Over the past ten years, the average credit score in America has hovered in the high 600’s. This is considered a fair credit score, but definitely not excellent.
If you’re among those who have a fair credit score and are looking to improve it, you’ll have to focus on a few different financial principles. Fortunately, there are easy fixes to improve your credit score. But first, let’s take a look at how your credit score is calculated:
How Your Credit Score Is Calculated
There are a number of factors that go into calculating your credit score (and, depending where you check your score, there are even different formulas!). For ease’s sake, though, let’s go with the golden standard: the FICO. Here’s how your score formula breaks down:
- Payment history (35%) — Payment history is whether, and how often, you pay your credit accounts on time.
- Amounts owed (30%) — Amounts owed is how much credit you’re using at a given time, compared with your total available credit.
- Length of credit history (15%) — Length of credit history is the average age of your credit accounts.
- Credit mix (10%) — Credit mix is the variety of accounts you have including credit cards, retail credit cards, mortgage loans, auto loans, and most other kinds of debt.
- New credit (10%) — New credit is how many recently opened credit accounts you have, and also how many recent credit inquiries you have.
Now that you have an idea of where you stand and why, let’s look at how you can improve upon your credit score.
Fix 1: Get Current With Your Bills
Paying for bills on time is the most important fix you can make to improve your credit. Since payment history makes up the majority of your credit score, this will have a significant impact. Potential lenders look at your payment history to determine how likely you are to pay their loan/revolving credit back on time.
One way to make sure you pay your bills on time is to set calendar reminders. I set calendar notifications one week before my credit card due date, as well as one day before. My bank’s mobile app also sends a reminder to my phone the day before payment is due.
If you miss one payment, it’s not the end of the world. As long as you have plenty of on-time payments, one missed payment shouldn’t plummet your credit score. Just make sure you continue to make on-time payments after that.
Fix 2: Reduce And Eliminate Debt
Amounts owed is the next most important factor that contributes to your credit score. Your credit utilization ratio is the current balance on your debts divided by your available credit. You want to keep your credit utilization ratio as low as possible.
Reducing and eliminating debt will decrease your credit utilization ratio. To reduce your debt, simply continue making on-time payments to your bills. It’s great if you can pay more than the minimum balance. This will help you eliminate the debt faster. If you can pay your entire credit balance off in full each month, that’s even better!
There is no magic number for your credit utilization ratio (though some financial gurus recommend staying below 35%). Just keep in mind that lower is better.
Fix 3: Ask For A Credit Limit Increase
Another easy fix to improve your credit score is to ask for a credit limit increase. If your debts remain the same, having a higher credit limit will decrease your credit utilization ratio. Having a lower credit utilization ratio, in turn, improves your credit score.
The point of increasing your credit limit should be to decrease how much available credit you’re using. It shouldn’t be used to further fund your lifestyle or pay for additional expenses.
When you request the credit limit increase, ask if it’s possible for the credit card company to do so without doing a hard pull. A hard pull is an inquiry on your credit report that can have a temporary negative impact on your credit score. Instead, ask if the credit card company can do a soft pull.
Fix 4: Avoid New Credit Cards
Getting a new credit card affects two parts of your credit score: length of credit history and new credit. When you get a new credit card, your average length of credit history decreases.
For example, let’s say you have two credit accounts — one is six years old and the other is three years old. Your length of credit history will be 4.5 years (the average of your accounts’ ages). If you open a new credit account, the average age of your accounts will plummet because the newest account will be zero years old.
Another tip is to make sure you keep your oldest credit card open. This will keep your length of credit history long and help improve your credit score.
Although they have a small impact, recent inquiries play a role in your credit score as well. As previously mentioned, a hard pull creates a small dip in your credit score. This is another reason to possibly avoid getting a new credit card.
Fix 5: Check Your Credit Report
Checking your credit report can only help you. It may not have a direct impact on improving your credit score, but it can help you avoid some very costly mistakes.
You should check your credit report to make sure there aren’t any unauthorized accounts under your name and that all of your payment history is correct. Sometimes data furnishers make mistakes. Catching those mistakes early and removing them immediately will prevent any negative impacts to your credit score.
You can check your credit report for free at annualcreditreport.com. All three bureaus are required to offer your credit report for free each year. I usually check my report from one of the three credit bureaus every four months, so that I have an opportunity to check for errors multiple times throughout the year. Sites like myFICO, Credit Karma, and Credit Sesame also offer free credit reporting tools.
These easy fixes to improve your credit score are based on the five factors that contribute to your credit score, as determined by FICO. It’s important to be patient when it comes to improving your credit score.
There’s no magic formula to increase your score by 200 points. But with persistence and following through on these tasks, you can improve your credit score over time.