Credit scores are a complex and confusing topic for many people. This is due in part to the fact that most activities surrounding credit scores are not transparent or visible to consumers – they take place behind the scenes in the world of finance and lending. However, understanding credit scores, and how to improve your credit score, are vitally important. A good credit score can save you thousands, maybe even tens of thousands of dollars on things like home loans and auto loans. A bad credit score can make it hard for you to get any loans or even credit cards!
In this article, we’ll explain some of the basics of credit scores, answering typical questions like, “What is a credit score?”, “What is the credit score range?”, and “What is a credit score used for?” to name a few. We’ll focus on providing consumers with the background and foundation to understand credit scores and understand how long it takes to improve a credit score. Then, we’ll offer details on the 10 best ways to improve your credit score and some information about credit reporting and monitoring. By the time you finish reading this guide, you’ll be a regular credit score expert, and ready to improve your credit score as much as possible!
Important Note: As with much of our content, this article focuses on the credit bureaus, scores, and systems in place in the United States of America. While similar principles may apply to credit scoring systems in other countries, and many of the methods we will highlight to improve your credit score are also likely to be useful, our information is based solely on US scores, agencies, and information, valid as of the date of publication of the article.
What is a Credit Score?
Before we can get into the nitty-gritty about how to improve your credit score, we really need to address some basics about credit scores and credit bureaus. Credit scores are numeric scores that are generated by one of two companies/methods – FICO or VantageScore – based on the data maintained by credit bureaus. These bureaus, sometimes known as credit reporting agencies, generate files on consumers’ credit, lending, and financing activities. There are three major credit bureaus in the US – Experian, Equifax, and TransUnion – and several smaller or more specialized bureaus as well.
The credit bureaus are essentially data warehouse operations, collecting information from creditors. This includes basic personal information, as well as a listing of various credit accounts and loans for each consumer, along with their payment history, outstanding balances, and similar. These files on each person are known as your credit file or credit report. Keep this in mind as we discuss ways to improve your credit score, as several of them have to do with the credit bureau files and information contained therein.
A credit score is generated by analyzing the contents of one or more of these credit files, and using either the FICO method (for a FICO score), or the VantageScore method (for a VantageScore score). FICO is the older, traditional method, and is an acronym for Fair Isaac Company, who developed the algorithms used to generate the scores. VantageScore is a more recent innovation (released in 2006) and is a collaboration between the big three credit bureaus. Some lenders prefer to use one or the other scoring methods, though FICO remains the most common (around 90% of market share).
The actual numeric credit score that is the result of all of this is based on a number of factors. In general, it is meant to provide a meaningful benchmark for lenders to compare one client to the next and have some insight into a customer’s credit and payment habits. However, like many things in life, it is hard to boil down the complexities of human behavior into a simple score or grade. Things like delinquent accounts, extremely high loan balances, an abnormally large number of loans or credit accounts, and similar all drag down your credit score. On the other hand, loans that have been paid off on-time, credit accounts with positive payment history and reasonable balances, etc. all help improve your credit score.
What is the Maximum Credit Score? What is the Credit Score Range?
Naturally, it’s useful to understand the credit score range and where your score relates to this range. Do you have one of the lowest credit scores, a fair credit score, or one of the highest credit scores? What is a good credit score? What is a bad credit score? What is an excellent credit score? What is the maximum credit score? Relax, we’ll explain this simply and easily!
Both FICO and VantageScore credit scores use a credit score range of 300 to 850. Therefore, the lowest credit score is a 300, and the maximum credit score is 850. This is also what is considered a perfect credit score, though in practice an 850 is virtually impossible to attain. While individual lenders may vary in exactly where they draw the lines in this range in terms of good or bad scores, the following list is a typical guideline.
Based on public data, in 2017, 56.8% of consumers in the US had a FICO score of Good or Excellent (700-850 range), and the median in 2011 was listed at a score of 711. In answer to “What is a good credit score?” it is safe to say that anything over 700 is pretty widely seen as “good” or better.
