How to Improve Your Credit Score
In the United States, your credit score is one of the most important evaluations of your financial health. A good credit score can open doors for you, while a bad one can cause you to be denied loans, a place to live or even a job.
Fortunately, there are several steps you can take to improve your credit score and keep it on track. From consistently making on-time payments to keeping your credit utilization ratio below 30%, we've researched the 10 most important steps you can take to get your credit score back in good standing.
What is a good credit score?
The lowest credit score you can have is 300 while the highest is 850. Between these two scores, there are multiple credit score ranges. The following ranges are how two of the major consumer credit reporting bureaus (Experian and Equifax) classify credit scores:
- Poor (300-579)
- Fair (580-669)
- Good (670-739)
- Very Good (740-799)
- Excellent (800-850)
While there is a specific tier that is specifically referred to as “good,” any score in the 700s and above is typically considered good credit. Having credit in this range will help you qualify for better terms on loans, lower interest rates and other perks such as access to the best rewards credit cards.
How to improve your credit score
Whether you're looking to figure out how to repair bad credit or just a few ways to improve your credit score, there are several steps you can take to make sure your credit score is in the best shape possible. Many of these steps are not just one-time actions but habits you'll need to consistently practice and commit to. With some patience and dedication, the following 10 steps will have you well on your way to attaining a higher credit score.
1. Consistently make on-time payments
Making payments on time is one of the most important steps toward improving your credit score. Credit bureaus track your payment history, so if you consistently pay your bills late or miss them altogether, it will likely result in negative marks on your credit report. Even one reported late payment could have a major impact for up to seven years.
To make sure you never miss one, you can set up automatic payments for all of your accounts. This will help ensure that payments are made on time, and you don't have to worry about forgetting or getting hit with late fees. Additionally, establishing a budget and tracking your spending will help you stay on top of your finances, ensuring you always have money available for your payments.
2. Keep your credit utilization ratio low
One of the other major factors that impact your credit score is your credit utilization ratio. This ratio measures the amount of debt you owe compared to the total amount available to you. Generally speaking, it's best to keep your credit utilization ratio below 30%, as this has been shown to have the most positive effect on your credit score.
To find your credit utilization ratio, add up all of your outstanding credit card balances and divide that number by the sum of all your credit limits. If this number is above 30%, consider paying off some of the debt to reduce it down to that threshold.
3. Check your credit report for errors
Your credit report is a document containing information about your credit history, such as all of the debts you currently owe and whether or not you’ve made your payments on time. It’s important to check your credit report for errors regularly, as inaccuracies can have an adverse effect on your credit score. For example, if there are any delinquent accounts or late payments that don’t belong to you, getting them removed could drastically improve your score.
There are three major credit bureaus (Equifax, Experian and TransUnion) that track and report your credit history. As put forth by federal law, you have the right to a free copy of your credit report once every 12 months from each bureau. This can be done by visiting AnnualCreditReport.com, calling 1-877-322-8228 or completing the Annual Credit Report request form and mailing it to:
Annual Credit Report Request Service
PO Box 105281
Atlanta, GA 30348-5281
If you do find any errors, you can dispute them with the credit bureau that reported the mistake. Each of the three bureaus allows you to dispute the information online, over the phone or by mail. Be sure to include any supporting documentation that proves the error is incorrect. For further guidance, read our guide on how to read your credit report.
4. Pay down your outstanding balances
Paying down your debt is often a quick way to improve your credit score. As you pay off accounts in full, the outstanding balance will be reported to the credit bureaus as $0. This will result in a reduction of your credit utilization ratio and help you achieve a higher score. It will also help you avoid any late payments that could lower your score.
Focusing first on paying off the highest-interest accounts is usually the best approach, as this will save you the most money in interest over time. If you have a lot of debt, it may be difficult to quickly pay off all of the accounts in full. In this case, you may want to look into a debt consolidation loan or a debt management plan in order to reduce your interest rates and simplify the process.
5. Avoid frequent credit inquiries
Applying for new lines of credit or loans always results in the lender checking your credit history. This is known as a “hard inquiry,” and too many of these can have a negative effect on your score. It is best to avoid frequent credit inquiries, as this could signal to the credit card company or lender that you're desperate for credit. But compared to other factors, hard inquiries have a relatively small impact on your score and don't stay on your credit report for more than two years.
