No matter your current credit score, it’s possible for you to improve your credit score quickly with a few simple changes to your financial habits.
Your credit score is one of the most important factors lenders will look at when determining what interest rate to offer you on a loan. Generally, the higher your score, the more you can borrow and the less you’ll have to pay in interest.
In this article, we’ll cover what a credit score is, how these scores are calculated and five simple tips you can follow to improve your credit score.
Note, however, that credit scores are based on the specific circ*mstances of your financial history. It’s always wise to begin by looking at your credit report if your score recently dropped and you’re unsure why.
What is a credit score and why is it important?
A credit score is a fast and easy way for businesses to predict your credit behavior based on information contained in your credit report.
Businesses will use credit scores to get a quick snapshot of your credit history without having to dig through every entry in your credit report.
Put simply, a credit score is a number between 300 and 850 that shows banks and other lenders how likely you are to pay back your loans in full and on time.
Credit scores fall into a few ranges that indicate the relative health of your credit history:
- 800 and above: excellent
- 740 to 799: very good
- 670 to 739: good
- 580 to 669: fair
- 579 and below: poor
Lenders will use credit scores to make decisions on whether to offer you a line of credit for things like a mortgage or credit card. Further, your credit score will affect the interest rate and credit limit on any type of credit you receive.
For example, if you apply for a personal loan with a credit score of 780, the lender will likely offer you a larger loan at a lower interest rate. However, if you applied for the same loan with a credit score of 500, the lender may not offer you the loan at all. Or, if they do, they may charge a higher interest rate to offset the risks related to lending money to someone with a low credit score.
The average American has a credit score of between 690 and 720 (depending on how the score is calculated). Aim for a credit score of at least 700 to ensure better rates and deals on any loans you might take out.
How is my credit score calculated?
Companies will use a mathematical formula to calculate your credit score. The specific formula they use, however, will depend on the scoring system and the factors they consider.
Around 90% of top lenders make decisions about credit approvals, terms and interest rates using the FICO scoring system. Your FICO score will account for information such as your payment history, amounts owed, new credit, length of credit history and your mix of different credit types.
Importantly, when one of the three major credit bureaus (Equifax, Experian and TransUnion) calculates your credit score using this method, they’ll weigh each of these factors differently when determining your final score.
For example, in the FICO scoring system, your payment history (whether you paid your loans on time) accounts for 35% of the final score. Meanwhile, the length of your credit history will only account for 10% of your final score.
This means that factors such as accounts in collections will have a much greater impact on your credit score than recent credit inquiries or the length of your credit history.
Why does it matter if I have a good credit score?
Businesses will only look at your credit score and credit history when they’re considering you for a loan, lease, job or anything else that may require a credit check.
For lending purposes, this means that your credit score will have a direct impact on whether you’re approved for a loan, the interest rate on the loan and the terms of the loan (such as how long you have to repay the debt).
Put another way, taking out a loan with a higher credit score will cost you less money in interest than if you took out a same loan with a lower credit score.
5 Tips for improving your credit score
Credit can be complicated. Figuring out why your credit score is low or if it continues to drop can lead to a lot of worry and headaches.
However, the key thing to remember is that your credit score is simply a summary of your overall credit history.
The five tips we list below focus on ways you can best show your trustworthiness to lenders on paper.
Often, people find that low credit scores are the result of either a small number of negative factors or a lack of positive factors on their credit reports.
Finding the right way to balance the good and the bad is the most effective way of improving your credit score now and in the future.
1. Review your credit regularly and request a free copy of your credit report
Remember, your credit score is calculated using the information found on your credit report. A good place to start when you want to improve your score is to request a copy of your credit report from each of the three credit bureaus: Equifax, Experian and TransUnion.
By federal law, you can get a free copy of your credit report from each of these credit reporting agencies once every 12 months. This can help ensure all the information on your report is correct and up-to-date, and that you have no outstanding debts you might otherwise be unaware of.
You can request a free copy of your credit report from each of these three agencies at annualcreditreport.com.
Once you have a copy of your reports, take a moment to look them over for any mistakes or errors that may be affecting your credit score. Look for things like outstanding balances you don’t recognize or a large number of hard inquiries from businesses you don’t recognize.
If you find any errors, take immediate action to dispute the error at all three bureaus.
2. Pay your bills on time and set up automated payments
As stated above, one of the most important factors when determining your credit score is your ability to pay your bills on time. The presence of any late payments, bankruptcies or accounts in collections will significantly lower your credit score.
One of the best ways to improve your credit score moving forward is to avoid late payments at all costs. Here are a few quick tips to help you work toward this goal:
- Set up an emergency fund that can cover three to six months of your household expenses. This extra financial buffer can help you account for any unexpected expenses that might make it hard for you to pay your bills.