In reality, there is actually a wide range of scores for both FICO and VantageScore, as they have different products and categories relating to different types of loans, client models, and data from all of the different credit bureaus. However, the main, classic score is really what we’re most concerned with here and referring to as a credit score. Any more specialized scores will likely improve if you improve your credit score.
What is a Credit Score Used For?
Before we talk about how to improve your credit score, we need to touch on what exactly a credit score is used for. Typically, credit scores are used by lenders to evaluate your suitability for a loan or lending product and assess the likely risk of you defaulting or not paying back the loan. They are used to determine rates (and in some cases limits) on loans, as well as used in the decision-making process for things like renting an apartment, insurance, and even employment (though the latter is a somewhat controversial use and has been banned in several states).
Put in more practical terms, those on the higher end of the credit score range generally have an easier time accessing credit and lending services and get more favorable rates. They are also less likely to have issues with secondary credit score uses, like the aforementioned risk assessment prior to apartment renting or purchasing utility services. Below, we provide an example of how a credit score might influence the lending and credit activities of two people. – We’ll call them Alan and Bill – who have the same income and work in the same company, in the same office, and live in the same neighborhood, with the same size families, same size bank accounts, and everything else the same – except their credit scores.
- Alan and Bill both make $60,000 a year in gross salary. They are both single and currently rent their homes.
- Alan has a credit score of 723. Bill has a credit score of 682.
- Alan was able to rent his townhome with no problems or issues. Bill was required to provide 2-months’ rent as a security deposit, amounting to $3,000.
- Alan and Bill both have credit cards. Alan wanted to increase his credit card limit from $5,000 to $10,000. The bank approved, based on his income and credit history. Bill also wanted to make this change. The bank only authorized an increase to $7,500 based on his credit history, despite the same income level as Alan.
- Alan and Bill both wanted to buy a car and needed a car loan. Coincidentally, they both bought the same type of car with the same options, costing the same amount of money, $20,000. They both had $5,000 saved up for a down payment, meaning they both needed loans for $15,000 over 5 years.
- They both had their auto loans approved. Alan received a rate of 3.75%, and Bill a rate of 7.25%. Over the life of the loan, this means Alan will pay $1,474 in interest, while Bill will pay $2,927 in interest.
In our basic example above, you can see how a credit score makes a big difference for Alan and Bill. With a slightly better credit score and everything else being equal, Alan was able to avoid a security deposit on his townhouse, access an additional $2,500 in credit limit on his credit card, and saved nearly $1,500 in interest on his car loan due to a more favorable rate. Bill had $3,000 tied up in his security deposit, missed out on the extra credit limit and paid nearly twice what Alan paid in interest on the car. If only Bill had worked a bit harder to improve his credit score…
How Long Does It Take to Improve a Credit Score?
When you are looking to improve your credit score, it’s important to understand that this process takes time. As credit scores are based on your credit files, and that information is usually updated monthly at best, there’s no practical way to truly boost your credit score overnight. Even methods or websites claiming to tell you how to improve your credit score in 30 days are a bit misleading, as it often takes longer than this for agencies to update your file, and new scores to be generated. And it is quite unlikely that any site (ours included) can provide a magic answer on how to improve your credit score to 800 or beyond. So much depends on your current score, the details of your credit bureau files, and the actions you take moving forward.
So just how long does it take to improve your credit score? There are some simple and easy ways to improve your credit score, that don’t take months and months of effort on your part. In general, it may take 6-8 weeks, or even up to 3 months in some cases, for these methods to result in meaningful changes in your credit file and credit score.
The 10 Best Ways to Improve Your Credit Score
By now, you’re hopefully aware of how credit scores work, what they are used for, and what kind of impact they can have on your finances and opportunities. Naturally, you may be wondering how to increase your credit score. Below, we offer up 10 expert-approved methods to improve your credit score, mostly just by forming better habits and taking a few simple actions. With a little effort, and these tips, you’ll be fully aware of how to improve your credit score in 3 months or less, and start enjoying better interest rates, more lending opportunities, and saving money.
