It’s important to get your credit score as high as possible if you want to qualify for the best loans and credit. Many lenders don’t even look at your credit report; they stop at your credit score. FICO credit scores range between 350 and 850, with 850 being the very best score you can get. If you have below a 680 score, there is much room for improvement — and if your score is even lower than that, you might be feeling hopeless. It is, however, possible to raise your credit score to a much higher level by the end of the year — or sooner, in some cases.
WHAT GOES INTO A CREDIT SCORE
MyFICO.com, the original developer of the commercial credit-scoring model, has published basic guidelines of what goes into your score:
— 35 percent of your score is your payment history
— 30 percent of your score is your credit utilization, or how much of your available credit you use
— 15 percent of your score considers the length of your credit history.
— 10 percent of your score is the amount of new credit you’ve received.
— 10 percent of your score is the type of credit you’ve used.
Now that you know what goes into your credit score, how can you take advantage of this knowledge? There are some things you can do to raise credit scores quickly, while other methods take time. We’ll break up our tips into quick fixes and longer-term goals.
CREDIT-SCORE QUICK FIXES
PAY DOWN YOUR CREDIT-CARD BALANCES
Since the amount of credit you use makes up such a large part of your credit score, paying down your balances will have a dramatic, positive effect. The credit-scoring model rewards those who have used less than 30 percent of their total credit limit. If you are maxed out on your credit cards, paying them down below 30 percent can easily cause your score to increase dramatically.
REFINANCE YOUR HOME EQUITY LINE OF CREDIT INTO A SECOND OR FIRST MORTGAGE
Despite the fact that these loans are secured by your home, HELOCs are revolving lines of credit, and the percentage of the line you have used up can lower your score. If you have used more than 30 percent of your HELOC credit limit, you will be penalized as if you have used up too much of your credit on a credit card.
Refinancing can also help your score. This act rewards you for opening new credit (10 percent of your score) and opening up an installment loan. The credit-scoring model likes to see a mix of credit, installment loans (mortgages, auto loans) and revolving loans (credit cards and HELOCs). Adding an installment loan to your mix can raise your credit score.
PULL YOUR CREDIT REPORT
The FTC did a survey in 2013 and reported that 1 in 5 Americans have errors on their credit report, with 1 in 20 having mistakes so grievous it negatively affected the credit score. Pulling your credit report to make sure there are no mistakes or problems with identity theft will help you make the right decisions to raise your credit score. You can get your TransUnion credit report and score from CreditRepair.com. If you don’t like what you see, the site offers credit repair and score improvement services to get your credit back in shape.
FIX MISTAKES ON YOUR CREDIT REPORT
Once you have identified mistakes, it’s time to take action on them. Write to the credit bureaus and explain why you think a listing is in error and needs to be corrected. Include any documentation you might have to back up your claim.
DON’T UNNECESSARILY CLOSE ANY ACCOUNTS
Length of credit history counts as 15 percent of your score; the older the accounts, the more points for you. In addition, if you close an account, your total credit utilization (30 percent of your score) will go up, lowering your credit score.
LONG-TERM CREDIT-SCORE FIXES
PAY YOUR BILLS ON TIME
As we have seen, payment history makes up to 35 percent of your score. Positive payment history on your accounts can take up to a year to increase your score, so there’s no time like the present to start paying in a timely fashion. Make sure you don’t let any account go past the due date.
MAKE AT LEAST THE MINIMUM PAYMENT ON ALL YOUR BILLS
Making partial payments actually counts as a late pay on your credit report, even if you make your payment by the due date. A payment is not considered made until the entire amount has been received. Even a single late payment can negatively affect your credit score.
CREATE A BUDGET
The No. 1 reason people get into trouble with paying their bills and consequently wind up with a negative payment history and crushing debt is a lack of money management. Carefully go over your income and expenses and see if you can find a way to cut down on your monthly outlay. When you find extra money, use it to pay down existing debts, which will lower your credit utilization and increase your credit score. Having a good budget will also ensure your bills are paid on time, which can improve your scores tremendously.
OPEN AN INVESTMENT ACCOUNT, THEN BORROW AGAINST IT
Many banks and credit unions have secured loan programs allowing you to borrow against an existing account. You can buy a CD for as little as $500 and use it as the basis for a loan. Adding new credit to your report will help improve your score, both from the positive payment history and the new credit line you will add.
BE CAREFUL WHEN APPLYING FOR NEW CREDIT
Any time you apply for new credit, your credit report is pulled and reviewed by lenders. To keep a record of this credit-report review, an “inquiry” is placed on your credit report. The scoring model does not favor excessive inquiries — applying for numerous loans and lines of credit is a red flag for lenders, and this is reflected in the credit score.
The good news is that if you apply for a new mortgage, auto loan or student loan, multiple inquiries within a certain period of time only count as one inquiry. For mortgages and auto loans, all inquiries placed within a 30-day period of time only count as one inquiry against your credit score. All student-loan inquiries within a 14-day period of time count as one inquiry. There is no similar penalty-free “shopping period” for other types of loans and lines of credit, such as credit cards: All submitted credit applications will result in an inquiry being placed on your credit report. Inquiries stay on your credit report for up to two years.