5 Ways to Increase Your Credit Score and Improve Your Credit

Understanding Your Credit Score

If you are trying to improve your credit score, it is important to first understand what makes up your credit report and credit score. Your credit score is determined by an advanced algorithm developed by FICO that pulls data from your credit report to determine your score. When calculating your credit score, the following information will affect your credit score in the corresponding percentages:

• 35 percent: History of on-time or late credit payments.
• 30 percent: Credit available on your open credit cards
• 15 percent: The age of your credit lines (old = good)
• 10 percent: How often do you apply for new credit?
• 10 percent: Variable factors, such as the types of open credit lines you have

Most of this information may be common sense or something you’ve learned over time, which can help you achieve a good credit score, but maybe not a perfect score. If you have a bad credit score, it may take a lot of time and work to improve it, and you may want to consider repairing your credit first. If your credit score is already above 700 but you’re trying to get to that perfect 850 to get the best deals and interest rates, here are 5 ways to improve your credit score:

5 Ways to Get a Higher Credit Score

1. Maintaining the debt/limit ratio

To improve your credit score, it is recommended to keep your debt-to-credit ratio below 30% and, if possible, as low as 10%. The debt-to-limit ratio is the difference between the amount you owe on a credit card and the amount of your credit limit. For example, if one of your credit cards has a credit limit of $5,000, you should still keep the balance below $1,500, but preferably around $500. As you can see above, 30% of your credit score is determined by the available credit on your open credit cards, so maintaining the debt-to-limit ratio will increase your available credit and also show that you are responsible with your credit.

2. Keep your credit cards active

Make sure you use your cards at least once a year to keep them showing as “active” credit, and make sure you never cancel your credit cards. 15% of your credit score is determined by the age of your credit lines, so you should always keep your credit cards active to extend the age of your credit line. Many people tend to cancel cards they no longer use, often because the rates aren’t great or they have another card with better benefits, but even if you don’t use the cards very often (once a year is enough), you should keep them active. Typically, someone with a credit score above 800 has lines of credit with at least 10 years of positive activity.

3. Always pay your bills on time

Perhaps the most well-known factor in your credit score and the one that has the biggest impact on your credit score (35% of your score) is your history of making your credit card, mortgage and car payments on time. If you have a history of consistently making your credit card, mortgage and car payments on time, you will significantly improve your credit score. It can also have a negative effect if you make a late payment. Unfortunately, it only takes one late payment to significantly lower your credit score, so it is essential that you make sure you are consistently making your credit payments on time.

4. Dispute errors on your credit report

If you don’t already, be sure to request a copy of your credit report once a year and check it for errors. It’s actually quite common for credit reports to contain errors that can be disputed and potentially allow you to have negative items removed from your credit report. If, for example, your credit report shows a late payment on a credit card but has errors on file, you can dispute the negative item and ask for it to be removed from your report. Having a negative item, like a late payment, removed from your report can significantly improve your credit score. While disputing errors on your credit report can be tedious and time-consuming, it’s usually worth it. Another option would be to contact a credit repair agency to help you dispute negative items on your credit report.

5. Reduce the number of credit applications

While it only affects 10% of your credit score, limiting the number of credit inquiries can still help you achieve that perfect credit score, but it’s often overlooked. You should never make more than one credit inquiry per year, but many people don’t realize how often this happens and often have their credit checked more than once a year. Whether you’re applying for a car loan, checking your credit score online, or applying for a new credit card, these types of actions will almost always result in a credit inquiry and should be avoided if you’ve already been inquired about for credit earlier in the year. Be sure to do your research on what will result in a credit inquiry so you don’t accidentally make more than one in a year without realizing it.