content navigation

Having good credit means having a good credit score, something many people out there don’t have. Maybe you? Fortunately, there are lots of things that you can do to get your credit score moving in the right direction. This guide offers a comprehensive list of actions you can start taking now to help boost your credit score. To understand how to improve your score, however, it’s first important to know exactly what credit scores are, who produces them, how they are calculated, and why they’re important to your financial well-being.

What is a Credit Score?

There are actually dozens of different types of credit scores out there, but when most people refer to their credit score, they’re talking about their FICO score. FICO credit scores are used practically universally by creditors, banks and businesses to decide whether or not to extend credit to consumers, as well as the amount and conditions of any credit extended. In fact, FICO credit scores are so commonly used that the terms “FICO credit score” and “credit score” are, for practical purposes, the same thing. When we you see the term “credit score” in this guide, we’re referring to a FICO credit score.

What does a FICO Credit Score Look Like and How is it Calculated?

A FICO credit score is a three-digit number that indicates an individual’s “credit worthiness” determined using an algorithm that takes into account several factors based on the person’s past and current credit-related activities. “FICO” is the abbreviation for Fair Isaac Corporation, the name of the company that originated the use of this particular method of scoring credit. Today, there are three major credit bureaus that provide credit reports and generate FICO credit scores for individuals: Experian, Equifax and TransUnion. The information collected and how it is interpreted varies somewhat between credit bureaus, which accounts for the slight differences in the scores generated from each bureau.

There are five key factors considered by credit bureaus when calculating an individual’s credit score:

  • Payment History: The most heavily weighted (35%) of the five factors. Payments that are made late or missed entirely can have a significant negative effect on your credit score. How big of an effect depends on the lateness of the payment (30, 60, 90 days, for example) and how much overall debt you are carrying. Along with credit cards, other types of credit considered in your payment history include mortgages, car loans, retail accounts, installment loans, and others. Foreclosures, tax liens and other legal judgments are also taken into account.
  • Credit Utilization: Your credit usage is the second most important factor (30%) in determining your credit score. Credit utilization is stated in the form of a ratio, which is the amount of debt outstanding on the consumer’s revolving credit in relation to his/her total amount of credit available. For example, if someone has a total available credit amount on their credit cards of $10,000 and a total outstanding debt on those cards of $4,000, then their credit utilization ratio is 40%. Conventional thought is that consumers should aim for a credit utilization ratio of below 30%. A credit utilization ratio above that will negatively affect your credit score, more severely as you approach your maximum credit limit.
  • Length of Credit History: Bureaus look at such factors as the average age of your credit accounts, ages of your oldest and youngest accounts, and how recently accounts have been used. Weighted at 15%.
  • Applying For and Opening New Credit Accounts: Opening new accounts, especially if you open several within a short period of time, can negatively impact your credit score. Also, whenever you apply for a new line of credit, the creditor checks your credit record before accepting or rejecting your application. This is known as “hard inquiry”. Hard inquiries appear on your credit record and can lower your credit score, at least in the short run. Simply checking your credit scores and reports with a service like Credit Karma, known as a “soft inquiry”, generally doesn’t affect your credit score. Activities related to hard inquiries and applying for new accounts has a 10% influence on credit scores.
  • Credit Mix: Credit bureaus look favorably on consumers that have a mix of types of credit (like auto loans, mortgages, etc.) along with credit cards when figuring credit scores. Credit mix accounts for 10% of the overall score.

What is a Good Credit Score?

Credit scores range from 300 to 850. The major credit bureaus each have their own measurements regarding the quality of credit scores, but generally speaking a credit score of 700 or higher is considered good, while a credit score of 800 and above is considered excellent. Most people have credit scores between 600 and 750, although it’s not unusual for scores to be lower for folks with some credit issues. According to Experian for example, over a third of consumers have a credit score rated either “fair” (580 to 669) or “very poor” (300 to 579).

Why Good Credit is Important

Good credit opens up a whole world of opportunities to those with it, including access to more credit at better rates, saving money (lots of it) over the course of a person’s lifetime. Good credit means lower interest rates on a slew of types of credit, including mortgages, car loans and credit cards. It can also mean better deals on all sorts of products, like internet and cable services, and even insurance.

Put another way, good credit is important because it’s the opposite of bad credit. And here’s what bad credit can mean. Bad credit makes it harder – sometimes impossible – to get the funding you need to buy the big ticket items most people want, like a house or new car. And when you do get that funding, it’s liable to cost you a lot more money in higher interest rates. Mortgages and car loans aren’t the only items you could get turned down for due to bad credit. Bad credit can mean losing out on a house or apartment rental or – worse – a great job you’d otherwise be qualified for.