#1 – Review Your Reports and Dispute Any Errors
This is one of the easiest ways to improve your credit score. The information in your credit file is pulled from a large database of sources, and often things can appear there that isn’t entirely accurate – or may not even relate to you! While Social Security numbers are usually used for data integrity, that information isn’t always available, and it’s not uncommon for people with similar or the same name to end up with entries mixed in on your report. There’s nothing worse than having your score negatively impacted from some bad debt or unpaid bills that aren’t even really yours! If you notice errors on your report, you can contact each of the major credit bureaus and dispute the information. It may take time, and a good deal of back-and-forth, but all of these bureaus have dispute mechanisms in place, both online and over the phone. While it may take some time to resolve, and longer still to be reflected in your credit score, this is one of the only ways to, at least in one sense, boost your credit score overnight.
#2 – Open a Credit Card Account and Use It Responsibly
This tip mostly applies to those looking to build a credit score, that don’t already have a credit card or loan. Opening a credit card account is critical to building a credit file. You don’t need to use it often or for large purchases – even a credit card with a $500 limit, used to purchase gas for your card every week or something similar is a great way to start. Making sure to pay at least the minimum amount due each month, on time, is the quickest way to start adding months or positive payment history to your credit file, which immediately goes to work to improve your credit score – especially if your file is otherwise empty or non-existent. If you need help choosing the best credit card for your needs, check out our article on Top Considerations for Choosing the Right Credit Card.
#3 – Know and Respect Your Credit Card Spending Limits and Balances
For those who already have one (or more) credit cards, knowing your limits, and staying within those limits, is very important. In an ideal situation, you want to keep your outstanding balance to below 30% of your account limits, though this can be difficult in practice. This includes both your overall statement balance, as well as your daily balance – as in many cases, regardless of how much you pay, the balance outstanding may be reported to the credit bureau. What this means is, if you have a $10,000 limit, and run up charges of $7,000 in a month, then pay all but $2,000 off at the end of the month, you may still get dinged for having a high utilization (70%) with respect to your limit. To combat this, you can make more frequent payments or transfers against the balance. Just remember, to improve your credit score, try to keep your balance below 30% of your account limit.
#4 – Increase Your Credit Limit
While you have no direct control over your credit limit (it is usually based on score, income, and other factors), requesting an increase to your credit limit is another way to accomplish the 30% balance tip from #3 above. Your actual income and that kind of information aren’t disclosed as part of credit reports, so credit bureaus and score agencies don’t know if your account with $900 ($1,000 limit) is any different than an account with $9,000 ($10,000 limit). In both cases, they see 90% utilization of credit and ding you for it. $900/$2,500 or $5,000, on the other hand, is a positive, as you are using a small portion of your available credit. So, in general, if you can request an increased credit limit (and avoid using it to run up more charges), then you should do so, as it’s a great way to improve your credit score.
#5 – Limit Your Number of Cards, and/or Pay Off Balances
One of the things that can push your score down to the lower end of the credit score range is having too many cards with outstanding balances. Having 3 cards, each with less than $100 balances on them outstanding, is worse for your score than having 1 card with a $300 outstanding balance. While the exact number of cards or accounts that are considered “too many” is not disclosed by credit bureaus, tidying up your list of accounts, and paying off or tiny balances can be a great way to improve your credit score. Most experts recommend you have 1 major credit card and 2-3 minor or store cards in an ideal situation but obviously needs and availability will vary from person to person. This doesn’t mean you should necessarily close accounts, however – see our next tip, #6.
