How to Raise Your Credit Scores
Are you looking to raise your credit scores to get approved for a loan or credit card? Or maybe you just want a peace of mind knowing that your credit score is in good shape.
Depending on where you currently stand and what items are your credit report, it could take a little or a lot of time. By contrast, a few strategic moves could do the trick if you’re a credit newbie with limited credit history.
Either way, there are several simple ways to raise your credit scores. But understanding how your score is calculated and rectifying any errors in your report is the first step to boosting your scores.
Read on to learn more.
What’s In Your Credit Score?
Why does this matter? Simply put, it’s the easiest way to figure out which actions will have the greatest impact when working to improve your credit score.
So, what’s in your credit score?
Payment history
If you’ve ever received any form of credit advice, chances are making your payments on time was at the top of the list. And for a good reason.
Payment history accounts for 35 percent of your FICO score, which is the largest component of your credit score. So, not making timely payments can have serious consequences for your credit score.
In fact, all it takes is one late payment to tank your score by up to 110 points if the account is more than 30 days delinquent, notes Equifax. Plus, you’ll run the risk or incurring late fees and be assessed a penalty APR (for credit cards). And oddly, the higher your credit score is before the delinquency appears on your report, the greater the impact.
Amounts owed
Next in line for impact is the amount owed on all debt accounts, which accounts for 30 percent of your credit score. Lenders and creditors pay close attention to the percentage of credit in use compared to your total credit limit. This is referred to as your credit utilization ratio. (Installment loans aren’t really factored into this equation, so if you have a new car loan, your credit score won’t tank because your credit utilization is at 100 percent).
To illustrate:
If you owe $15,000 on all your credit cards and the total credit limit across the board is $30,000, your credit utilization ratio will be right at 50 percent. But if your credit limit is $45,000, your credit utilization ratio will drop down to 33 percent.
Creditors like to see this number at 30 percent or lower. Anything higher could make you appear riskier and negatively impact your credit score.
Length of credit history
The FICO scoring model also takes the amount of time you’ve been in the credit game into consideration, to the tune of 15 percent of your score. It’s not unusual for someone who’s managed their credit responsibly for several years to have a credit score of 800 or higher.
But being a credit newbie doesn’t automatically mean you have to accept a poor score. If you take the right first steps out the gate, you can land a high FICO score in record time/sooner than later.
Credit mix
There are two types of accounts on your credit report; revolving (i.e. credit cards and installment (i.e. student, mortgage, and auto) loans. Even if you have a high credit score, having all of one and none of the other could hurt your chances of being approved.
But having a combination of both revolving and installment credit demonstrates to creditors and lenders that you can responsibly handle both types of debt. You should also know that credit mix accounts for 10 percent of your score.
New credit
That last component of your FICO score is new credit, which accounts for 10 percent of your credit score. Each time you apply for credit, a hard inquiry appears on your report. They impact your score between three to five points, and sit on your report for up to 24 months.
Fortunately, there’s an exception to the rule when shopping around for loan products. The FICO scoring model allows you to shop around for the best financing terms within a certain window without incurring multiple hits to your credit score. This is known as rate shopping.
Multiple hits will only count as a single inquiry if you select a loan product by the time the window ends, notes myFICO.
You may also notice inquiries on your report that you did not initiate. These result from prescreened credit offers and do not impact your credit score.
Types of Credit Scores
FICO vs FAKO Scores
Not all credit scores are created equal. There are FICO scores from each of the three credit reporting agencies, and then there are FAKO scores generated by alternative scoring models.
According to myFICO, the FICO score is used by 90 percent of creditors to reach a lending decision. This means FAKO scores aren’t nearly as prevalent, so don’t get discouraged if the score you’re seeing from an alternative model, like Vantage, isn’t quite where you want it to be.
Also, be mindful that each lender or creditor uses their own variation of FICO scores. Your scores could also vary across the board as each credit bureau has a unique algorithm and not all creditors report account information to the three credit bureaus.
The Benefits of Having a Good Credit Score
So why all the fuss about credit scores? Well, good credit scores usually mean you’ll have the best shot at securing the most competitive terms on debt and credit products. Some additional benefits of having a good credit score:
- Increased approval odds for debt products
- Lower interest rates, which could save you hundreds or thousands over the life of loan products
- Better housing opportunities (without spending a fortune).
