A higher credit score may help you qualify for better interest rates, lower insurance costs, rental housing, and more affordable loan terms. Improving credit, however, is usually a gradual process. No legitimate company can guarantee that your score will increase by a specific number of points or that accurate negative information will immediately disappear.
Credit-scoring models do not all use the same formula. Under the commonly used FICO model, payment history and amounts owed are generally the two largest scoring categories. The effect of any action will depend on your complete credit profile. Learn how FICO scores are calculated.
1. Pay Every Bill on Time
Payment history is generally the most influential part of a FICO credit score. Even one missed payment can hurt, particularly if it becomes seriously overdue. Building a reliable payment history is therefore one of the most effective ways to improve your credit over time.
Steps to follow
First, list every account that reports payments to the credit bureaus, including credit cards, auto loans, student loans, mortgages, and personal loans. Record each account’s minimum payment and due date.
Second, create calendar reminders at least seven days before every due date. If your income is predictable and your bank balance can cover the payment, consider setting up automatic payments for at least the minimum amount.
Third, contact the creditor before the due date if you cannot make a payment. Ask whether the company offers a hardship plan, payment extension, temporary reduction, or adjusted due date. Assistance is not guaranteed, but contacting the creditor early is usually better than ignoring the bill.
Fourth, bring past-due accounts current when possible and continue making timely payments. Older late payments may have less influence as newer positive information is added to your reports.
Example
Maria has a credit card payment due on the 20th of each month, but her disability benefit arrives on the third. She asks the card issuer to move her due date to the 10th and sets an automatic minimum payment for the fifth. She then makes an additional payment when her budget allows. This arrangement helps her avoid late payments without risking an overdraft near the end of the month.
The Consumer Financial Protection Bureau recommends paying bills on time every time and using automatic payments or reminders when appropriate. Read the CFPB’s credit-score guidance.
2. Reduce Your Credit-Card Utilization
Credit utilization is the percentage of your available revolving credit that you are using. To calculate it, divide your reported credit-card balance by the card’s credit limit and multiply the result by 100.
For example, a $600 balance on a card with a $1,000 limit produces a 60% utilization rate. High utilization can suggest that a consumer is financially overextended.
The CFPB advises keeping total utilization at no more than 30%, while lower utilization may be even more helpful for some credit profiles. This is a guideline rather than a guarantee. You do not need to carry a balance or pay interest to build good credit.
Steps to follow
First, write down the balance and limit for every credit card. Calculate utilization for each individual card and for all cards combined.
Second, focus additional payments on cards that are closest to their limits while continuing to make at least the minimum payment on every account.
Third, make a payment before the statement closes if possible. Credit-card issuers commonly report statement information to the credit bureaus, so paying before the closing date may reduce the balance shown on your reports.
Fourth, avoid charging the card again immediately after making a payment. Continue spending only what you can afford to repay.
Example
David has a $900 balance on a card with a $1,000 limit, resulting in 90% utilization. He pays $100 before each of the next four statement closing dates and avoids making new purchases. His balance eventually falls to $500, reducing his utilization to 50%. His next goal is to lower it below $300, which would bring it under 30%.
David may save more money by paying the highest-interest card first. However, targeting a nearly maxed-out card may reduce its utilization more quickly. He should select the strategy that best fits his budget and debt costs.
3. Review Your Credit Reports and Dispute Errors
A credit score is calculated from information in your credit reports. An account that is not yours, an incorrect late payment, a duplicate collection account, or an inaccurate balance could affect your creditworthiness.
Checking your own credit reports does not damage your credit score. Consumers can obtain free weekly online reports from Equifax, Experian, and TransUnion through AnnualCreditReport.com, the federally authorized website.
Steps to follow
First, request and review reports from all three credit bureaus because their information may differ.
Second, check your name, addresses, account balances, payment histories, collection accounts, and credit limits. Look for accounts you do not recognize and payments incorrectly marked late.
Third, gather supporting records, such as bank statements, payment confirmations, account letters, or identity-theft reports.
Fourth, dispute inaccurate information with the credit bureau and the business that supplied it. Clearly identify the item, explain the error, and include copies rather than original documents. Keep confirmation numbers and copies of all correspondence.
Example
Angela’s report says that she missed a car payment in May, but her bank statement shows that the lender received the payment before its due date. She files a dispute with the credit bureau and sends supporting documentation to the lender. If the investigation confirms that the late-payment notation is incorrect, the information should be corrected or removed.
Removing an error may help a credit score, but results are not guaranteed. Accurate negative information generally cannot be removed simply because it lowers a score. Review the CFPB’s instructions for disputing credit-report errors.
4. Limit New Applications and Build Credit Carefully
Applying for several credit accounts within a short period can produce multiple hard inquiries and make a borrower appear financially stressed. New accounts may also reduce the average age of your credit history.
Consumers with limited credit histories may still need an account that reports positive payment activity. A secured credit card or credit-builder loan from a reputable bank or credit union may help, but fees, interest rates, deposit requirements, and reporting practices should be reviewed carefully.
Steps to follow
First, apply only for credit that you genuinely need. Avoid opening store cards solely to receive a small discount.
Second, ask whether an application will result in a hard credit inquiry. Checking your own reports or using many prequalification tools generally involves a soft inquiry, but confirm the terms before proceeding.
Third, consider keeping an older credit-card account open if it has no expensive annual fee and you can manage it responsibly. Closing it could reduce your available credit and shorten the history reflected in your active accounts.
Fourth, if you need to establish credit, compare secured cards or credit-builder loans. Confirm that the provider reports payments to all three major credit bureaus, and select a payment that comfortably fits your budget.
Example
Robert has no active credit accounts. He obtains a secured card with a $300 limit from his credit union after confirming that it reports to all three bureaus and charges no annual fee. He uses the card for a $20 monthly purchase and pays the statement balance in full by the due date. This creates payment activity while keeping utilization low and avoiding interest.
Credit-Building Mistakes to Avoid
Do not pay a credit-repair company to dispute information you know is accurate. Avoid payday loans as a credit-building strategy, and do not carry a credit-card balance merely because someone claims that paying interest improves your score. Also be cautious about becoming an authorized user on another person’s card, because high balances or missed payments on that account could affect you.
The safest approach is to pay on time, lower reported card balances, correct genuine reporting errors, and apply for new credit selectively. Consistent financial habits are more dependable than promises of an overnight credit-score increase.
Final Thoughts
Improving your credit score does not require taking on unnecessary debt. Start by checking your reports, protecting every payment due date, and reducing the balances you already have. Review your progress monthly, but remember that creditors report information on different schedules and scoring models may respond differently.
If debt payments are becoming unmanageable, consider speaking with a reputable nonprofit credit counselor before opening another account. A counselor may help you review your budget and possible repayment options without promising a particular credit-score increase.