#6 – Only Close Accounts Strategically
Closing credit accounts, regardless of whether or not you currently use them on a regular basis, is not necessarily a good thing. The overall amount of potential credit, and your overall utilization across all accounts, is a factor in your scoring. Closing an account reduces your available credit, and therefore automatically increases your utilization based on any outstanding balances (or just regular usage). It is recommended that you only close accounts strategically, when you know you do not intend to use them, and when your overall balances across all accounts are low. Staggering the closing of accounts to not more than one per quarter is often the best idea if you are truly seeking the highest credit score possible.
#7 – Pay All Your Bills on Time
All bills need to be paid on time – both those that are for loans or credit cards and those that are for everyday things like utilities and shopping. Any delinquent bills will find their way onto your credit report. Since overdue bills negatively affect your payment history in your credit files, and payment history makes up 35% of your scoring (at least in the FICO system), even a single overdue bill can wreak havoc with your credit score. If you have trouble remembering to pay bills on time, most companies these days offer automatic online bill-pay, linked to your credit card or checking account. If you want to improve your credit score – pay your bills on time. This may sound simple and straightforward, but it’s vitally important.
#8 – Use Multiple Types of Credit
Though it may sound counter-intuitive, utilizing multiple types of credit can help improve your credit score. If you find yourself often flirting with your credit card limits, for example, you may want to take out a small personal loan to pay off some of your balance. As long as you can afford it (and are sure to make the loan payments on time), this provides a double benefit to your credit score. The additional account and available credit, along with solid payment history, means your score will go up. The lower utilization on the credit card will also increase your score. It’s a win-win. What’s more, usually personal loans have a much lower interest rate than carried interest on credit cards, which can be 15-30% annually depending on your card and terms.
#9 – Don’t Worry About Old Debt
A lot of people mistakenly believe that if they’ve paid off a loan, that they should then follow-up and get it removed from their credit report (since it’s no longer an outstanding debt). This is the exact opposite of what you should do, in fact. If it’s fully paid off, it will show as such on your credit report. There’s no reason to remove it – in fact, leaving it there shows you had a loan and paid it off successfully. This is a positive to your score, not a negative. So don’t worry about it – it shows that you are responsible with your credit and payments. It’s a good thing, not a bad thing!
#10 – Consolidate Your Debt or Utilize a Debt Counseling Service
If you’ve got more debt than you can handle, many credit cards or loans and accounts, or are just confused, and in over your head, a personal loan or debt consolidation may be just what you need. Debt consolidation or debt counseling services can help settle accounts with creditors, reducing your outstanding balances and payments, without the negative impacts of bankruptcy or similar “last-ditch” efforts. The only downside of using this method to improve your credit score is it’s not free – services often charge a decent fee for their work, the money you may not have if you are already in financial dire straits. Nevertheless, even basic debt consolidation can make a huge impact – a single personal loan for $9,000, on which you make the monthly payments on time, is much better than 3 credit cards with $3,000 limits and nearly $3,000 balances on each, to which you can only pay the monthly minimum.
Credit Reports and Monitoring
Before we conclude this guide to improve your credit score, we should touch on credit reports and monitoring of your credit score. In order to know where your current credit score is, and what might be in your credit file, you have to get access to your current reports and information. All citizens are entitled to a free copy of their reports at least once a year, which can be obtained from annualcreditreport.com, a service of the US government. You can also get your report and scores from multiple third-party companies, some for free and some for a fee. They may require you to enroll in their paid monitoring services. Some banks and credit card companies also offer free FICO scores to their customers on a monthly or annual basis. Just remember, look out for scams or sketchy websites, and start with your free reports from the government site.
Hopefully, armed with your credit files and scores, along with the tips from this guide, you’ll be able to improve your credit score and get as close to a perfect credit score as possible in no time!
For More Information, Check Out…
If this guide isn’t enough for you, or you have some serious problems on your credit report, you might want to read this book by Anthony Davenport, to provide more in-depth information than we’ve covered here.
For additional tips on how to improve your credit score, this guide by Liz Weston covers much more detail and many techniques that can help augment what we’ve covered in our article.