If you’ve ever been told that your credit score wasn’t high enough to rent an apartment, borrow money, or purchase a new car, know that you aren’t alone. I’ve struggled with my credit score in the past, and, according to Experian, one-third of all Americans currently have what’s considered “bad credit.”
It’s in your best interest to do all you can to achieve a good credit score or above — a benchmark many consider to be anything above a 670 credit score — but doing so is easier said than done. But, I promise it’s not impossible. By being smart with your finances and managing your debt, you can slowly start to improve your credit score over time.
There are several steps you can take to either raise your score in the immediate future or get on track to where you’ll see improvement down the road. With these tips, you can start moving the needle toward a good (or even excellent) credit score, but first, let’s go over why it’s beneficial to have a good credit score in the first place.
Having a good credit score can help you qualify for low interest rates when you take out a loan, get approved for credit cards, and purchase a new home. Most landlords even conduct credit checks when considering potential renters.
Other instances where having a good credit score is important include:
What makes a credit score “good,” you ask? Let’s break it down. FICO® Scores are one of the most well-known types of credit score and are used by many lenders. These scores will range from 300 to 850, with a score of 670 or above considered “good.” The chart below breaks down the different FICO® score ratings and the credit score ranges that apply to each rating. We’ve also included the percentage of people who fall within each range so that you can compare.
Now that we’ve gone over why your credit score is important and what it means to have good credit, let’s dive into how to improve your credit score. These tips can apply no matter where you fall on the scale, from very poor to exceptional.
Your No. 1 priority, regardless of your credit score, is to always stay on top of your payments. Making a payment past a due date will have an immediate effect on your score, and the more payments you’re late on, the more your score will drop — believe me, I know from experience.
If you’ve fallen behind on payments, the best plan of attack is to simply stay on top of them from here on out. You obviously can’t go back and undo missed payments, but as each month of on-time payments passes, your score will start to reap the benefits. The longer you keep it up, the more your score will improve!
The second most important aspect of your credit score is what’s known as your utilization rate. This refers to how much of your available credit you’ve used. For example, if your total credit limit across all your cards is $4,000, and you’re currently sitting at $1,000 of total credit being used on all cards, your utilization rate would be 25%.
Keeping your utilization rate under 30% is considered best, as it demonstrates to lenders that you’re not anywhere near to maxing out your cards while being responsible with your debt amount. To reduce your credit utilization, try to limit your card usage while making larger payments, ideally on credit cards with higher interest rates.
Have you heard of the term “hard inquiry?” Well, if not, now you have. A hard inquiry is when a potential lender performs a credit check in response to you applying for things like a new credit card, credit account, or loan. Each time they inquire about your credit score, your score will suffer as a result. Seems a little unfair, right? Unfortunately, that’s the reality we all have to deal with.
The occasional hard inquiry may not do much to your score, but multiple inquiries within a short period will trigger red flags to lenders while causing your score to drop even further. These inquiries remain on your record for two years, so try to limit your applications only to cards or loans you absolutely need and that you are highly confident you’ll be approved for.
Have any of your unpaid debts gone to collections? You’ve probably already seen the effect they can have on your credit score (hint: it’s not good). You’ve also probably gotten all the phone calls and letters in the mail that accompany debts that have defaulted.
While this can be stressful and hang over your head for a number of years, you can almost always negotiate the outstanding amount and settle for a lesser amount, whether you’re paying it off in one payment, or agreeing to a payment plan. Regardless of how you decide to go about it, your score will start to go up once you’ve paid that debt off.
One of the lesser-known ways to boost your credit score is to mix it up when it comes to your actual credit. This means having credit beyond just a credit card or two, such as an installment loan, car loan, or credit account with certain companies or catalogs. Having a mixture of revolving credit types signals to lenders that you are capable of handling different debts, which reflects on your score.
This tip ties in with the utilization rate part, but it’s worth mentioning on its own. It may be tempting to close a credit card once you’ve paid it down to zero or if you no longer wish to use a card, but don’t do it! When you close the card, you’re wiping out the available credit from it too, which impacts your score as we learned earlier. Age of credit is another factor in determining your credit score — the older, the better! If you've had that account for a while and then close it, that could also potentially impact your credit age, which can also impact your score.
Just leave it open. If you get tempted to use it when you shouldn’t be, simply cut it up and throw it away, bury it in your backyard — whatever works! If you get into a bind in the future, you can always request a new card for the account.
So there you have it. No matter how far your credit score has fallen, you can always take some immediate steps to get back on track and set yourself up with a much-improved credit score down the road, unlocking all the opportunities and benefits that go along with it. Even if you can’t follow all the steps above starting off, following just a few will work in your favor and set you up for the rest in the future.
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