How to Improve Your Credit Score
Last week we covered how companies use our credit scores to make decisions that influence our financial opportunities. We also discussed score ranges, what they mean, and the seven factors that make up scores.
Today I’m going to share effective ways to improve your score and how to help build a partner’s or child’s credit as well.
You can check your score online for free at annualcreditreport.com or through apps and services like credit karma. Know your numbers and know your report before you start. As we say here, you can’t know which way to go unless you know where you are.
The best way to start boosting your score is by focusing on the three highest-impact factors. As a reminder that’s 1) on-time payments, 2) credit utilization, and 3) derogatory marks.
On-Time Payments (HIGH impact)
Always pay your credit card bill on time. Whether you’re making the minimum balance payment or the full balance, it must be paid by the due date.
Note that different creditors report metrics at different times, and that’s not in your control. But making on-time payments is.
Payments can be automated with a few taps in your card’s app, so you never have to think about it. Over time, automation can improve your score.
You’ve likely figured out by now that I’m a very hands-on money manager, so while I advise it in many cases, I don’t automate. I go into my apps and pay my credit cards off myself every week. It’s now just part of my Friday routine. Get up, pour coffee, let the dog out, play Wordle, pay off card balances. Then on with the day.
I do this for a couple of reasons. 1) We use our cards like cash, so paying them off each week helps with budgeting. I know about what the balances should be each week if we’re on track, and if they exceed tremendously it triggers me to figure out why. 2) This practice ensures that I’ve always made the payment on time, and that I’m never carrying a balance and never paying interest.
Credit Utilization (HIGH impact)
Another positive side effect of paying off balances each week is that my credit utilization stays low at all times. I don’t know exactly when the credit card company will report my utilization rate to credit bureaus each month, so I just make sure it’s paid off regularly.
Revolving credit is a good thing. That just means routinely charging and paying off debt. It shows positive habits and ability to pay back what you borrow. Carrying a balance (not paying off credit cards) is not so good in the eyes of credit scorers as it signals that you can’t pay for what you bought.
A great way to lower your credit utilization percentage is to increase your credit limit. Usually this is a quick and easy tap-tap on your apps, but sometimes you do have to call to request a credit limit increase.
While perhaps counter-intuitive, the math is in your favor when you increase your limit and do not use it.
If you have $4,000 charged on a $10,000 limit card, your utilization is 40%. But if you increase the credit line to $20,000 then your same balance is now only 20%. Much better!
The key to using higher credit limits to improve your credit is not using it! This takes discipline. Know yourself and know your tolerance level.
Derogatory Marks (HIGH impact)
If you can, keep the dents off your record from the start by paying your bills on time. But life happens right? And if you find yourself with an account in collections there are a few things you can do.
You can call and negotiate your balance or pay it off if you can afford it and ask for the collection to be cleared.
If the ding is an error (it very well could be), you can have errors removed from your credit report by calling the credit bureaus and making a claim. It’s a process, but it can save you hundreds or even thousands of dollars. Doing this is worth the time investment.
Age of credit (MEDIUM impact)
The longer your record of credit history, the better. Remember this number is an average so when you open up a brand new line of credit the overall average will decrease. If you want to open another card or need an additional line of credit, you should do so strategically. Open no more than 1 line of credit every year, preferably much much less often than that.
Along those same lines, do not close your older credit lines, even if you aren’t using them. Closing a card could remove that history and bring your average credit age down.
Number of Credit Accounts (LOW impact)
This is the number of different credit cards or loans open in your name. In general, the more accounts you have the better.
Opening more accounts could increase this metric, but as we covered last week, there are some higher-impact factors influenced when opening more accounts, namely your credit age. Do so with intention.
Credit Inquiries (LOW impact)
Another reason to avoid opening multiple new accounts in a short time, each time you ask for credit you’ll have a hit to your credit score.
Two More Tips
There is one more set of options you could employ to improve your score or that of a loved one.
Add an authorized user to your account to improve their score.
Several years ago my husband’s credit score needed some improvement. I added him as an authorized user to my credit cards, which connected him to my credit history. This improved his credit score by 30 points almost instantly! And it did not negatively affect mine at all.
Now, I say with a caveat. It’s unwise to do this with any ol’ person. I advise only a close trusted loved one.
Story time: I worked for a mortgage company for a while after college, and the owner once shared that he would often add prospective customers (ahem, strangers) as authorized users on his personal credit cards to quickly improve their scores so he could sell them mortgages. Woof. Anyone else smell the unethical here? I got far away from that company as quickly as I could, and they folded up a few years later.
If your credit needs a boost, have a loved one with a good credit score add you as an authorized user to one of their credit accounts.
You’ll never even need to have access to this account. This works to build credit history and improve your score pretty quickly, the same way.
***Bonus Idea
Our children are all three authorized users on our main credit cards (and they don’t even know it). They do not have access to make charges to the accounts and likely never will. But the point is to build their credit history and kick their financial options off to a good start.
For each of these components and strategies, time is your biggest through-line. Consistent payments over time, increasing your credit limits after some time, opening additional lines of credit over time, and time using credit all contribute to score improvement.
Improvement to your score takes time and diligence, and consistency. And through consistency over time, you’ll develop the positive habits that will serve to benefit your financial future.
Do you need guidance to improve your habits? Contact me for help and support.