What is a Credit Report?

Some people think that credit scores and credit reports are the same thing. They’re not. A credit report is a detailed listing and description of a person’s current credit situation based on information collected by a credit bureau. This information is then used by the credit bureau to determine the three-digit credit score. Types of information found on your credit report include identifying info (name, date of birth, employment, Social Security number, etc.), data on your credit accounts and inquiries, and public records regarding bankruptcies, civil lawsuit judgments and collection agency activities. Such negative past information may stay on your credit report for seven years or longer. The older the info, however, the less impact it will have on your current credit score.

Things You Can Do to Improve Your Credit Score: The Big Two

Contrary to what you may have read on less-than-credible websites or heard from questionable financial advisors, creating long-term, substantial improvement to your credit score is going to take real time and real effort. And there’s really only a couple of ways to do it:

As mentioned above, the major credit bureaus view payment history as the single most important factor in calculating an individual’s credit score. Payment history is all about making your payments on time, so if your goal is to raise your credit score in a meaningful way, consistently making your monthly payments by their due dates is essential.

In many cases, a late payment is just the result of forgetting to make the payment. There are a lot of things you can do to avoid that from happening. Here are three of the best:

  • Set Up Automatic Payments: Setting up automatic payments from your checking account is a sure-fire way to avoid a late payment on a credit card or other debt. That is, of course, if you have the money in your checking account to cover the cost of the payment.
  • Set Up a Payment Reminder System: If automatic payments don’t work for you, consider a payment reminder system. Most credit companies and other lenders, as well as many banks, offer payment reminder services that send you a text message or email alerting you to an upcoming payment due date. If you’re not already receiving such reminders, contact your or creditor or bank to set them up.
  • Get a Calendar: There’s always the old-fashioned system of putting up a calendar on your kitchen wall and marking due dates and ticklers on it. Don’t knock it if you haven’t tried it.

Of course, the reality for many people is that there are times when making a payment on or before the stated due date is simply impossible due to a lack of funds. If you find yourself in that situation, don’t panic. A payment made within a few days past the due date will likely not affect your credit score. That’s because many lenders do not report payments that are only a little late. More particularly, payments made within 30 days following the due date are often not reported and, in some (but not all) cases, the same is true for payments made between 30 and 60 days after the due date. So, if you’ve failed to make a payment on time, be sure take care of it as soon as possible, hopefully within 30 days. Just don’t make a habit of it.

And remember, making a late payment within 30 days of your due date is only a stop-gap measure to keep your credit score from dropping lower. The only way to improve your credit score in any substantial way is to start making all of your payments on time, every time.

It’s very simple. Those maxed out credit cards are really hurting your credit score, not to mention your overall financial health. In terms of credit score, it’s all about your credit utilization ratio. The higher the percentage of available credit that you use, the lower your score. The goal is to get those balances down to 30% or less of your total available credit. You don’t have to get all the way there, though, to see your credit score begin to rise, so the sooner you start lowering those balances, the better. Credit bureaus take into account both your total utilization (the total of what you owe on all of your cards compared with the combined available credit from all of your cards) and your individual card utilization ratios. Therefore, it’s probably a good idea to pay down the balances on your maxed out cards first – that is, once you’ve taken care of the monthly payments on all of your cards.

There are other ways to lower your credit utilization ratio as well:

  • Obtain a Limit Increase on One or More of Your Current Credit Cards: If you’ve had a credit card for awhile and have kept up-to-date on your payments, your card issuer is likely to offer you an increase in your credit limit. If you haven’t received such an offer, you can request one. An increase in your credit limit on one card means an increase in your total available credit, and that should lower your credit utilization ratio.
  • Get More Credit Cards: You can also lower your credit utilization ratio by obtaining additional credit cards. This will result in an increase in your overall available credit similar to obtaining a limit increase on an existing card. Going this route, however, can cause a temporary negative impact on your credit score due to the hard inquiries that come with new card applications.

Keep in mind that any improvement in your credit score resulting from an increase in your credit limit – either by obtaining new cards or limit increases on current cards – will disappear in a hurry if you use that extra credit. So, curb your spending.

Thinking About Closing Unused Credit Card Accounts? Think Again

Many people believe that closing unused credit card accounts will improve their credit scores. They’re mistaken. In fact, closing unused accounts might actually damage your credit score. Remember, the second biggest factor in calculating credit scores is credit utilization ratio (total credit used related to total credit available). If you close an old account, you’re subtracting your credit limit on that account from your total available credit, which raises your credit utilization ratio and, in turn, lowers your score. Also, credit bureaus consider a longer credit history as a plus, and closing old accounts may shorten your overall credit history. So, it’s probably better to leave those open but unused accounts just as they are… open.

