utilization ratio is 20%.
To figure out your average credit utilization ratio, look at all your credit card statements from the last 12 months. Add the statement balances for each month across all your cards and divide by 12. That’s how much credit you use on average each month.
Lenders typically like to see low ratios of 30% or less, and people with the best credit scores often have very low credit utilization ratios. A low credit utilization ratio tells lenders you haven’t maxed out your credit cards and likely know how to manage credit well. You can positively influence your credit utilization ratio by:
- Paying off debt and keeping credit card balances low.
- Becoming an authorized user on another person’s account (as long as they use credit responsibly).
3. Apply for and Open New Credit Accounts Only as Needed
Don’t open accounts just to have a better credit mix—it probably won’t improve your credit score.
Unnecessary credit can harm your credit score in multiple ways, from creating too many hard inquiries on your credit report to tempting you to overspend and accumulate debt.
4. Don’t Close Unused Credit Cards
Keeping unused credit cards open is a smart strategy, because closing an account may increase your credit utilization ratio. Owing the same amount but having fewer open accounts may lower your credit scores.
5. Don’t Apply for Too Much New Credit, Resulting in Multiple Inquiries
Opening a new credit card can increase your overall credit limit, but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score, though this effect will fade over time. Hard inquiries remain on your credit report for two years.
6. Dispute Any Inaccuracies on Your Credit Reports
You should check your credit reports at all three credit reporting bureaus (TransUnion, Equifax, and Experian) for any inaccuracies. Incorrect information on your credit reports could drag your scores down. Verify that the accounts listed on your reports are correct. If you see errors, dispute the informaiton and get it corrected right away.
How Long Does It Take to Rebuild a Credit Score?
If you have negative information on your credit report, such as late payments, a public record item or too many inquiries, you should pay your bills and wait. Time is your ally in improving your credit scores. There is no quick fix for bad credit scores.
The length of time it takes to rebuild your credit history after a negative change depends on the reasons behind the change. Most negative changes in credit scores are due to the addition of a negative element to your credit report, such as a delinquency or collection account. These new elements will continue to affect your credit scores until they reach a certain age.
- Delinquencies remain on your credit report for seven years.
- Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years.
- Inquiries remain on your report for two years.
Establishing or Building Your Credit Scores
If you simply don’t have a credit score because you have little experience or history with credit, you likely have a thin credit file. That means you have few (if any) credit accounts listed on your credit reports, typically one to four. Generally, a thin file means a bank or lender is unable to calculate a credit score because there is not enough information in a user’s credit history to do so.
There are things you can do to fix this, such as applying for a secured credit card, becoming an authorized user on someone else’s credit card or taking out a \credit builder loan.
How Changes Affect Scores
One common question involves understanding how specific actions will aftect a credit score. For example, will closing two of your revolving accounts improve your credit score? While this question may seem easy to answer, there are many factors to consider.
- Credit scores are based entirely on the information found on an individual’s credit report.
- Any change to the credit report could affect the individual’s credit score.
Simply closing two accounts not only lowers the number of open revolving accounts, but it also decreases the total amount of available credit. That results in a higher utilization rate, also called the balance-to-limit ratio (which generally lowers scores).
One change can affect many items on a credit report. It is impossible to provide a completely accurate assessment of how one specific action will affect a person’s credit score. This is why the credit risk factors provided with your score are important. They identify what elements from your credit history are having the greatest impact so that you can take appropriate action.
What You Might Not Know About Credit Scores
Credit scoring involves complex calculations, and the more you know about how credit reports and credit scores work, the more you can take control of your own credit. In addition to knowing the most important factors considered in credit scoring, it can be helpful to know a few other facts about credit reports and credit scores. These components tend to be the most important:
- Negative information on your credit report can lower your credit scores. That information remains on your credit report for a set period of time. For example, late payments appear for seven years from the date you first missed a payment. Paying off a collection account won’t immediately remove it from your credit report. Bankruptcies can remain on your report for seven to ten years, depending on the type of bankruptcy. The good news is, all negative information will eventually cycle off your credit report. Until it does, focus on the things you can positively influence, including paying all your bills on time.
- You don’t need to carry a monthly credit card balance to build your credit history. You can pay off your credit card bills every month and positively affect your credit standing.
- Settling accounts for less than the full amount you owe can harm your credit score. Any time you fail to repay a debt as you originally agreed, it can negatively affect your credit. That said, the negative impact of settlement is still less than the negative effect of not paying a debt at all or declaring bankruptcy.
A good credit score can open doors for you. From helping you qualify for the best interest rates and terms when you borrow money to influencing how much you pay for life insurance, some might be doors you never even dreamed existed. Landlords will consider your credit scores when you apply to rent, and even telecom companies might look at your scores before you lease your next smartphone.