Improving Your Credit Score

What are the most important numbers in your life? Your anniversary? Your significant other’s birthday? Your Social Security number? Your bank account balance? How about your credit score? You’re probably aware that it’s the figure with the greatest impact on your financial well-being. It can open and close so many doors.

But do you know your credit score? According to a survey, almost half of U.S. adults don’t know theirs. What’s more, more than a third have three or more credit cards, and one in 10 don’t know their credit card debt amount. With alarming statistics like these, it’s clear why so many Americans struggle to maintain their finances in a healthy manner.

The first step to improving your credit score is realizing you have a problem. Look it up. You’re entitled to one free credit report each year from, but you’ll have to pay for your Fair Isaac Company (FICO) score, usually $7 to $9. There are three different three-digit numbers from the three main credit bureaus: Experian, Equifax, and TransUnion. Their scoring methodologies are essentially the same; however, each has a different amount of credit data, causing the score to vary from bureau to bureau. The credit score model you request may also change the score, which typically runs from 300 to 850. Here’s a rundown of the credit score ranges:

  • 740 and above: Excellent
  • 680 to 739: Good
  • 620 to 679: Average
  • 560 to 619: Poor
  • 559 and below: Bad

Most scores tend to hover from 650 to 800. Experian’s National Score Index shows that the average credit score in the U.S. is 688. Note that it utilizes a slightly different scale: 330 to 830. Your goal should be to, at the very least, have a score of 680. But it’s always best to strive for perfection.

How Did it Come to This?

Before you commence with rebuilding your credit, you need to understand what information is used to calculate your score. Your FICO score is determined using five factors that demonstrate your financial responsibility as a consumer.

  • Payment History – 35%: Few things are worse than being incessantly hassled by bill collectors. Fortunately, in many cases, lenders don’t report late payments until you’ve reached a 30-day threshold. Note that missed mortgage payments can harm your credit score substantially. Here are the five components of the payment history category: how much credit you have, types of credit you have, how long you’ve had credit, how you’ve managed credit, and how much money you owe.
  • Amount Owed – 30%: Your debt level is significant because it’s an indicator of whether or not you’ll be able to make payments in the future. Having some debt isn’t an issue, but the more debt you accumulate, the more cautious lenders will be to let you borrow. Here are the six components of the amount owed category: amount of debt owed to lenders, number of accounts with outstanding debt, amount of debt owed on individual accounts, the lack of a certain type of loan, percentage of credit lines in use on revolving accounts, and percentage of debt owed on installment loans.
  • Length of Credit History – 15%: Typically, the older you are, the more likely you are to have an excellent credit score. That’s because older individuals have more extensive credit histories and thus more opportunity to prove themselves to creditors. If you’re credit history is lacking, and you’ve opened many new accounts without establishing some continuity in paying them off, then you’re credit score will take a dive. Here are the three components of credit history length: how long accounts have been open, how long specific account types have been open, and how long it’s been since those accounts were used.
  • New Credit – 10%: Have you opened multiple credit accounts at once? If so, it reflects poorly on you. FICO is leery of new borrowers because its research has shown they’re more likely to miss payments and become delinquent. Doing so with a weak, unproven credit history can only exacerbate the problem. Here are the five components of new credit: how many accounts have been opened in the last six months to a year (including the proportion of accounts that are new – types are considered), how many credit inquiries have been made recently, how long it has been since the new accounts were opened (type is considered), how long it’s been since any credit inquiries have been made, and the reappearance of positive information on a credit report for an account with a shaky history of repayment.
  • Type of Credit – 10%: A profile featuring a list of your different types of credit accounts is considered. This includes all of your credit card, retail, and financial company accounts, loans, and mortgages. Credit from financing companies can harm your score. Credit from a department score is not equal to credit from a major credit card company.

In her recent article on, Bethy Hardeman dispelled some common myths pertaining to credit scores and what affects them, pointing out that your spouse’s credit score has no direct effect on yours, high debt doesn’t necessarily ruin your credit score, and people with bad credit scores got that way because of drastic actions like bankruptcies and foreclosures.

The Fix is In

The good thing about your credit score is that your recent credit history is weighted more heavily than your record from the distant past, meaning that you can put yourself on the upswing in a hurry. Here are some actions you can take to ensure you get off to a strong start as you embark on your journey up the credit scale:

  • Pay down balances immediately: Doing so as soon as possible enables you to reduce the amount of credit you’re using, which makes you look better to FICO. Your first priority should be to manage those revolving accounts, such as credit cards, before you pay off installment loans. The objective is to increase the margin between how much you owe and your credit limit, so take care of the cards that are closest to reaching their limits.
  • Keep using your cards, but in moderation: Neglecting those credit cards will only make things worse. Inactive accounts actually hurt your credit score. Prove that you’re capable of using your credit cards responsibly, in moderation. Rotate between the cards and use them in equal intervals.
  • Dispute recent late payment reports: If you’ve recently started a new line of credit or are making monthly payments on any other type of account, you may be granted some leeway on a missed payment or two by the company. In the end, they want to establish trust with their customers. A little haggling with customer service never hurt anyone.
  • Dispute older late payment reports that deserve it: In other words, haggle with the customer service department of a company that unfairly reported a late payment in the past – perhaps they overcharged you on a bill and you couldn’t afford it. If that fails, you can dispute the account with the credit bureaus.
  • Dispute errors on your credit report: Pore over your credit report to make sure it’s completely accurate, as a simple mistake can unfairly damage your score. Examine your credit limits to ensure they’re not too low, history of late payments, the status of your accounts past and present, and any accounts still marked as unpaid that were expunged during bankruptcy.

Of course, building and maintaining a good credit score is a long-term, never-ending process. Like dieting, it requires a full lifestyle change – your habits, your priorities, your values. Based on the above factors used to determine your FICO score, we can easily deduct what you need to do to improve your credit score:

  • Pay bills on time, no matter what: It’s in your best interest to take those calls from bill collectors and resolve the issue (pay the bill) not only to get them off your back, but to maintain a good score. This is especially important when your score is in excellent condition, as one hiccup can affect it more significantly than when the score was mediocre to good. In fact, just don’t let it get to the point where you’re receiving calls from collectors. Enroll your bills in auto pay, if possible, and allow them to take care of themselves.
  • Get your credit card accounts in good standing, and don’t close them: Remember, the amount of unused credit you have available positively impacts your credit score. You want open accounts in good standing. A good rule of thumb is to use less than 10% of your available credit, a common trait among people with the highest scores.
  • Don’t needlessly apply for new credit: Only get a new credit card or apply for a new loan if it’s absolutely necessary – as in you need something, anything to build your credit history from scratch (see the next list item). You should try your hardest not to spend money that technically isn’t yours, and the presence of extra monthly payments isn’t good either. Furthermore, several inquiries at once from credit card companies and lenders can hurt your credit score.
  • Get a secured credit card (if you don’t have any credit cards): Those who struggle to get a credit card because of bad credit have a difficult time building their credit histories. Getting a secured credit card can serve as a solution. You make a deposit that serves as a credit limit, and you use the card until you prove you’re worthy of an unsecured card down the road.

Rebuilding your credit is something you have to do entirely on your own. It’s a matter of self-discipline and being aware of your debt and expenses. Do not seek help from a credit repair company. The Federal Trade Commission warns consumers of these scams, providing tips to help you identify them and instruction on properly disputing inaccurate information with a credit reporting agency.