Other Tips to Improve Your Credit Score

While your main focus should be squarely on paying your bills on time and bringing down your overall debt, there are several other things you can do to help boost your credit score – or at least keep it from sinking further.

  • Keep an Eye on Your Credit Reports to Make Sure They’re Accurate
    • Mistakes on your credit reports are more common than you might think, and those mistakes can have a substantive impact on your credit score. According to one Federal Trade Commission study, one in four consumers found errors on their reports significant enough to potentially affect their credit scores.

      There are two basic types of errors that often occur on credit reports:

      • Clerical Errors: Such as ID errors (like wrong names, addresses, phone numbers, etc., and credit accounts of others with similar names listed on the report), account status errors (closed accounts reported as open or open accounts reported as closed, for example), balance errors, and data management errors.
      • Errors Resulting from Identity Theft: Such as accounts never opened by consumers but showing up on their reports.

      The good news is that, believe it or not, most credit report errors are relatively easy to correct. The trick is in spotting the error and alerting the credit bureau as quickly as possible, which means that you’ve got to check your credit reports regularly and often. Remember, there are three major credit bureaus – Experian, Equifax and TransUnion – so when you check your credit reports, be sure to check all three.

      How to Check Your Credit Reports

      Consumers are entitled to receive one free copy of their credit report annually from each of the three major bureaus. You can request your free annual copies at AnnualCreditReport.com. Additional credit report checks throughout the year are available, but may cost you money unless you use one of the free-of-charge services, such as Credit Karma (Equifax and TransUnion) or freecreditreport.com (Experian). And, as mentioned earlier, checking your credit reports through these services will not negatively affect your credit score.

      How to Correct Errors on Your Credit Reports

      If you find an error on one or more of your credit reports, it’s up to you to act to correct it. To do so, start by contacting the credit bureau that issued the report with the error in it and filing a dispute. You’ll typically have the option of either filing your dispute online or through the mail. You will also want to contact the company that provided the erroneous information (known as a “furnisher”) to the credit bureau. Links to the three major credit bureaus’ dispute web pages and to downloadable dispute forms, along with detailed information for filing a dispute, is available at this Consumer Financial Protection Bureau webpage. If you believe that the error on your credit report resulted from identity theft, you can get additional help in reporting the issue from the Federal Trade Commission at identitytheft.gov.

      Unless your dispute is determined to be frivolous, once you have filed your dispute with a credit bureau, the bureau is required to investigate your claim, forward all documentary evidence you have submitted to the furnisher, and report any results of the investigation back to you. If your claim is legitimate, the furnisher must notify all of the credit bureaus of the error. If the furnisher determines that there was no error and does not update the disputed information, you may request that the bureaus include a statement explaining your side of the dispute in your credit file and future reports, and provide the statement to anyone that requests your credit report.

  • Think Diversity in Your Borrowing
    • As mentioned above, credit bureaus like to see a mix of credit types when calculating credit scores. Examples of the types of credit that might apply here include mortgages, car loans, student loans, and home equity lines of credit. Additionally, varying types of revolving credit, such as credit accounts with department stores, big box retailers, and specialty merchants, might also apply. Just remember that although diversifying your types of credit can help your credit score, it only accounts for 10% of that score. So, only open new accounts if you can really use them. And, most importantly, always make your payments on these accounts on time just as with your regular credit cards. If you don’t, you’re bound to experience much more damage to your credit score than any improvement you receive by mixing things up.

  • Get a Secured Credit Card
    • People with bad credit, and particularly people with no credit, may find that a secured credit card is a good way to establish or rebuild their credit scores. A secured credit card is one that requires customers to make a security deposit when opening their accounts. The amount of the security deposit then becomes the card’s credit limit (for example, if you deposit $250 into the account, you can use the card to buy things up to the $250 limit). The card holder uses the card and makes payments on the account just like a regular credit card. Activities associated with the card impact the holder’s credit score the same as a regular card, meaning that if payments are made in full and on time, the holder’s credit score will rise. Conversely, if payments are late, the card holder’s credit score will be negatively affected.