- Employment opportunities
- Lower car insurance rates
- Higher credit limits
- Minimal (or no) deposit required for utilities and services
- Peace of mind
How to Raise Your Credit Scores
Now that you understand what components go into your credit score and why you should be concerned with having a good score in the first place, it’s time to work on improving that three-digit number. Some suggestions to get you started:
Make timely payments
One of the easiest ways to improve your credit is by paying your bills on time. And if you have any delinquent accounts on your credit report, it’s important to get current and stay current to prevent further damage to your credit score.
If you’re having a hard time meeting the minimum payment each month or bringing the account current, reach out to the creditor promptly. They may be able to make payment arrangements or enroll you in a program to make the payments more comfortable without additional credit reporting until you get back on your feet.
Minimize outstanding balances
Since the amounts owed on revolving debt account for 30 percent of your FICO score, you want to accelerate debt-repayment efforts to get those balances down. The easiest way to do so is by getting your spending under control with a realistic budget and using the extra funds to tackle debt. (It’s a good idea to have money saved before you get aggressive with debt repayment so you won’t have to run the credit cards back up or resort to loan products if you encounter a financial emergency).
It’s also a good idea to allocate any financial windfalls, like work bonuses or tax refund checks, to your debt to reach the finish line faster. And if time permits, consider picking up overtime at work or finding a side hustle/part-time job to earn funds that can be used to eradicate the balances.
Keep balances low
It’s not enough to pay down outstanding debt. To continue raising your credit card debt, you’ll have to keep your balances low, and that involves being disciplined. A practical, but effective budget is a great way to make this happen.
Automate payments
Having trouble making timely payments because there are too many to keep track of. As mentioned earlier, one overlooked payment could drop your score by up to 100 points if an account reaches 30 days or more past due. But by automating payments, you avoid this issue altogether since you can schedule payments on or well before the due date.
Don’t close credit cards
You may be tempted to close old accounts to clean up what’s showing on your credit report or eliminate the desire to use them. But don’t because you’ll automatically lower your credit utilization ratio. In other words, it benefits you to have as much available credit on your existing credit cards as possible. (And closing cards that have a current balance won’t help you out, either).
Only apply for credit as needed
In an effort to boost their available credit and lower debt utilization ratios, some will apply for new credit. The only problem is each time you apply, the hard inquiry generated (even if you’re approved) hits your score by two to five points, as mentioned earlier. While your score could benefit from the lower debt utilization ratio sooner than later, it’s smarter to request credit limit increases on your existing credit cards.
But before you do so, confirm with the creditor that they’ll only have to initiate a soft pull to review your credit when determining if you’re eligible for a limit increase.
Become an authorized user
When you become an authorized user on someone else’s credit card, your credit profile will reflect their payment history. In order for this tactic to work, you want to deal with someone who’s responsibly managed their credit card over time and kept the balances low.
Another major benefit of becoming an authorized user is that despite having purchasing power (if granted by the cardholder), you’re not on the hook for the outstanding balance. And you can be removed from the account at any time.
Open a secured credit card or loan
If you’ve struggled with making timely payments in the past or are a credit newbie, secured credit cards or loans are a great way to start rebuilding your credit rating. They also demonstrate to lenders that you can responsibly manage credit.
Most consumers with less than perfect credit also find that they’re much easier to qualify for than traditional credit products. This is attributed to the security deposit, usually equivalent to the amount of the credit limit, that’s required to activate the card or loan product.
Quick note: credit builder loans through Self-Lender are the way to go if you don’t have the funds for a security deposit.
Review your credit report regularly
Because the information in your report is input by humans, your credit report is prone to errors. So, it’s best to review it regularly to ensure the contents are accurately and timely. You can also sign up for a free credit monitoring service to stay on top of activity that’s occurring in your credit file.
Monitor account activity
Pay attention to what’s going on in your accounts as it could be the first sign of identity theft should strange transactions start appearing. Also, review statements in the mail for odd transactions, and if you receive documentation from creditors or lenders that you don’t recognize, inquire immediately.
