Your credit score can derail your financial life. It sounds dramatic, but the interest rates you’ll pay with low credit scores can equal thousands or hundreds of thousands of dollars over your lifetime. It can set you back from the start and keep you struggling. Fortunately, there’s a lot you can do with any income level to build a good credit score. It’s easier than you might expect. Below, we’ll break down what matters to help you master how to improve your credit scores this year!
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10 Tips for how to improve your credit score
Wondering how to raise credit scores? It starts with basic habits. Keep in mind that credit score improvement is not guaranteed. Credit scores are independently determined by credit bureaus. Your credit score may be negatively impacted by other financial decisions you make, or by activities or services you engage in with financial services organizations. Whether starting with a credit score of 350, 750, or none, these tips can help you build a positive credit history.
1. Pay bills on time
This is the most important factor in your credit score and one of the best ways to build credit over time. Set up automatic payments or reminders to ensure you never miss a due date. Late payments can significantly damage your score and stay on your credit report for up to seven years. Important dates to know for on-time payments: the due date, the date you’ll need to make at least the minimum payment, and the closing date, when the credit cards will report to credit bureaus.
2. Reduce credit card balances
High balances relative to your credit limits could negatively impact your score. One of the ways to improve credit scores is to pay down your debts, focusing on the highest-interest cards first. Aim to use less than 30% of your available credit, and for a higher score, aim to use 10% or less of available credit.
3. Keep old credit accounts open
The length of your credit history matters. Older accounts help establish a longer credit history, which is generally viewed positively. Even if you don’t use an old card often, consider keeping it open as long as it doesn’t have a large annual fee.
And here’s a bonus tip for account age: becoming an authorized user on someone else’s account with an older credit history can help boost your score. Just make sure they have a good credit score to maximize credit boosting!
4. Limit new credit applications
Each time you apply for credit, a hard inquiry is placed on your report, which can lower your score slightly. Too many applications in a short time can make you appear risky to lenders. While no specific number is “too many,” many suggest avoiding more than one application every three months or three applications a year. Lender criteria vary, but six total inquiries on a report could be too many to gain approval for an additional credit card or loan.
5. Use a mix of credit types
A diverse credit mix (e.g., credit cards, installment loans, mortgage) could positively impact your score. It shows that you can handle different types of credit responsibly. Therefore, if you only have credit cards, you could consider a credit-building loan.
6. Regularly check your credit report for errors
Mistakes on your credit report can unfairly lower your score. Check your report from each major bureau annually (you’re entitled to one free report annually) and dispute any errors you find. You can find your credit reports at annualcreditreport.com.
One of the most common errors is information related to someone with a similar name. You could have a mortgage, unpaid loans, or other incorrect information on your credit report. If necessary, you can learn more about how to contact the credit bureaus and dispute incorrect information.
7. Consider a secured credit card if you have poor credit
A secured credit card or student credit card are two financial products designed to help someone with no credit history to help build a positive credit score. These cards require a cash deposit and can help you build or rebuild credit. Use it responsibly, and your score could improve over time.
8. Become an authorized user on someone else’s account
If a family member or close friend has good credit, ask if they’ll add you as an authorized user on their credit card. Their positive payment history could boost your score. Just be sure to use the card responsibly (or not at all), as they will still be responsible for paying it off.
9. Keep credit utilization below 30%
Credit utilization is the amount of credit you use compared to your limits. Keeping this ratio below 30% (ideally below 10%) can positively impact your score. Not sure how to calculate this? If you have a card with a $5,000 credit limit, 30% would mean using a maximum of $1,500. And better yet, pay it off in full each month!
10. Pay off debt rather than moving it around
In the long term, reducing total debt is one of the best ways to help increase credit scores. While balance transfer cards can help you save on interest, repeatedly moving debt around doesn’t address the underlying issue. Additionally, you’ll usually have to pay a percentage of the transfer fees. Instead, focus on paying off your debts to help improve your credit score long-term. You can consider the snowball or avalanche debt repayment methods or work to build a budget and pay off more.
Why should I improve my credit score?
There are many reasons to improve your credit score, from better loan terms to increased job opportunities. We’ll share the options here.
Better loan terms
A high credit score can lead to significantly lower interest rates on mortgages, auto loans, and personal loans. For example, on a $200,000 30-year mortgage, the difference between a 4% and 5% interest rate could save you over $40,000 over the life of the loan. And the difference between a 6% and 8% interest rate could save you nearly $100,000 over the loan lifetime.
Increased approval odds
Lenders view high credit scores as indicators of responsible financial behavior and represent a decreased risk of default or late payments. This makes you a lower-risk borrower, increasing your chances of approval for premium credit cards, larger loans, or other financial opportunities.