  • Credit-Builder Loans
    • A credit-builder loan is another good way to establish credit or rebuild bad credit. With a credit-builder loan, the borrower takes out a loan in a relatively small amount with a bank or credit union. The funds from the loan, however, remain with the lender in a savings or certificate account. The borrower makes monthly payments on the loan – in full and on time, of course – allowing him/her to “build” a credit record for the loan account, thus establishing a positive credit score. The down side to a credit-builder loan is that it will cost the borrower in interest payments without providing access to the loan funds. But that might be a small price to pay to get a credit score that’s heading in the right direction, especially when no other options are available.

If You Are Still Having Trouble

Finally, if you find yourself failing at your credit management efforts, it’s probably time (or likely past time) to seek some outside help. Fortunately, such help is available.

Talk to Your Creditors

Creditors understand that their customers sometimes find themselves in financial straits making it difficult or impossible to pay their monthly bills on time. Creditors also understand that when customers give up on making their payments entirely, they lose money. Therefore, it’s to their benefit to work with a delinquent customer to develop a plan with new terms that will allow that customer to continue making their payments and eventually pay of their debt. If you are falling behind in your payments, then, it’s important to reach out to your creditor as soon as possible to see if new payment arrangements can be made. You may be surprised at just how willing they are to work with you.

Contact a Legitimate Credit Counselor

Nonprofit credit counseling agencies offer a wide range of counseling services for issues such as debt management, general budgeting, housing cost management, student loans, bankruptcy, and more. Debt management is the biggest service item for most credit counseling agencies, and counselors can provide you with a comprehensive debt management plan that will help you pay off your consumer debt while saving both time and money. Practically all reputable counseling services offer an initial counseling session free-of-charge, but expect to pay a reasonable fee for any additional services provided.

If a credit counseling service sounds good to you, it’s important that you do business with a reputable agency. How do you know if an agency is reputable? Check out our expert interview below. More information on choosing a credit counselor can be found on this Federal Trade Commission website.

And Finally…

There’s no better way to improve your credit score in the long run than to curb your credit use. Easier said than done, that’s for sure. There are certainly lots of good reasons to use credit, like buying a house or car – if you can afford them. But credit should only be used reasonably and responsibly. And when it comes to credit cards, it’s best to remember the Golden Rule: “Only use a credit card when you can afford to pay it off at the end of the month. If you can’t afford to do that, you can’t afford it – period.”.

Interview with Credit Expert Bruce McClary

Based in Washington, D.C., Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling (NFCC), providing marketing and media relations support for the NFCC and its member agencies throughout all 50 states and Puerto Rico. Bruce has been a featured financial expert for many of the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, and Fox Business, as well as for hundreds of local media outlets from coast to coast.

What is the biggest mistake or misconception people have about credit scores?

For years I worked directly with people as a credit counselor answering questions about their credit and why their credit score had taken a tumble or moved in one direction or another. One of the things that I would hear often was that people were advised to close a lot of their unused credit card accounts to help clean up their credit report and improve their financial situation. But it doesn’t help at all, it actually sends your credit score in the wrong direction. When you close too many open accounts at the same time – and I’m talking here primarily about revolving accounts – you’re bringing your overall credit limit down closer to the outstanding balances that you still owe. And the closer your balance gets to your credit limit, the warning bells go off and your credit score can take a dive.

How about some other mistakes or misconceptions?

Another misconception relates to how much control people have over clearing items off of their credit reports, and I think this one leads people into the hands of scammers. There are a lot of scammers out there promising that if you pay them a fee, you don’t have to worry about unpaid credit and collection accounts, or wage garnishments or judgments that show up on your credit report. That leads people to believe that there is some kind of special process to get a fresh start no matter what their circumstances are. And the issue there is that you can dispute anything you want on your credit report, you do have the ability to do that. But if the account you’re disputing can be validated by the creditor, or the bank or credit card company that you owe, then it stays on your credit report. So, there is no magic bullet for cleaning up your credit. That’s a misconception that unfortunately has led people into the hands of scammers.

How hard is it to fix or improve your credit?

It depends on the circumstances. If you are talking about a situation where you are trying to repair damage that was caused by reporting of inaccurate information or by fraudulent activity – where reporting of the incident, investigation, verification and the correction can take place quickly – those sorts of things can be resolved, I would say, within 90 to 120 days. The other more protracted process would be if you are in a situation where you have accounts that are falling behind because you are unable to make the payments, if you have any judgments that have been taken against you in a civil court because of money that you owe, or if there is a foreclosure that’s showing up on your credit report. Those are fairly damaging to your credit and they take a bit of time to recover from. And even if you file bankruptcy, there are still consequences related to your overall credit health that can be long lasting.

What can people in those circumstances do?

