How to Improve Your Credit Score (and How Long It Will Take)
There are a number of ways to improve your credit score – from paying down debts to maintaining a low credit utilization ratio. In order to fully understand what influences your credit standing, causing it to rise (or fall) over time, you must first understand what a credit score is at its core as well as how it’s fueled by the information in your major credit reports.
In short, credit scores are numerical indicators of financial responsibility. Based on your past spending and payment habits when using loans or lines of credit (i.e. the data tracked by major credit bureaus), a credit score – together with your disposable income – will tell a financial institution what (if any) offers to extend your way. Landlords, car dealers, and employers even use credit data to gauge the trustworthiness of applicants as well.
With that background in mind, you probably already have some guesses regarding what will improve your credit score. Those assumptions may even be bolstered by a tip or two that you’ve picked up from a golf buddy or at a dinner party along the way. Some of these credit improvement ideas are bound to be on point, but some are probably wrong or misleading as well. Therefore, allow us to set the record straight about what will and will not improve your credit score, as well as the timeline you can expect for achieving good credit.
Ways to Improve Your Credit Score
- Check for Errors:
The Federal Trade Commission estimates that one in five credit reports contains an error serious enough to hurt one’s credit score and lead to adverse actions from lenders and other decision makers. Identifying and disputing credit report errors is one of the easiest ways to improve your credit score, especially since you can get each of your major credit reports for free once every 12 months.
- Have Open Trade Lines That are in Good Standing:
It’s very important that you have at least one open loan or line of credit to which you make on-time payments every month. Lenders relay account management information to the major credit bureaus every month, and the more accounts you have in good standing, the more positive information will find its way into your credit reports. This will either water down negative records or help expand a thin file.
While credit cards and loans both report to the major credit bureaus on a monthly basis, the former are far more accessible for the average consumer. Loans, of course, require repayment of whatever amount you borrow, but a no annual fee credit card that you pay off in full every month won’t cost you a thing.
- When in Doubt, Get a Secured Credit Card:
If you’re unable to get a “regular” credit card because of previous financial mistakes or you want an additional card whose credit limit you can control, open a secured credit card. Secured credit cards are easier to get than most other credit cards because the $200-300 deposit you’re required to place in opening one acts as your credit line and thereby prevents overspending, which would cause problems for both you and your card’s issuer. You can also increase your spending power and available credit by simply adding to your deposit. When you close your account, you will get your deposit back, minus any outstanding balances.
- Do NOT Show That You’re Desperate for Credit:
Secured credit cards are attractive credit-building tools because they offer basically guaranteed approval. That’s important because repeated applications submitted within a short period of time indicate desperation to credit card companies, which could be a precursor to serious financial problems. You should therefore avoid applying en masse, and if you don’t get an unsecured credit card after a couple of denied applications, opt for a secured card.
- Mind Your Credit Utilization:
Maxing out your credit cards (i.e. spending up to your credit limit) can also signal that you are desperate for additional spending power. Not being able to pay off financial obligations with your existing credit lines is often an indication of unsustainable spending habits. So, our rule of thumb is that you should try to maintain a credit utilization ratio below 60% across all of your accounts. That figure isn’t based on any hard data; it’s just our educated guess of what is both realistic and appealing to issuers. (Quick Tip: Your balance at the time your monthly credit card statement is made available is what is used to calculate credit utilization).
- Don’t Close Unused Accounts:
Given the importance of available credit and the length of your credit history to your credit score, it’s a bad idea to close old accounts, even if you no longer use them. Doing so would decrease your available credit, lead to a higher overall credit utilization ratio, and even make it look like you haven’t been using credit for very long.
Keep in mind, however, that you shouldn’t allow an unused account to just sit if it charges an annual fee or has an outstanding balance. Rather, you should close accounts that are costing you money and strive to pay down amounts owed.
- Build & Maintain a Long Credit History:
Financial institutions and other decision makers are more apt to trust you if you have a long track record of responsible use. Having positive information about recently-opened trade lines in your credit reports will help, but without a more extensive track record, the question of whether or not these positive habits are sustainable remains. For all you fantasy football players out there, you can think of this like a second-year running back who had a great rookie campaign. Will the player keep it up in year two, regress, or even find himself in a situation that’s not conducive to performance? It’s hard to tell, at least as compared to a veteran who’s never missed a game and has displayed steady production over the years.
