Are you wondering how to boost your credit score?
Whether you’re getting ready to apply for a new loan or working to rebuild your credit after a period of financial hardship, this article will cover everything you need to know about credit cards and credit score.
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How are Credit Scores Calculated?
The FICO® Score model is perhaps the most well-known, but VantageScore is another credit score model. Whichever credit score model you’re looking at, the factors used to calculate credit scores are pretty similar among the different models. Here’s what to pay attention to when trying to improve your credit score:
Total Credit Usage (30% of your score)
Just because you have it doesn’t mean you should use it—especially if you regularly carry a balance on your credit card(s). To improve your credit score, keep your revolving balance below 30% of your total credit limit. For example, if your credit limit is $1,000, your balance should never exceed $300.
If you have more than one credit card, you’ll want to keep each card’s balance below 30% as well as keeping your total credit card balances below 30% of your total credit limit. For example, if you have three cards and one has a zero balance, the second is utilizing 10% of the credit limit, and the third is nearly maxed out at the limit, your credit score will still suffer from the maxed-out card.
Finally, keep in mind that opening a new credit card will increase your total credit limit, potentially decreasing your total credit utilization rate if you carry a balance on other cards. Inversely, closing a credit card account will lower your total credit limit and could hurt your credit score. If you’re trying to stop using one of your credit cards, it’s better to cut up the card and leave the account open, unused, than to close it and risk lowering your credit score.
On-Time Payment Record (35%)
This factor is one of the most straightforward and easy to control. Simply pay your bills on time every month and you’ll maintain a positive payment history that will boost your credit score. With your credit card accounts, make at least the minimum monthly payment by the due date. If you experience financial hardship and can’t make one or more of your bill payments on time, contact your lenders and utility providers right away to see if they can work something out with you that won’t hurt your credit score.
Length of Credit History (15%)
This one isn’t as much in your control since, the younger you are, the shorter your credit history is going to be. However, the one thing you can do in this category to improve your credit score is to keep your accounts open, especially the oldest ones. Some credit accounts, such as a student loan, will automatically close when paid off. But that first credit card you got at 18, 20, or so? Keep that open even if you don’t use it anymore. Maybe charge one small purchase on it each month just to keep it open—the older your accounts, the more of a boost you’ll get to your credit score from this factor.
Credit Mix (10%)
Having different types of credit accounts will also help your credit score, as it demonstrates your ability to manage different loans and credit card accounts. For example, credit cards, auto loans, and home mortgages represent a nice mix of credit accounts. If you don’t have a credit card account yet, consider applying for one to diversify your credit mix.
New Credit Inquiries (10%)
While there are times when applying for a new credit account can improve your score, you don’t want to apply for too many accounts in a short period of time. And sometimes, as when going through the mortgage application process, you should stop applying for new accounts entirely.
What Are the Credit Score Ranges?
Now that you understand the factors that make up your three-digit credit score, let’s look at the five ranges your credit score can fall into:
- 800+: Excellent
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- <580: Poor
How to Check Your Credit Score
If you don’t already know where you fall in the range of excellent-poor, you can check your credit score. Here’s how:
The companies that calculate your credit score charge a fee to anyone who wants to check it, including you, any lenders you apply for credit from, and landlords and employers. However, you may be able to access your credit score for free through a credit card perk. You can also view an estimate of your score through free apps like Credit Karma and Credit Sesame. Fico also offers a free score range estimator.
For a Fee
You can also purchase your credit score report from Fico or any of the three major credit reporting bureaus.
Does your credit score seem lower than it should be? Check your credit report for free from each of the agencies by visiting Annual Credit Report.com – Home Page. Make sure there are no errors or unauthorized transactions on your report that could be dragging down your score.
10 Ways to Improve Your Credit by Using Credit Cards
Now that you have a foundational knowledge of how credit scores work, review these tips and take action on anything relevant to you to improve your credit score.
- Get a Secured Credit Card: These work like a regular credit card and help build your credit history, but they are good for people who don’t have much credit history yet or who are trying to improve a poor-fair credit score. To open a secured credit card, you use a savings account or credit union shares as security for your card. If you don’t pay your bill, it will come out of your security account instead.
- College students can get a Student Credit Card. Designed for college students, these usually come with a lower credit limit but can help you build a good credit history if used responsibly. May need to provide proof of enrollment.
- Ask a relative or guardian to add you as an authorized user. A parent or other trusted adult with a credit card can add you as an authorized user. This means you would get a card in your name linked to their account, which can help you build a positive credit history. However, sharing an account can be tricky. Set up an agreement in advance so everyone has the same expectations for how much or when you will use the card and how it will be paid off.
- Pay your bills on time, every month. Even if you’re a college student or young adult without any credit accounts right now, you can still build your credit history by paying your rent, utility, and cell phone bills on time every month. And once you do get a credit card or other loan, it’s especially important not to pay late or default on the account. So make sure you don’t commit to or borrow more than you can comfortably afford.
- Make frequent credit card payments. If you’re trying to pay down a balance, it may be easier to make multiple smaller payments throughout the month than one bigger payment when the bill is due. For example, if you get paid twice a month, you could pay something on your credit card balance out of each paycheck. This approach will also help lower your overall credit utilization rate, which can improve your credit score faster over the long term. You can also save on interest over the long term.
- Keep your credit utilization ratio low. As mentioned above, <30% credit usage is optimal, but if you can get to <10% you’ll see even more improvements to your score. Best of all is to pay off your balance each month by the due date.
- Increase your spending limit. Another way to increase your overall credit limit and lower your credit utilization rate (besides applying for a new card) is to request a credit limit increase. Call your credit card provider to inquire about your options.
- Have a good credit mix. Get your free credit report and review your current open accounts. Look for gaps you could fill by adding a new type of credit account to your mix, such as a credit card or auto loan.
- Review your monthly statements for errors or unauthorized transactions. When you receive your monthly credit card statement, review the transactions to be sure there are no problems. If your card is lost or stolen, or you suspect that someone is using your card information illegally, report it to your credit card provider immediately.
- Try the free Experian boost. According to their website, the average boost user raised their Fico score by 12 points. Experian boost works by giving you credit for bills you already have such as phone, utilities, and streaming services.
Ask Us How We Can Help You Improve Your Credit!
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