Exercising in the park

My Credit Score: How Do I Improve It?

Are you thinking about applying for a loan, getting a credit card, or finding a new place to rent? All of those actions are going to rely on your credit score! It may seem like some magical number that is impossible to understand, but it isn't! In this article, we are going to show you why your credit score is important, how it works, and steps that you can take to improve it.

Note: This article contains affiliate links. This means that if you purchase a product or sign up for a company through one of our links, Thrive Oak will make a small commission (at no extra cost to you).

Exercising in the park

Why is Your Credit Score Important?

A credit score is essentially the grown-up version of a report card (that thing you used to get in school) to show how well you take care of the money that is lent to you, including credit cards, loans, mortgages, and other similar items. Therefore, when it is time to go do adult things like buying a car, getting a home loan, or even signing a lease for an apartment, they are going to run your credit score to see how responsible you have been.

The better the score, the more likely that landlords and banks are going to trust you to treat their property or loan well. Also, the higher a score, the more favorable interest rate you will receive. For example, on an auto loan, a high credit score would land you a 4% interest rate, whereas a bad score could get you a 15% interest rate or a complete denial of the loan. The difference between these interest rates on the purchase of a $20,000 car could be over $6000! Clearly, it’s critical to maximize your credit score.

All in all, having a good credit score opens more and better doors for your future endeavors. On the other hand, having a bad credit score will mean paying more for a car, paying more interest on your debts, and possibly not getting approved on a loan or apartment that you want.

How Does it Work?

Before we can improve your credit score, it is probably a good idea to understand how it works. While the exact formula isn’t available for examination, we can look at the five main components and how they are determined.

Payment History

Your payment history is worth 35% of your overall credit score. It’s calculated based on how often you paid your bills on time (on time/total = % on time). Let's look at a quick example.

You have had one credit card for two years (24 months). You only paid one payment late, and the rest were on time. So that would be (23 on-time/ 24 total payments =) a 95.8% score, …which, as you can see from FICO’s ranking system shown below, is not a high enough percentage to be considered a good credit score.

Don't despair, let's look at another quick example. 

Payment History

Let’s say that you have had three credit cards for the past three years, and you have only been late on one payment (107 on-time/ 108 total payments =) 99.1% score. This would give you a good score! The whole point of these examples is to show you that paying your payments on time is a MUST if you want to improve your credit score. If you haven’t done that in the past, you can start now!

Amount Owed

The amount that you owe on your credit cards is worth 30% of your credit score, but it can be a bit confusing. Lenders, even though they give you a big of credit line, don't want you to use it all. They all want you to utilize a portion of it, which you can see in the graphic below. What does this mean? Let's look at an example:

Say you had a credit card with a $10,000 credit line. You then went out and bought a $5,000 TV. At the end of the month, you only paid the minimum payment on the card. This means that you used 50% of your credit utilization ($5,000/$10,000 = 50%), which puts you in the dark orange “poor” section.

Credit Utilization Ratio

To improve your credit score, you want to put yourself in the excellent category, which means only utilizing 0-9% of your credit. The best way to do this is to always pay off your credit card in full!

Length of Credit History

The length of your credit history just shows how long you have used credit, and it is responsible for 15% of your credit score. Determining the length of your credit history is done with three components: how long your accounts have been open, how long specific accounts have been open, and how long it has been since you last used those accounts. The main thing you need to be aware of it the Average Age of Accounts (AAoA) metric. It is the main formula, and it divides the ages of your accounts by the total number of accounts.

So, if you are 19 and opened your first credit card on your 18th birthday, your credit history is going to be pretty tiny (1 year), and your AAoA is going to be based on that one average. However, if you got one credit card from 6 years ago, one from 4 years ago, and one from 2 years ago, you will have an average credit history of 4 years ((6+4+2)/3 total cards). Generally speaking, the longer the credit history, the higher your score is going to be, seven years is considered the “happy length” to have established good history.