Dealing With Errors and Negative Items
There’s a possibility your score could be in the trenches as a result of errors or untimely information that has surpassed the reporting timeline. Either way, you’ll need to file disputes with the credit bureaus to have this information removed.
Filing Disputes
The process of filing formal disputes with the credit bureaus isn’t necessarily a difficult one, but you’ll need time and patience to see it through from start to finish. To get started:
- Get a free copy of your credit report from each of the bureaus at AnnualCreditReport.com. If you’ve retrieved a free copy within the past 12 months, you will have to pay a nominal fee to access another copy. But if you meet certain criteria, you may be entitled to a free report.
- Draft up dispute letters. The letters will be based on the inaccuracies found in the report. You also have the option to initiate disputes online, but if your grievance is denied, you forfeit your right to re-dispute the item(s) in question. Here are some handy templates to assist you when writing letters.
- Mail your letter and supporting documentation to the credit bureaus. Be sure to send copies and keep the originals just in case your package gets lost in the shuffle. Also, mail the contents with tracking and signature confirmation so you’ll know when it arrives.
Upon receipt, the credit bureau will launch an investigation into your claim by furnishing the information provider with any documentation related to the dispute. They must respond to your dispute within 30 days or the item must automatically be removed from your credit report. But if it’s truly an error or untimely information, you could see it rectified or removed in a much shorter time span.
Worried the credit bureaus won’t respond? You also have a right to follow-up if you haven’t heard back within 30 days.
It may also worth a shot to contact the creditor before filing formal disputes. You may find that they’re willing to rectify the issue without asking you to initiate a formal dispute, and it generally takes far less time to receive a response.
Goodwill Adjustments
What if there are late payments on your credit reports that are accurate and timely? Call up the creditor, plead your case while being apologetic and promising to not let it happen again. In return, they may offer to remove the late payments out of goodwill. If you don’t have success the first time around, keep trying as it’s not uncommon for creditors and lenders to give consumers a second chance.
But if you’re a repeat offender, you may face more difficulty when requesting goodwill adjustments. So it’s best to have a strong reason for the untimely payments and prepare to speak to several representatives before you get the results you’re looking for.
Pay for Deletion Letters
What about accounts that have gone to collection or charged-off? If it’s been less than seven years from the date the incident occurred, you’re still technically on the hook for what’s owed. But don’t be tricked by a collection agency into paying the balance in full to raise your credit score. Paid and unpaid collections have the same impact, so paying off the balance won’t do much for you.
Instead, negotiate a settlement and offer to pay the agreed upon amount in exchange for a pay-for-deletion. This gives you the best of both worlds; settling the balance and removing the negative mark from your report, which could skyrocket your credit score.
When negotiating with creditors and credit agencies, be sure to do so in writing. This gives you supporting evidence in case you need it as proof later on down the line.
More Complex Negative Items
Is your score being drug down by bankruptcy, evictions, judgments, liens or repossessions? You may have spotted ads promising to have these items removed in exchange for a fee, but it may in your best interest to seek legal counsel for guidance. Or if funds are low, focusing on other areas of your credit profile to raise your credit score could prove to be a much more feasible option.
Should You Hire a Credit Repair Company?
Depending on the state of your credit score and what’s in your credit report, you may deem it necessary to hire a credit repair company to do the clean-up work for you. But is it a good idea or is it possible to handle the credit repair process on your own?
It depends. But according to the Federal Trade Commission (FTC), “anything a credit repair company can do legally, you can do for yourself at little or no cost.” So it ultimately boils down to whether or not you’re comfortable with tackling those negative items on your report or if you’d prefer to leave it to the professionals because you have no idea what you’re doing or are strapped for time.
If you decide to do the latter, do your homework to find reputable options. Pay attention to their fees and billing policies.
Under the Credit Repair Organizations Act (CROA), they cannot charge you for services until they are executed. You also want to make sure that their pricing is comparable to others in the industry. Once you’ve narrowed down your options, review each company’s status with the Better Business Bureau and read customer reviews from independent sources (outside of the company’s website) to get a better feel of what to expect.