6. Keep paying your other bills on time
Aside from credit cards, other types of accounts are also reported to the credit bureaus. This includes student loans, mortgages, auto loans, utilities and even medical bills. By consistently making your payments on time for all these accounts, you'll be able to build a strong history that shows lenders you're a responsible borrower.
7. Don't close old accounts
As previously mentioned, one factor affecting your credit score is the average age of your accounts. Generally speaking, it's a good idea to keep older accounts open, as this will help increase the average age of your accounts and credit mix.
That being said, it's important to keep an eye on any old accounts that you're no longer using, as they may be costing you money in annual fees. If that's the case and you already have a high average credit age, closing the account may be best to save money.
Other ways to improve your credit score
Build up your credit file with a secured credit card, credit builder loan or a rewards credit card
If you're just starting out and don't have much of a credit history, you can establish one by taking out a secured credit card, applying for a credit builder loan or signing up for a rewards credit card. These products are designed to help you build a credit history with minimal risk and offer secure ways for beginners to start establishing their credit scores.
A secured credit card is a type of credit card that requires you to make a deposit upfront to act as collateral against future payments. Your credit limit will be equal to the amount of your deposit — if you put down $500, that will be your credit limit. By consistently making your payments on time, you build a positive credit history and improve your score.
With a credit card builder loan, borrowers make monthly payments (usually small amounts) similar to a standard loan, but instead of receiving the funds upfront, the money is held in an account until the loan is paid off. Each successful monthly payment is reported to the credit bureaus and helps build your credit score.
Rewards credit cards are a type of card that provides rewards, such as cashback or points, for each purchase you make with the card. Although these types of cards are usually reserved for those with good-to-excellent credit, some cards are designed for those with fair or limited credit history. Using these cards responsibly can help you build a good credit score while earning rewards.
Monitor your credit score
Finally, it's important to monitor your credit score on a regular basis. While you can obtain a free copy of your credit report from each of the three major bureaus once per year, you can also use online monitoring tools to receive regular updates. This will help you stay on top of any changes to your score and take action if necessary. It will also allow you to identify any suspicious activity on your account that may be the result of identity theft.
Catch up on your past-due credit accounts
If you have any past-due accounts, it's best to catch up on payments as soon as possible. Many lenders offer payment plans and other assistance programs, so it's worth taking the time to research your options. If you’re able to make a payment agreement and stick to it, your credit score should start to improve.
In some cases, you may even be able to negotiate with the creditor in order to have the account removed from your credit report. This can be done by writing a goodwill letter, explaining the circumstances that caused the late payment and asking if they would be willing to delete it from your report in exchange for payment.
Does paying off collections improve your credit score?
Unfortunately, paying off a collection account won't immediately improve your credit score. Even after paying off a collection account, it will likely remain on your credit report for up to seven years. The only exception is sending a goodwill request after having paid off the debt — in which case, the collection account can be removed if the creditor agrees.
That said, paying off collections does result in the account being updated from unpaid to “paid in full." This can make a difference for lenders that look beyond just the credit score and into the details of your credit report. It's almost always best to pay off any debt you have in collections, as the longer it goes unpaid, the worse it will look on your credit report.
How long does it take to improve your credit score?
This depends on several factors, including the type of history on your credit report and the changes you make to improve it. Generally speaking, your credit score can take anywhere from a few months to a few years to improve. Even though credit scores are typically updated at least once a month, the unique history and factors related to your report will determine how long it will take for your score to improve.
For example, if you have several missed payments, collections accounts and a relatively short average age of accounts, it could take longer to repair the damage. If the only thing negatively impacting your score is a single late payment or a high utilization rate, improving your score would likely take significantly less time. Be patient and consistent in your efforts, as the results may not happen overnight.
Does your credit score increase when you pay off a loan?
Generally speaking, paying off a loan will result in an increasing credit score over time. This is because it will show that you are a responsible borrower who can be trusted to pay back loans. It will also reduce your overall debt-to-income ratio, which can help improve your credit score.
Summary of Money's how to improve your credit score
Whether your credit score is low or it's decent, and you’re looking to improve it further, there are a number of strategies that can help. Some of the most impactful ways to increase your credit score include making on-time payments for all of your accounts, maintaining a credit utilization ratio below 30%, disputing any errors on your report, avoiding opening too many new accounts, regularly monitoring your credit score and avoiding frequent credit inquiries. The most important thing is to stay consistent and persistent with your efforts, as it may take some time for the changes you make to have an impact.