Types of Credit

Making up 10% of your credit score is how many lines of credit that you have open. It may seem counter-intuitive, but having more lines of credit open is the way to go. We aren't telling you to go crazy, but having just three or four just isn’t enough.

Simply put, the more lines of credit you have = a higher limit on your credit = lower credit utilization + more payments you can pay on time! Plus, if you have a variety of debt like credit cards, a mortgage, and auto loans, you are demonstrating that you can handle yourself and are more trustworthy to invest in.

To get a good score it is recommended to have a mix of at least 11 different kinds of credit. WARNING: this is not us telling you to go open 11 lines of credit right this instant, that would be BAD! We will come to that in a few minutes!

New Credit (Hard Inquiries)

Whenever you apply for a new credit line (no matter what kind), it shows up on your credit score, accounting for 10% of your total score. It basically keeps track of how many times you are asking for money. If you suddenly go out and apply for two new credit cards, a personal loan, and an auto loan, that is a big red warning flag that you are running out of money, which makes you a risky investment. 

Luckily, hard inquiries only impact your credit score for a single year, and they drop off your credit report after two years!

We also want you to know that if you are shopping around different lenders to see what their rates are, like if you wanted to get a mortgage or an auto loan, this wouldn't hurt your score. The scoring method will understand that you are shopping around and lump them all together into one hard inquiry so that you don't get dinged for being a responsible shopper. Just remember that this has to be done in a relatively short time (such as a few weeks).

Businessman under a pile of bills

How Do I Improve My Score?

1. Run Your Credit Report

Before you can fix up your credit score, you need to figure out where you are going wrong. Many banks offer free credit score checks at just a click of a button. If this is not available to you, can you check it for free at Credit Sesame and Credit Karma or access your free annual credit report at Annual Credit Report. Don’t pay for this service! You don’t have to, so don’t!

Once you have run your credit score, you will see which of those categories above where you are falling a bit sort. Most likely, you either don't have enough credit history, you have late payments, you have maxed out credit cards, or you have an account in collections or bankruptcy.

2. Dispute Errors

Did something pop up on your credit report that shouldn’t be there? Is there a credit card in your name that you never applied for? Are you in bankruptcy and didn’t know? Are the dates off on your payments? If that is the case, call up your bank to see what’s going on. You may have a case of stolen identity or an error in the system. Disputing and clearing up any errors will improve your score quickly.

The same goes for debt collections, bankruptcy, and foreclosures, which will stay on your credit report for 7-10 years. If you have any of these problems, ensure that everything is valid, that there are no errors, and it gets taken care of immediately. Sadly, removing these from your credit report is highly unlikely, so you will have to do your best to improve your credit score around them until they get taken off your report.

3. Pay On Time

One of the easiest things that you can do to help out your credit score is to pay on time! Remember that payment history is worth 35% of your score, so it is vital that you pay on time! Even if you can only make the minimum payment, you don’t want to be late.

If you are a few days late, your bank will likely not report you but just give you a late fee (which you might be able to get removed if you ask nicely). However, if you haven't paid for 30 days, your lender is going to report it, and it will stay on your credit report for 7 years! OUCH! Pay on time, seriously!

On the bright side, the longer ago you had the late payment, the less it will affect your score. So, if it happened 3 years ago, it won’t affect you as much as if it happened last month. On the other hand, the more late payments you have, the worse it gets.

So, what should you do? Pay off anything late first! If you do have late payments and are struggling to pay them, get in contact with the lender and see if you can work something out like a payment plan so that you don’t get sent to collections.

Remember how we politely asked to get a late fee removed? Once you have paid your late payment, you might be able to very nicely ask for them to remove it from your history. They may not do it, but it is worth a try.

