Today, my credit score is above 800. I opened my first credit card through my main bank while I was in college and have always made my payments on time. I also have two retail accounts: one from Macy’s and one from PayPal. That’s it. That is the entirety of my credit history. This goes to show you that you do not need to open a bunch of accounts to have a high credit score. What matters most is your payment history; and that is what I have always focused on.
Before we get into the tips on how to improve your credit score, let’s take a look at the factors that determine your credit score:
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
Although the different factors have set percentages for how they calculate into your credit score, the importance of any given factor varies from person to person. For example, information in a credit report may be looked at differently for someone who has a short history than for someone who has a lengthy history. For this reason, it is difficult to say how much any one action will affect your credit score. The best thing to do is cover yourself on all fronts. Here are five ways to improve your credit score based on each determining factor.
Payment History Tips
The main thing potential lenders look at when evaluating your credit is whether you have paid past accounts on time. I make sure that my credit accounts are paid on time by setting calendar reminders. Every month, I get a reminder one week before my payments are due and another one the day before. On top of this, I have automatic payments set up with my credit card so that the statement balance is automatically transferred from my checking account on the due date.
If you miss a payment, be sure to get current and stay current. One missed payment will not affect your credit score much if there are plenty of more recent on-time payments. If you are struggling to pay all of your credit accounts on time, consider a debt consolidation loan to pay off your accounts. Just remember to pay that loan back on time.
Amounts Owed Tips
Another term for amounts owed is “credit utilization ratio”. Using a high percentage of your available credit is not good for your credit score. For example, if your credit card has $10,000 of available credit and you have a $9,000 balance on that card, this shows lenders that you may be not be able to payments on future loans. There is no magic number for what your credit utilization ratio should be. Just keep in mind that the lower it is, the better.
One way to improve your credit score is to ask for higher limits on your credit cards. This way, your credit utilization ratio will go down even if you maintain the same balance.
Length of Credit History Tips
In general, the longer your credit history, the higher your credit score will be. Your credit score takes into account the age of your oldest account, the age of your newest account, and the average age of all your accounts. For this reason, it is a good idea to always keep your oldest credit card open.
Your credit score also considers how long it has been since you used certain accounts. Try to use all of your credit cards from time to time so that they don’t remain idle.
Credit Mix Tips
The types of credit you have play a factor in your credit score as well. Having a mix of retail accounts, mortgage loans, and credit cards will improve your score. Credit plays a small factor in your credit score calculation, so do not worry if you do not have every type of account. It is better to have just a few than to open up accounts unnecessarily. I have only one main credit card and two retail accounts; and my credit score is still over 800.
New Credit Tips
Both how many new accounts you have and how many inquiries you have on your credit report affect your credit score. New accounts lower the average age of your credit history, which we have determined also affects your credit score. Inquiries or “hard pulls” to your credit history also impact your affect score negatively. Try to shop for new loans or credit cards around the same time. If you get multiple hard pulls in a short period of time, they will count as one inquiry. If they are too spaced out, each hard pull will lower your score.
Now that you know the five factors that determine your credit score, you are equipped to take action to improve your credit score. The tips mentioned above are specific to each factor. You can decide which action steps to take based on your problem areas. Remember that these calculations are not set in stone. Everyone’s credit score is calculated a little differently depending on their entire credit report.
Do you know your credit score? How has it changed over time?