“The best way to improve your score is to use credit responsibly,” says Cynthia Saltzman, head of the Department of Economics at Widener University. “Some advisors recommend that you have a revolving account (credit card) and you do not charge more than 30 to 40% of your credit limit, with 10% being even better. Some advisors recommend that you have a revolving account and an installment account in which there are no missed payments. The bottom line is that you need to establish a good credit history, and of course, that takes time.”
- If You Don’t Trust Yourself, Take Precautions:
Some people struggle with remembering to pay their credit card bills on time. If you are one of them, call your credit card company and ask them to automatically withdraw your monthly payment from your checking account.
Others get tempted by credit cards and incur unnecessary debt. If you are one of them, the right solution isn’t necessarily to close all of your credit cards, but instead to keep some of them open yet locked into a drawer (or even cut into a million pieces) so that you do not end up using them.
When to Start Improving Your Credit Score
Credit score improvement should be a continual effort, not only because very few people have perfect credit scores, but also in light of the fact that credit scores are fluid entities that are regularly recalculated based on the new information that gets added to your major credit reports each month. A good credit score is also a product of responsible habits, which must be formed and maintained over time.
With that said, your credit score becomes increasingly important during major life events, such as when you want to take out a home loan or a line of credit, apply for a job that requires a security clearance or the handling or money, or rent an apartment. It’s important to have the best possible credit score in those situations because your likelihood for approval as well as the terms of your agreement may vary widely based on your credit standing.
Having foresight of these credit-dependent events – especially those that are difficult or costly to change the terms of at a later date – is also helpful since there are certain steps that you can take to maximize your credit standing in the preceding months.
For starters, you can check your credit reports for errors, pay down certain debts that may be causing high credit utilization, and avoid taking any actions that will damage your credit – either in the short or long term. Interestingly enough, that includes opening a new credit card account.
Opening a new credit card may cause as much as a 10% reduction in your credit standing for a period of about six months. This decrease reflects the added risk for financial institutions that may consider giving you another loan or line of credit before you’ve proven yourself capable of affording the one you just got.
In the long-term, the additional spending power that you’d garner from a new credit card as well as the added information that would get reported to the credit bureaus each month would counteract the initial credit score hit and foster credit score improvement, assuming you use the card responsibly. But getting locked into a more expensive mortgage as a result of temporary credit score damage would be counterproductive.
So, while your overall personal finance strategy should be geared toward building and maintaining an excellent credit rating over time, it’s particularly important to get your financial house in order in the months leading up to a major purchase or significant life event where your credit standing will be a key deciding factor.
Credit Building Myths
There are a lot of myths out there concerning credit cards and their use – from the idea that NSPL cards don’t have spending limits to the notion that Visa’s Black Card is the one that celebrities talk about. But regardless of what you may have heard, the following are just myths.
- Not Paying Your Full Credit Card Bill:
The argument behind this urban myth is that credit card companies prefer it when customers leave a small balance from month to month because it enables them to make money on interest. In other words, interest payments are almost like a bribe, and paying off your full balance will lead to issuer resentment and a lower credit score. This is totally NOT true!
First of all, credit bureaus track the information that makes up your credit score and credit scoring companies ultimately tabulate these scores. Credit card companies merely represent an information source and therefore cannot manipulate your credit score based on whether or not they glean interest revenue from you. What’s more, credit card finance charges can be expensive, so always pay your full bill if you have the ability to do so.
- You Have to Make Purchases to Build Credit:
As mentioned above, simply having an open credit card that is in good standing will improve your credit score. Making purchases and on-time payments will expedite the process, but locking away a card with zero balance isn’t a bad idea if you don’t trust yourself to use it responsibly.
- Closing Old Accounts Will Improve Your Credit Score:
While many people advocate closing old and inactive accounts as a way to improve credit, in many cases it may actually lower your score, as it may change your debt-to-available-credit ratio and make your credit history appear artificially shorter.
- Once You Pay Off a Negative Record, It Will be Removed from Your Credit Report:
Negative records such as late payments will remain on your credit report for 7-10 years after they are first posted (see How long does negative information stay on your credit report?). Paying off the account before the end of the set term doesn’t remove it from your credit report, but the account will be marked as “paid.” That may or may not help your credit score, depending on the particular model used.
- You Can Hire a Company to Improve Your Credit Score:
We’ve all seen the advertisements for “credit repair” services that promise miracle fixes to your damaged credit in return for a hefty fee. They’re a rip-off. There are no shortcuts to credit building. All that a credit repair company might be able to do is get errors removed from your major credit reports, but you won’t typically need help to do that. If you one of the credit bureaus refuses to remove a legitimate error, hiring a lawyer will pay far greater dividends than getting in bed with a shady credit repair organization.