4. Maxed Out Cards

Maxing out your credit cards is never a good idea. Remember, the “amount owed” category is worth 30% of your credit score. We know that you have that magical line of credit available, but using it all is bad for your credit score. It is recommended that you only use a small percentage of your credit limit. You are actually better off having more credit cards and using less credit on each one than having fewer credit cards that are maxed out! GASP! That sure is strange, huh?

conquering debt

In all reality, banks don’t particularly care about how much you borrow as long as it isn’t all in one place. It is all about utilization. Now, we are NOT telling you to go out and get more credit cards, because that in itself can be a problem. What we are saying is that you should spread out your credit card debt while properly maintaining multiple credit cards with high credit limits.

The most important thing that you need to do is pay down your credit card debt! If you have maxed out credit cards, paying off some of the debt and lowering your utilization number will improve your credit score.

5. Maintaining Current Credit

Maintaining your current credit is another way that will help your credit score. First, keeping paying your debt on time every month on all of your debt no matter what. Keeping up timely payments will improve your payment history and length of credit scores.

Next, don't close old credit cards! There is a myth that closing old cards is a good idea, but that is FALSE! You want to keep your oldest cards in good standing because that helps your length of credit history. Make sure to use them every now and then, even if it is a small purchase so that your lender doesn't close them due to lack of use.

In addition to keeping your old credit cards in play, you also want to see about asking for larger lines of credit on your existing cards. If you have decent credit, your bank may agree. By having a higher line of credit, it will help to decrease your credit utilization ratio. Just remember that even though you have it, don't use it! Pretend it doesn't exist instead of going on a spending spree.

6. New Credit Lines

If you are about to apply for something where you need a good credit score, avoid opening new lines of credit. Not only does it appear on your credit score, but it also decreases your average credit history. You don’t want to do anything that involves getting another hard inquiry, because that will ding your score.

However, if you are not planning on applying for something big like a mortgage, auto loan, or new lease in the near future, you may want to consider opening new lines of credit. (Note that this is under the assumption that you have already done #1-5 from above. Don’t do this if you are struggling with credit card debt or have no control over your spending habits.)

Lenders love loaning money to people who don't need it, ironic, huh? Take advantage of that! Every six months to a year, open a new line of credit. This will help you build up your number of lines of credit, decrease your payment history, and decrease your credit utilization if you spread your expenses out over the new lines. Keep in mind that this will reduce your score in the short-term because of the hard inquiries and will lower your Average Age of Accounts metric. But, since you don’t need anything big right now, you are laying the foundation for success later on when you do need a loan of some type.

7. Increasing Your Credit History

Sadly, increasing your credit history doesn’t happen quickly as it takes time (7 years, remember) to really build up a good credit history. You will have to be patient…we know that sucks. However, there are a few ways in which you can nudge the system along to help you out.

The first option would be to become an authorized user on someone else’s credit card. By doing this, you will get their credit score reflected back on to yours.

Quick Tip: Only become an authorized user with someone you trust who has good credit. We are talking parents, a spouse, or a best friend, not your new boy/girlfriend or a coworker!

The second option would be to get a secured card. A secured card is where the lender gives you a line of credit that comes from a deposit that you already put down. This allows you to earn the trust of the lender, and if you mess up, they just take your deposit.

Quick Tip: Make sure that the credit card has NO annual fee (it is a waste of money).

The third possibility is getting a cosigner. If you need a loan or are trying to get a lease, but your credit is inadequate or non-existent, a cosigner could help you out by taking responsibility for you.

Quick Tip: Like with authorized users, only choose someone you trust AND make sure not to screw up because your mistake will take them down with you.

FICO Credit Score Range

What Score Should I Aim My Credit Score For?

Since there are a few different scoring models out there, we are going to go with the most popular one, which is the FICO scoring method created by the Fair Isaac Corporation. As you can see in the image, red is bad and blue is good. Our goal for you is to start by getting to the “Good” rating and then work your way up to the “Excellent” rating. The “Good” rating will open many doors for you, but the “Excellent” rating will get you the best interest rates, loans, and opportunities. You can do it! It may take some time, but you will get there if you keep practicing our methods for how to improve your credit score.

If you are looking to improve your credit score by getting rid of debt, check out our article on A Guide to Conquering Debt!