How to Increase Your Credit Score
What is a credit score?
Before we can start talking about how to raise your credit score, we have to discuss what a credit score actually is. Your credit score is determined by your credit report and your credit history. Think of it like a report card where you get grades in - math, science, history - except now they are grades in your money habits. Your credit score looks at your past credit to help lenders (like the bank) determine how trustworthy you are, before they lend you money. They basically want to know the answer to the question: Will this person pay me back? The better your credit score, the more likely the answer is “Yes”.
One of the most common types of credit scoring is called the FICO score (named for the Fair Isaac Corporation that developed it). Your FICO score is a specific number ranging between 300-850. Generally, in this article, I’ll be talking about the FICO score.
A “good” credit score is around 670-740
Your FICO score is a combination of 5 different categories:
Payment history
Amounts owed
Length of credit history
New credit applications
Credit mix
Part 1: Payment History (35%)
At 35%, your payment history is the largest portion of your FICO score, making it the most important factor. You’ll get an A+ in this category if you 1) pay in full, 2) make payment on or before your due date.
But what if you can’t pay the full balance?
At the very least, you must make the minimum payment by the due date. If you do this, you’ll get full points for payment history. But, be cautious, because carrying a balance on your card can hit your credit score in other ways, as we’ll discuss with amounts owed.
Part 2: Amounts Owed (also called Current debts) (30%)
Amounts owed represents 30% of your FICO score, making it the second largest and second most important category. Your Amounts Owed is affected by your credit utilization.
Credit utilization is essentially the percentage of your overall credit that you use on a month-to-month basis. This is calculated as a combination of utilization per-card, as well as your overall use across all cards.
For example, if you have a credit card with a $10,000 limit and you spend $2,000, then your credit utilization is 20%.
Spending $2,000 with a $10,000 credit limit gives you a 20% utilization score
Generally, keeping your credit utilization under 30% is good, and under 10% is great.
You can improve your credit utilization score in 2 ways: 1) decrease your spending, 2) increase your credit limit (or, most likely, a combination of the two).
A few years ago, I learned that you can actually call your bank and request an increase to your credit limit. I was shocked when I called to request an increase and they said, “Sure! What would you like it to be?” I had no idea that I could control my credit limit. I asked for an extra $4,000 and I got it easily. Just be cautious, and ask your bank if they do a hard inquiry before approving increases; most banks don’t, but some do. More on hard inquiries in part 4.
Increasing your credit limit helps lower your utilization score, assuming you continue to spend the same amount. If previously, you spent $2,000 with a $10,000 credit limit, you had a 20% utilization score. Now, you spend $2,000 with a $15,000 credit limit, lowering your utilization score to 13%.
Increasing your credit limit lowers your utilization, without reducing your spending
Part 3: Length of credit history (15%)
The length of your credit history is worth 15% of your credit score. But, unfortunately, out of all of the parts of your FICO score, this one is probably the least in your control today. The length of your credit history involves 1) the age of your oldest account, 2) the average age of your accounts.
For example, let’s say you opened up one credit card 10 years ago, and 3 credit cards in the past 12 months. The oldest account would be 10 years, which is good, but the average age of your accounts is only 3.25 years. Those 3 new cards would be a red flag to a lender, wondering why you opened up so many cards recently and if you were using them to overspend.
The best thing you can do for the length of your credit history is keep your cards open as long as possible, especially the oldest cards. An “Excellent” score in this area is usually 20+ years, so have some patience. The length of your credit history might not be in your control, but you can absolutely still get an 800+ FICO score by making the other 4 categories strong.
However, one way you can increase the length of your credit history now is by becoming an authorized user on another person’s credit card. I did this for my husband when he moved to the United States, and it instantly gave him 7 years of history in his credit report. More on this in the last section.
Part 4: New credit (10%)
When a lender pulls your credit report before lending you money, it’s called a “hard inquiry”. A hard inquiry is a deep dive into your credit history to determine whether you are a reliable person to lend money to. However, these hard inquiries can slightly decrease your credit score, and they stay on your report for several years, so you want to be careful about when you are applying for credit.
You might have a hard inquiry on your credit report if you apply for a new credit card, a car loan, a mortgage for a house, or student loans. One of my credit cards even does a hard inquiry before granting a credit line increase, so be aware of who is pulling your credit report and when. They cannot do it without your permission.
Part 5: Types of credit (credit mix) (10%)
The final part of your credit score is your credit mix. This represents 10% of your score. Your credit mix has two parts 1) installment loans, and 2) revolving credit.
Installment loans are types of credit that have due dates where you must pay the full amount: mortgages, auto loans, student loans. You must pay your car payment in full every month, and it has a final due date in the future when the full amount will be paid off.
Revolving credit is credit that is moving more consistently throughout the month and doesn't necessarily have a due date or set balance. You use a credit card throughout the month and year, but there is no set balance that you must pay. Although you must pay the minimum by the due date, you aren’t required to pay more than that (although you really, really should). Additionally, I may spend $500 on my credit card this month, and $1,000 next month and the credit card company doesn’t care as long as I pay my bill and stay under my credit limit.
Having a mixture of these types of loans can increase your credit score. That being said, these types of credit are still debt. I would never recommend taking out an auto loan or student loans or carrying a balance on your credit card month-to-month, just to increase your credit score.