- Use your bank’s automatic payment functionality to send scheduled payments for your credit cards or other loans.
- Add reminders to your calendar to ensure you remember to pay your bills on time. Make a habit of paying your bills on a particular day or at a certain time to establish a habit of making sure everything is paid in full and on time. Additionally, remember that most late payments don’t show up on your credit report unless you leave them for at least a few weeks, so it may also be wise to set a reminder to check that all your payments went through. If you catch an error, you can take action to quickly correct the mistake before it affects your credit.
If you do end up with a late payment on your account, try your hardest to pay off the debt as quickly as possible. While this won’t remove the mark against your credit, it will prevent any future marks, as well as the account going into collections.
3. Keep your credit utilization below 30%
The term “credit utilization” refers to the percentage of your total credit that you’re currently using regularly. You can calculate your credit utilization by dividing the amount you currently have outstanding on credit payments by the total amount of credit available to you.
For example, let’s say you have two credit accounts. One has a balance of $500 and a limit of $10,000. The other has a balance of $2,500 and a limit of $20,000.
In this scenario, you’d have an outstanding balance of $3,000 and a total credit limit of $30,000. If we divide the outstanding balance by the total limit, we’re left with a credit utilization of 10%.
The Consumer Financial Protection bureau generally recommends keeping your credit utilization at no more than 30%, as anything higher might indicate you’re close to maxing out your finances.
Note, however, that this means there are two ways of impacting your credit utilization rate.
First, you could lower the amount of debt you owe on your credit cards and other credit sources each month. Second, you could choose to raise the maximum limits on your cards or open new accounts that could increase the total amount of credit available to you.
The best strategy, however, is often to both lower your debt and find ways to raise your credit limit. This can make it easier to quickly lower your credit utilization without having to make excessively large payments on your debt or having to request far more credit than you need.
4. Limit the number of hard inquiries on your credit report
While hard inquiries only make up a small portion of your credit score (usually around 10%), it’s still wise to limit how many inquiries you have in a short period.
When you apply for any new form of credit or a service that requires a credit check—such as a credit card, mortgage, cell phone plan or lease—the organization performing the check will trigger a hard inquiry on your account.
Having too many hard inquiries on your credit report over a short period can lower your credit score. The logic is that a large number of hard inquiries indicates potential financial risk and uncertainty.
Why are you applying for credit cards? Is that an indicator of increased spending? Did your income recently decrease?
Credit reporting agencies may bundle hard inquiries together into a single inquiry if they’re performed over the span of a few days or weeks. This is common in scenarios where you’re shopping around for a loan for a car or other large purchases and you need to look at several different options (which will each result in hard inquiries).
Note, however, that the limit for this inquiry bundling is generally only 14 to 45 days, and that these inquiries—whether bundled or not—will impact your credit score for at least the following 12 months.
It’s wise to limit the number of hard inquiries on your report to only the essentials if you’re trying to improve your credit quickly.
5. Stay patient, building credit takes time
If you think of your credit score as a summary of your credit history, then it makes sense that the amount of history available would have an impact on your final score.
There are two ways that time and patience can improve your credit:
- Age of Credit Accounts — The average age of your credit profile has an impact on your credit score by showing how long you’ve been a trustworthy lending partner. It’s wise to keep credit accounts open for as long as possible to increase the average age of all your accounts. Some strategies to improve your credit age include putting small monthly subscriptions on your older accounts rather than closing them or being added as an authorized user on a close family member’s credit card to help build out a more diverse credit history.
- Limited Reporting Period — In most scenarios, your credit report will only include information from the past seven years (or 10 in the case of bankruptcy). This means that if you had poor credit when you were younger (such as missed payments or accounts in collections), you may only have to wait a few years for these negative marks to fall off your credit report.
With these two points in mind, you can think of your credit score as a summary of your past seven years of credit history. This means that establishing strong credit habits today will have a much larger impact on your future score than you might think.
The most important first step you can take on the path toward improving your credit score is recognizing that a low credit score is fixable, no matter the circ*mstances.
Take action to improve your credit score today
Credit scores are an essential part of our modern credit-based society, and having a strong credit score is the best way of ensuring you have access to the credit you need at an affordable rate.
If your credit score is lower than you’d like, it’s not the end of the world. Remember that your credit report usually includes information from the past seven years. Further, there are several strategies available to improve your credit score over time.
If you have any questions about credit scores and how they affect your ability to get a loan, please take a moment to give us a call at 800-236-8866, or schedule an appointment at any of our Associated Bank locations.
We’d be happy to help you understand everything you need to know about credit scores and what you can do to improve your overall financial situation.