Easier housing opportunities
Many landlords use credit scores as a screening tool. A score above 700 can make you a more attractive tenant, giving you access to better rental properties or helping you avoid additional security deposits. Some landlords will only accept tenants with a score of 740 or higher.
Lower insurance premiums
In states where it’s allowed, insurers often use credit-based insurance scores to set premiums. A good credit score could save you hundreds of dollars annually on auto and homeowners insurance. Small amounts add up over your lifetime. Even if you save $10 to $30 a month, it can become thousands over your lifetime.
Improved negotiating power
With a high credit score, you’re in a stronger position to negotiate better terms on loans or credit cards. This could include lower interest rates, waived fees, or higher credit limits. This is especially helpful when comparing offers for large loans like a mortgage.
Employment opportunities
While less common, some employers (particularly in finance or government) may check credit reports as part of background checks. A good credit history is a sign of responsibility and reliability and, therefore, can open better job opportunities.
Higher credit limits
Credit card companies are more likely to approve higher credit limits for those with good scores. This means you can make large purchases while keeping your credit utilization ratio low. It can also give you the convenience of making a single large purchase.
Better credit card rewards
Premium rewards cards often require excellent credit (typically scores of 740 or higher). These cards can offer valuable perks like travel miles, cash back, or luxury travel benefits. With some of the best rewards credit cards, you can earn up to $750 or more in points or miles.
Peace of mind
A good credit score provides a financial safety net. You’ll have easier access to credit or loans in emergencies and more financial options, which can significantly reduce financial stress.
How long does it take to improve your credit score?
The time it takes to improve your credit score can vary significantly depending on your circumstances. However, the ways to boost credit scores remain the same. Master these skills, and you could start seeing improvement in time. Even within a couple of months, you could start to see a boost. Here’s a general overview:
Short-term improvements (1-3 months)
- Paying off debt can begin to lead to a credit score boost.
- Additionally, paying down credit card balances can quickly lower your credit utilization ratio, potentially boosting your score within a month or two.
- Removing inaccuracies from your credit report can lead to quick improvements once the correction is processed.
- Set up automatic payments to avoid any more late payments.
- Use a rent reporting company to get credit for past on-time rent or utilities payments. You can also consider Experian Boost.
Medium-term improvements (3-6 months)
- Set up automatic payments for the minimum amount due, and aim to pay off your credit cards in full each month.
- Consistently making on-time payments can help positively impact your score after a few months.
- Being added as an authorized user can show improvements in this time frame if the original cardholder has a good credit history.
Long-term improvements (6-12 months or more)
- Building a credit history from scratch typically takes at least six months or more.
- Recovering from major negative items like late payments, collections, or bankruptcy takes longer, but you could see improvements in this time frame.
- To keep building your credit, set up habits like paying bills on time and not carrying a balance (treat a credit card like a debit card).
Ongoing improvements
- Maintaining good credit habits over the years will help gradually increase your score and make it more resilient to minor setbacks.
Factors affecting how fast you can increase credit score
- Starting point: If your score is meager, you might see faster initial improvements before it levels off.
- Reason for the low score: Addressing a single issue (like high utilization) is often quicker than recovering from multiple problems or major issues.
- Types of negative marks: Some negative items (like hard inquiries) have less impact over time, while others (like bankruptcies) can affect your score for years.
You could build an 800 credit score
A credit score is a tool that shows lenders, banks, and employers that you’re responsible for your money and know how to meet payment deadlines. You can build a good credit score over time, regardless of your current credit score. The fundamentals of credit building stay the same: pay bills on time, keep credit utilization low, and, ideally, pay off all revolving debt (like credit cards) each month. Learn how to raise your credit score by 200 points and get started today!
FAQ
What is the best way to increase your credit score?
The best way to help increase your credit score is to follow the credit-building tips in this article. If you need a faster credit boost, consider becoming an authorized user or using a rent reporting company.
What are some ways to improve your credit score?
Ways to help improve your credit score include paying off debt, making all timely payments, and not applying for too many loans or credit cards.
Why is it a good idea to improve your credit score?
Improving your credit score can open better financial opportunities, from lower interest rates to better jobs. It demonstrates that you can manage your money responsibly.
How often is my credit score updated?
Your credit score is typically updated once a month when lenders report to the credit bureaus. However, many banks now let you check your credit score daily if you want to.
How much will my credit score increase if I pay off a collection account?
You’ll see no set number of credit score increases, as it depends on other factors. But paying off debt could boost your credit score over time. On newer scoring models, your score may increase by however many points were impacted by the collections debt.