Some people report slight dips in their FICO scores when they pay off their student loans or auto loans, but the drop won’t last long before your score recovers, and when it does you’ll be debt free!
So how do I get a great credit score?
Pay on-time
First, and most importantly, paying your credit card on-time and in full is the best way that you can have a great credit score. If you can’t make the full amounts, at least pay the minimum and pay it on-time.
Keep your oldest cards open
Next, assuming they don’t have balances, keep your credit cards open as long as possible. My oldest credit card began as a student card when I was in college, and although I don’t use it as much any more, I keep it open because it doesn’t have any annual fees and is my oldest card. It shows lenders that I have a credit card that is nearly 10 years old and has 100% on-time payments. This looks great to a potential lender.
Keep cards active
It’s also important to know that you should keep your cards “active”. Some companies will close your account if you are inactive for more than 6 months. But, even if your credit card company doesn’t close the account, keeping a small, recurring payment on the card every month can help boost your score as well. I had a card that I kept open, but hadn’t used in several years. Then, I put a subscription for a streaming service onto the card for less than $10/month and paid it off. My credit score jumped almost 30 points in one month.
Become an authorized user
Next, if you know someone that is willing to add you as an authorized user to their card, this can also be a great way to boost your score. You are essentially piggy-backing on someone else’s credit card. You usually receive a card with your name on it, which you can use to make purchases, but you aren’t responsible for making the payments. The catch, of course, is that you should choose someone responsible that has good credit and who is also willing to add you as a user.
Advanced credit boost
This step requires a little strategizing, so only do it if you’re still able to make at least a minimum payment by your due date.
Your credit card company reports your credit-use to credit reporting agencies about once a month, usually towards the end of your statement period. This is why not paying on-time or in-full can affect your credit score, because your credit card is telling your credit report if you are paying your bills.
If you can’t find this specific date on your statements, call your credit card company and ask “What date do you report my credit use to credit reporting agencies?”
Generally, you want this reporting to happen because it says to the reporting agencies, “I used my credit card this month and I paid it. I am responsible.” But, if your expenses run high and you are getting close to your maximum limit (or even half of your maximum limit), you can make a payment before your credit card sends its report to the reporting agencies. This helps lower your utilization and increase your credit score.
For example, let’s say I have a credit card with a $10,000 credit limit. Last month, I spent $2,000, or 20% of my utilization ($2,000/$10,000 = 20%). However, if I made a $500 payment on the card before my credit card reported my use to the reporting agencies, then my credit card would only report that I spent $1,500 that month, lowering my utilization to 15% ($1,500/$10,000 = 15%). I MUST still pay $2,000, but I am paying $500 now, $1,500 later. This lowers the amount of money being reported to the credit agency, and therefore lowers my utilization score. As you remember from Part 2: Amounts Owed, utilization represents 30% of your score, so using this strategy can significantly increase your overall FICO score.
By making a payment before your use is reported to credit agencies, you can quickly lower your utilization and increase your credit score
Checking your credit score
Now that you’ve learned what a credit score is and how to increase it, where can you actually check it? The good news is that most credit card companies offer some sort of FICO score monitoring that updates monthly. This can be a great way to keep an eye on your score. Your score can go up and down a little, depending on the month, but it will generally stay within the same 10-20 points. However, if you see your score suddenly drop 100 points for no reason, something is up, and you need to check your full credit report.
You can (and should!) check your full credit report 1 time per year, for free, from each of the major credit reporting agencies: Experian, Equifax, and TransUnion. You can get all three reports at: annualcreditreport.com or on the company’s individual webpage.
Personally, I prefer to check one different agency every 4 months, so I can monitor my credit report throughout the year. Sometimes the information on the sites can vary a little, but generally it’s very similar. You’ll want to look through the information and make sure it is accurate. You should see: auto loans, student loans, credit card payment history, number of credit cards, hard inquiries and some personal information. Check this information for accuracy. If you see a hard inquiry on your account that wasn’t you, you need to get in touch with the credit reporting agency immediately, because it means someone else was asking for a loan using your name. It does happen, but you’ll need to get that information removed from your credit report as soon as possible so it doesn’t damage your score.
Action Items
Now that you’ve learned about how credit scores work and what you can do to improve them, you have some homework.
Make your credit card payments on-time and, if possible, in full. Every single month. Mark it on your calendar. Set an alarm. Whatever you need to do to remember to pay on-time.
Call your credit card company and request a credit line increase. Typically, if you live with someone that covers some of your monthly expenses (like a spouse that pays your rent) you can include their salary, in addition to your own. This can also help you get a higher credit limit.
If you have a credit card that you haven’t used in a long time, put a small, recurring payment on it. Think: streaming services, utility bills, monthly subscriptions, and set it to auto-pay or remember to pay it off every month.
Check your credit report. Go to annualcreditreport.com and check your credit report. Make sure the information is accurate, and report it to the agency if it isn’t. I once knew someone that had a credit card opened in their name and they didn’t realize it for a year and a half because they never opened up their credit report and checked it. They had an incredibly difficult time proving that they were not the ones that opened the card, as it had been open for so long.
Having a good credit score is very important for anyone that wants to buy a car, buy a house, take out student loans, or sometimes even rent an apartment. Whether you’re working to build your credit for the first time, or trying to recover from bad credit, taking actionable steps today will set you in the right direction. Before you know it you’ll be part of the 800+ club.
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
