Need to Boost Your Credit Score? Here Are 5 Things to Do and 5 Missteps to Avoid

Your credit score can have a significant impact on your quality of life. Potential lenders associate poor scores with increased risk when they’re making loans. A low score can be seen as a red flag that you have failed to handle borrowing well in the past and might make the same mistakes again.

This isn’t to say that lenders never extend loans to consumers with low credit scores, but they typically charge a higher interest rate if they do. It’s their way of compensating for the added risk they’re taking on. You’ll most likely need a credit score of at least 800 to qualify for the very best loan terms.

Key Takeaways

• Credit scores can range from 300 to 800 or even higher.
• Your payment history carries the most weight when calculating your credit score.
• It’s recommended that you keep your credit utilization rate at less than 30% to help boost your score.
• Signing up for a secured credit card can help build good credit.
• Becoming an authorized user on someone else’s card can be helpful, provided that they have good credit.

How Does a Credit Score Work?

Your credit score is derived from information included in your credit report. Lenders typically order a credit report when they’re evaluating the creditworthiness of someone who’s applying for a loan. They can request a credit score as well, which summarizes the information contained in the report.

The FICO credit score was created by the former Fair Isaac Corp. (now FICO) in 1989, and it’s used by 90% of top lenders. Three credit bureaus provide this score: Equifax, Experian, and TransUnion. Each determines its own score based on the information it has on file for a particular consumer, so the scores can be marginally different.

How Is a Credit Score Calculated?

FICO scores are based on five categories of information. Each contributes a percentage to the final number.

• Your payment history: 35%
• How much you owe: 30%
• Length of your credit history: 15%
• Your credit mix: 10%
• Amount of new credit: 10%

How much you owe is represented as the percentage of all your available credit that you’ve used. The number is referred to as your credit utilization rate. Your credit mix is the types of loans and lines of credit that you have.

Important

You won’t have a credit score if your credit report doesn’t include enough information to calculate one. You must typically have held at least one account for a minimum of six months and an account that has been reported to the credit bureau within the last six months.

What’s a Good Credit Score?

The number ranges for good, iffy, and poor credit scores vary a little depending on the score being used. FICO breaks them down like this:

• 800 or higher: Exceptional
• 740 to 799: Very good
• 670 to 739: Good
• 580 to 669: Fair
• 300 to 579: Poor

“Each lender has their own internal definition of what their top-tier credit is,” says Christopher Naghibi, chief operating officer at First Foundation Bank. “It’s not a secret, so you can just ask them what credit score you need to get the best rates.”

What Can Lower Your Credit Score?

Some actions will almost certainly slash away at that credit score you’re trying to boost. Five common missteps include:

Your Payment History

Not making a loan or credit card payment on time is probably the most damaging mistake you can make. The event will remain on your Equifax credit report and damage your score for seven years.

Experian will hold it against your score for seven years as well, but won’t ding you until payment is at least 30 days late.

Your Credit Utilization

It’s generally recommended that you use less than 30% of your available credit. Maybe you have one credit card with a $3,000 limit. Never let the balance you owe on the card exceed $900.

Too Many Applications

A hard inquiry appears on your report every time you apply for credit and the potential lender requests it. A lot of hard inquiries can tank your score if they’re made within a short period. Hard inquiries remain on your Experian credit report for two years.

However, multiple applications for auto loans or mortgages are often treated as just one inquiry if they’re made within 14 to 45 days or so. You can shop around for the loan that best suits your needs without dinging your score.

Closing a Credit Card

You might think that closing a card would be a good thing, but it can have a trickle-down effect that will negatively affect your score. You’ll increase your credit utilization ratio if you have a lot of unused credit available on that card. It can also shift the different types of accounts you’re holding, affecting your credit mix. It can affect the length of your credit history if you held the card for several years.

Not Using Your Available Credit

This might also seem like a good thing. You’re not closing an account; you’re just not tapping into that available money. However, the lender isn’t reporting any activity to the credit bureaus if your balances are paid off, so you’re not even making any payments. Your lender might even cancel your card because it’s inactive.

Ways to Boost Your Credit Score

A significant credit score boost won’t occur simply because you’ve avoided making mistakes. You’ll have to take some affirmative action as well.

Achieve Optimum Usage

Equifax suggests arranging an automated, regularly scheduled payment on a card for another bill you’d have to pay anyway. Just be sure to pay off the charge as soon as possible.

Shrink Your Credit Utilization Ratio

That 30% target is the most of your credit you want to use. Experian indicates that ideally, you’ll stay under 10%. You can calculate your ratio by dividing your outstanding card balances by your credit limit and then multiplying the result by 100 to get the percentage.

Ask for Help

Life happens, and sometimes takes a turn for the worse. Don’t bury your head in the sand if you’ve lost your job or suffered another cataclysmic financial event. Reach out to your lenders as soon as possible. Avoid simply not paying them. Ask them to defer or otherwise change your payment schedule or the amounts of your minimum payments. Ask for forbearance or modification of your loan or account.

Consider the Buddy System

“If your score is in rough shape and you’re struggling to get approved for anything, you might think about becoming an authorized user on someone else’s card,” says Joe Camberato, founder and CEO of National Business Capital, a fintech lending platform. “This only works if the primary cardholder is responsible and you need to be, too, but it can help you rebuild credit over time.”

Consider asking a close friend or family member who has good credit and is willing to help you boost your score. The account will appear on your credit report, too, and can gradually repair any problems there. This approach can also be extremely helpful if you’re just starting out and don’t have much of a credit history yet.

Sign Up for a Secured Card

A secured credit card is a rescue option if your credit score is ailing, and it can help if you’re establishing good credit rather than repairing and saving it. The lender requires that you make a cash deposit, and then it extends you a credit limit equal to or close to that amount. The deposit secures your debt in the event you default. The lender doesn’t touch the money if you make manageable charges and pay your credit card bill on time, boosting your score in the process.

Keep an Eye on Your Credit Report

It’s important that you know what lenders and others are seeing when they request a copy of your report and what factors are contributing to your score. Is everything on there accurate? Mistakes can be made by your lenders, or you might be a victim of outright fraud.

You can get a free credit report once a year from Equifax, Experian, and TransUnion at AnnualCreditReport.com so you can stay on top of the situation.

The Bottom Line

Managing and maintaining a good credit score can be a balancing act. Life necessitates being able to lay your hands on a little extra cash at times. Handling it properly and to your best advantage can form a safety net for you in the form of a good credit score. Boosting your score requires avoiding a few things and taking some positive actions.