“I think what happens is people hear what they want to hear,” says Gail Cunningham, vice president for membership & public relations with the National Foundation for Credit Counseling. “They need to remember what their mother told them, that if it seems too good to be true it probably is. But we get emotionally involved. … We just find ourselves putting commonsense on the shelf for the moment, and perhaps believing what a sales person is telling us, we follow their advice. We think, ‘they’re a professional, surely they wouldn’t advise me to do something that’s not in my best interest.’”
It’s also important to recognize that even the most reputable credit repair organizations will only provide temporary assistance. They aren’t a panacea; the consumer still has a lot of work to do, and too many people overlook that fact. “People who use those services rarely deal with the underlying financial conditions or habits that caused them problems in the first place,” says Mary Jo Wiggins, a professor of bankruptcy law and vice dean at the University of San Diego School of Law. “So, they use those services for a fee, maybe getting some short-term relief, and then they end up right back where they started from because they haven’t dealt with the source of the problem, only the symptoms.”
How Long Does It Take to Get a Good Credit Score?
You’ll generally find that someone who has damaged credit and can only get approved for a secured credit card will progress to fair credit and the ability to get an unsecured credit card within 12-18 months of responsible use. Of course, the timeline fluctuates based on how much information (whether positive or negative) already resides in your credit reports.
That’s about as specific as you’re going to get, however. Why? Well for starters, each one of us has a number of different credit scores and each credit score uses different data. There are actually more than 1,000 different credit scores on the market, and there’s no telling which one a given bank or lender uses.
Besides, financial institutions typically modify traditional credit scores with their own proprietary algorithms. That’s part of the reason why you might get approved for a credit card from one issuer but not another.
All this just goes to show that you can’t accurately predict the amount by which your credit score will go up or down within a specified period of time. What we can say, however, is that credit improvement is all about consistency and long-term trends. Credit reports reflect your spending and payment habits over time, so while you may be starting with a clean slate or a few strikes against you, you should have faith in knowing that your credit score will improve over time, provided that you always pay your bill on time (at least the minimum required) and avoid maxing out your credit lines and racking up debts you can’t afford to pay back.
Reading more about what is included in a credit report and how credit scores are determined will give you more context with which to understand the credit improvement process and timeline. The following tips and rules of thumb should help as well:
- The key factors that affect your credit score are your payment history, the length of your credit history, the amount of debt you have, and the percentage of credit you use in relation to the amount of credit that is available to you.
- Before you can start working on improving your credit score, you need to make sure that new negative information is no longer being reported to your credit files. For example, you don’t want to have an open credit card account on which the lender continues to report you as being delinquent on a monthly basis.It’s fine if you have existing negative information on your credit report, but it is important that you cut off any additional negative information from coming in before you can start improving your score.
- The pace at which you can improve your credit score depends on how much positive information is required to overcome your existing negative or limited credit history.If you have a lot of negative information on your credit report, it will take longer and you will need more positive information in order to improve your score than if you are starting with a fair or limited credit history.
- It is always better, no matter where you are starting from, to have as much positive information as possible being relayed to your credit reports on a monthly basis. For example, three credit card accounts reporting that you are on time with your payments is better than one account.Similarly, a credit limit of $2,000 is better than $200, and a secured card is the only type of credit card that allows you to have direct control of your credit limit. A secured card’s credit limit is tied – dollar for dollar – to the amount of your security deposit, which you can increase by as much as you want whenever you have some extra cash in hand.
- While the rate your credit score will improve is based on many factors, there are steps that you can take to expedite the process. The more you do, the faster your credit score will improve.
You can always gauge your progress by ordering a free credit score. Just realize that the score you get may not be the exact type used by a prospective lender.
There are no quick ways to improve your credit score, despite what you may have heard on the radio or TV. Rather, a higher credit score is a product of positive information about your spending and payment habits regularly flowing into your major credit reports, thereby gradually building out a thin file or devaluing negative information contained therein. It’s a process, and a credit card is the most accessible tool at your disposal because you don’t necessarily have to spend any money to get one and credit card companies report account information to the major credit bureaus on a monthly basis.
The work and discipline required to acquire a good credit score might lead to initial discouragement, but your wallet will thank you if you stick with it.