Credit Repair

What You Should (and Shouldn’t) Do to Improve Your Credit Score

Editorial Note: Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone.

Your credit score can have a significant impact on your quality of life, from whether you get hired for the job you want to whether you get approved for a mortgage. Your credit score can also cost you a lot more. A recent LendingTree study found that personal loan borrowers with a fair credit score (580-669) can expect to pay 271% more interest than those with a very good score (740-799). Raising your score to the very good category can save more than $45,000 on a range of debts.

If you want to achieve your financial goals while minimizing interest payments, you should always be working to improve your credit score. Here are some do’s (and don’ts) for improving and maintaining your score:

Credit score do’s and don’ts

You can check your credit score for free every year from each of the three major credit reporting agencies through AnnualCreditReport.com. Another handy way to check your score is with LendingTree’s credit score tool.

After checking your credit score to know exactly where you stand, follow these tips to make sure your financial decisions are helping it increase as much as possible.

Do: Keep open any credit cards that don’t have an annual fee. If the lender sees a credit card hasn’t been used in a long time, they may close it automatically. That’s why it’s a good idea to put a recurring charge on the card and autopay it every month, said Pearland, Texas-based financial planner Adam Beaty of Bullogic Wealth Management. “If you have a gym membership or Netflix subscription, these are perfect to put on that card. If the card has an annual fee, ask if you can switch to a card without a fee and keep the credit history on your account.”

Don’t: Use your entire line of credit. Be mindful of the credit utilization ratio, which credit bureaus take into account when calculating your credit score, said James Garvey, co-founder and CEO of consumer financial technology company Self Lender, based in Austin, Texas. “You should try to keep the amount of credit you use to under 30% of the total amount of credit available to you, otherwise this could negatively impact your score.”

Do: Become an authorized user on someone else’s credit card. This can boost your credit quickly and easily without the need for a credit check. Make sure you choose a person you know well, with an excellent financial track record and payment history. Because your name will also be on the account, avoid situations where delinquencies from the cardholder could negatively impact your credit report.

Don’t: Take out many new lines of credit at once or within a short period of time. Too many hard inquiries on your credit report could suggest to lenders that you’re in over your head, or about to go on a spending spree.

Do: Make payments on time, even if you only make the minimum required payment. If you find yourself unable to make a payment, don’t just forget about it and try to catch up the following month. “Call up your loan company, explain your situation and see if they can forgive your payment for the current month,” Beaty said. “Many companies can freeze your payments for a month or two, so you can make the payment down the road.” Missing even one payment can ding your credit score and will stay on your credit report for seven years.

Don’t: Forget to make your monthly payments, or make them a few days after they’re due. Because your payment history accounts for 35% of your FICO credit score, make sure your payments are always on time.

Do: Stay within your means. Once you get that loan, it’s not an excuse to go on a shopping spree, so make sure you’re living within your means to make your debt payments in full and on time. It’s also important to be realistic with your expectations when you request to borrow money in the first place, said Jason Marquardt, executive vice president of American Capital Financial Services, based in Lisle, Ill. “Typically, lenders don’t want to be the first to lend you money without adequate evidence of credit history.”

Don’t: Use only one type of credit. Make sure you diversify your credit portfolio. This could include a healthy mix of installment debts like car loans or mortgages; secured credit; and unsecured credit lines, like credit cards. “This diversity shows lenders you can responsibly manage multiple different types of credit,” Garvey said.

Do: Lower your credit utilization ratio. “You can do this by paying off your debt, increasing your credit limit on your card or opening another credit card to increase your overall limit,” Beaty said. “The idea is to get your debt down and the available credit up.” But just because you have access to more money does not mean you should spend it. Avoid temptations and use less than 30% of the credit available to you.

Don’t: Close older credit cards or lines of credit with higher limits. Closing older credit with higher limits erases years of payment history and could make your overall utilization rate skyrocket. Both could negatively impact your score.

Do: Check your credit report for inconsistencies. If you find any errors or inconsistencies on your credit report, make sure to contact the individual credit bureau that generated the report, as well as the associated vendor, to correct the mistakes.

Don’t: Ignore your credit report. You should check it at least once a year for accuracy and before making any sort of major purchase. “To protect it, consider a freeze,” said Howard Perlstein, the Boston-based founder of Make Your Change Count. “Before anyone can view your credit report, you would have to lift that freeze. Because it’s unlikely that a lender would extend credit without seeing your report, this makes it harder for identity thieves to open new accounts in your name.”

Do: Only take on as much credit as you can handle. If you carry high balances on other cards or rely too heavily on consumer-finance debt, this could be a red flag that you have poor credit management. Lenders may conclude that you are a high-risk borrower and trying to take on more credit than you can handle.

Don’t: Open and close accounts quickly just to get cash back or a deal. Playing the application game to get cash back or other sign-up bonuses like mileage points or rebates can impact your credit by creating a record of too many accounts that have been opened and closed in a short period of time, Perlstein said. “Having a steady pattern of payments is more helpful. That is preferable to having a lot of specialty card accounts at a mattress store, a rent-to-own store or other places where you make infrequent, more expensive purchases.”

Don’t: Open a credit card account and never use it. Instead of aiming for a credit utilization rate of zero, put expenses on your credit card and then pay them off immediately. “Don’t open a credit card and then never put anything on it, because that doesn’t tell the credit card companies how you handle your credit and payments,” Beaty said.

Calculating your credit score

Your FICO credit score is calculated based on five factors: payment history, credit utilization, length of credit history, new credit and the types of credit you use. These elements demonstrate to lenders how responsible you are with credit and paying it back.

“Essentially, they combine to create a resume on your financial life,” Garvey said. “Just like companies look at resumes before deciding to hire someone, to gain an understanding of their background and trustworthiness, lenders look at your credit score and credit report.”

  • Payment history (35%): “This is the biggest portion of your credit score and what you want to focus on when trying to maintain or repair it,” Beaty said. “The more late payments you make, the worse off this part of your credit score will be.”
  • Credit utilization (30%): This measures your ability to manage credit. The more you use, the more lenders fear your inability to pay back all your debt. Ideally, you want to keep your credit utilization at 30% or below, Beaty said. “This lets the loan companies know that you are using some of your credit and making on-time payments, but you are not using a lot of your available credit.”
  • Length of credit history (15%): Don’t close an account from 10 years ago, as it shows a length of payment history that is valuable for increasing your credit score. However, closing an account that is only three years old might not have as much of an impact — at least not in this specific category. “The hit of closing a credit account doesn’t occur as much in the credit history category, but it does hurt your credit utilization,” Beaty said.
  • New credit (10%): The weight of new credit on your overall score is 10%. When you shop for new credit, the inquiries companies make on your credit report can stay on your credit report for about two years.
  • Credit mix (10%): While this is not the biggest factor in the overall determination of your credit score, it does hold an important role. “A mix of credit types means you will probably have credit cards and some type of [fixed payment] loan,” Beaty said. “Lenders want to see people able to successfully manage multiple types of loans.”

Bottom line

A high credit score is usually based on a solid payment history and an ability to use credit responsibly. This shows lenders that you are less of a risk to default on your loans and may allow you to borrow more money at lower premiums, saving you thousands of dollars over the lifetime of the loan. It’s important to monitor your credit score regularly, making sure you are doing all the right things to repair it when necessary and keeping it as high as possible.

 

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