How to Improve your Credit Score

Your credit score is more than just a number; it’s a critical component of your financial picture. A high credit score can unlock lower interest rates on loans, better credit card offers, and even impact your ability to rent an apartment or acquire a motor vehicle. Here are some actionable steps to take if you’re looking to improve your credit score.

Understanding Your Credit Score

Before exploring improvement strategies, it’s essential to understand what a credit score is and how it’s calculated. Your credit score is a three-digit number typically ranging from 300 to 850, derived from your credit history. The most used scoring model is FICO, which considers the following factors:

1. Payment History (35%): Your record of paying bills on time and in full.
2. Credit Utilization / Amount Owed (30%): The amount of credit you’re using relative to your borrowing limits.
3. Length of Credit History (15%): How long your credit accounts have been open.
4. New Credit (10%): The number of recently opened accounts and hard inquiries.
5. Credit Mix (10%): The variety of credit accounts you have, such as credit cards, mortgages, and installment loans.

67% of Americans have a credit score of “good” or better. Anything under 580 implies to lenders that you are a risky borrower. A fair score means you’ll be able to qualify for loans, but you’ll be offered less favorable rates than good or very good credit scores. An excellent credit score will be able to easily secure new credit and qualify for the best rates on the market.

Steps to Improve Your Credit Score

1. Review Your Credit Report Annually

Start by obtaining your credit report from the three major credit bureaus: Equifax, Experian, and TransUnion. You are entitled to a free report from each bureau annually through AnnualCreditReport.com. Carefully review your reports for errors, such as incorrect account information or fraudulent activity, and dispute any inaccuracies. Checking your credit score will NOT hurt your credit.

2. Pay Your Bills on Time

Payment history is the most significant factor affecting your credit score. Late payments can stay on your credit report for up to seven years. Set up automatic payments or reminders to ensure you never miss a due date. If you have any overdue bills, prioritize paying them off as soon as possible.

3. Reduce Credit Card Balances

High credit utilization can negatively impact your score. Aim to keep your credit card balances below 30% of your total credit limit. For example, if you have a credit limit of $10,000, try to keep your balance under $3,000. Paying down high balances can quickly improve your score. Carrying a balance does NOT improve your credit score.

67% of Americans have a credit score of “good” or better. Anything under 580 implies to lenders that you are a risky borrower. A fair score means you’ll be able to qualify for loans, but you’ll be offered less favorable rates than good or very good credit scores. An excellent credit score will be able to easily secure new credit and qualify for the best rates on the market.

4. Open New Accounts Strategically

A hard inquiry is recorded on your report each time you apply for credit, which can temporarily lower your score. Multiple hard inquiries in a short period can be particularly damaging. Most lenders consider six total inquiries on a report at one time to be too many to gain approval for a new credit card or loan. Only apply for new credit when necessary and try to space out applications. Hard inquiries remain on your report for roughly two years.

5. Maintain Old Accounts (even if you aren’t using them)

The length of your credit history plays a crucial role in your credit score. Closing old accounts can shorten your credit history and increase your credit utilization ratio. Even if you no longer use an old credit card, consider keeping it open to benefit your score.

Improving your credit score is a journey that requires diligence, patience, and strategic planning. By understanding the factors that influence your score and taking proactive steps to address them, you can unlock better financial opportunities. Your credit score reflects your credit habits, so make it a priority to manage your credit responsibly.  If you need personalized advice or have specific concerns about your credit situation, talk to a Rockbridge advisor today.