It really depends on how you change your financial behavior that’s reflected on the credit report. Focus on making payments on time, and resolving unpaid balances that are past due by either getting those accounts up to date or negotiating some kind of a settlement or payment installment plan. And that can take a lot of time. It can take years to do that. But once you start getting back on track, your score will gradually see a lift.

Can you give us a few of your best tips or suggestions for improving credit scores?

If you are making your payments as agreed and making them on time, that’s going to result in the biggest lift in your credit score. Right behind that, it helps to keep your balances under control, to keep your credit utilization ratio low. You want to make sure that you’re not getting too close to your credit limit. If you work very hard to pay off your balances as quickly as possible, that guarantees you’re going to have the lowest possible credit utilization ratio, and it’s also going to end up resulting in savings for you because you’re not paying interest. You’re helping boost your credit score at the same time you’re helping your bottom line.

The other thing that I would recommend is to keep your appetite for borrowing in-check. Always limit your borrowing to circumstances where it is necessary. As the old commercial used to say, “Never borrow money needlessly.” I think that’s a good rule because it keeps you out of a situation where you are dealing with an unmanageable level of debt.

Any other tips you’d like to share?

Don’t buy into the myth that you have to carry a balance to boost your credit score. You can still have a healthy credit score by paying accounts off quickly. You’re only going to end up costing yourself more if you carry larger balances from month to month and only make the minimum payments.

Are there certain kinds of debt you should prioritize and pay off first?

Non-collateralized, high-interest debt is the most toxic and that really needs to take priority in terms of repayment. And it’s not limited to credit cards. There are other types of debt that have even higher rates. Payday loans, for example. In states where payday lending is regulated, you could be faced with a 36 percent APR. And in states where it is not as closely regulated, you could be dealing with a 300 percent APR. So the sky’s the limit there. Also, the signature loans that sub-prime finance companies make. Those loans are very high interest and go up to as high as 36 percent as well. So, that’s what I would consider toxic debt because it costs the most. And the faster you pay it off, the more you save yourself in the long term.

Can you tell us a little bit about your organization, the National Foundation for Credit Counseling, and what they do?

The NFCC is the largest and longest-serving nonprofit organization that’s dedicated to financial counseling and education in the United States. The NFCC is a network of nonprofit member-agencies throughout the country that offer a range of services including but not limited to budget counseling, credit counseling, and debt management programs that assist people who have fallen behind with their credit card payments and need help getting back on track. NFCC member-agencies also offer guidance for first-time homebuyers, foreclosure prevention counseling, student loan counseling, bankruptcy counseling, and small business owner financial coaching. Some member-agencies also offer counseling for seniors who are deciding whether or not to get a reverse mortgage. So, that’s a lot. And as a nonprofit organization with its members being nonprofits, it’s our goal that these services are accessible to everyone who needs them by providing them in the most affordable way possible.

When is it a good time for someone having trouble with making their credit payments to contact a credit counselor?

Anytime is a good time to contact a credit counselor because even if you are not in a situation where you are falling behind on your credit card payments – if you just need guidance on how to get the most out of your budget to make faster progress in paying down your debt – a nonprofit credit counseling agency can be a tremendous resource.

So people shouldn’t wait until things get really bad to contact a credit counselor.

Right. The services are there if things are getting bad and we definitely want to help people in those situations. And I always tell people that it is never too late to reach out and talk to a counselor, but on the front end of it, it’s never too early, either.

How can someone find a reputable credit counselor and avoid getting involved with a scammer?

You want to look for a legitimate nonprofit organization, number one. You can do that by going to NFCC.org. All NFCC member-agencies are held to a set of quality standards that are rigorously enforced, so it not only guarantees that you are going to receive a certain level of quality in service, but it also insures that those agencies can deliver what you’re looking for in terms of financial education and counseling. Another way to confirm that a credit agency is legitimate would be the list of agencies on the HUD.gov website, because those are financial counseling agencies that are all nonprofit and vetted through the HUD-approval process, which is rather rigorous.

Are there any red flags that people should look out for in terms of disreputable credit counseling services?

First of all, if they’re asking for your personal identifying information right up front, or if they ask for payment up front before they deliver any services or before you see any kind of description of services, or sign an agreement, that’s a red flag. This is what happens a lot with these fly-by-night credit repair companies. They’ll ask you to pay $500 or $1000 up front and get a bunch of your information, and you’ll never hear from them again. So, you don’t want to part with your money until you know what you’re getting, until you’re presented with something in writing that describes the services you are going to be receiving. Another red flag is if they’re the ones that call you first. If they’re cold calling you, if they’re sending you unsolicited emails, if they’re reaching out and marketing you aggressively in that manner, that’s a major red flag.