How to Improve Your Credit

What can I do to improve my credit?

1 Answer

In order to understand how to improve your credit, you must first understand what goes into a credit score, and then you must apply that to your personal situation so that you can see what areas need to be improved.

There are 5 factors that will go into your credit score. First, making up 35% of your score is your payment history. This is your record of how you have paid all of your credit accounts in the past. A currently late tradeline will have the most detriment to your score. After that, the further in the past the late score goes, the less impact it will have on your score. Additionally the severity of the late payments will matter. Accounts that are 60, or 90 days past due will have a greater impact than a 30 day late.

The second factor, making up 30% of a credit score is your percentage of balance versus your high credit limit. Plainly put, the credit bureaus want to see that you can manage your credit, and that you aren't maxing out your credit. The lower your balances as compared to your credit limits, the better your score will be.

The third factor of a score is the length of timeyour accounts have been open. This makes up approximately 15% of your credit score. The longer your accounts are open, the more strength you are seen to have, because you have managed your credit over a long history. Opening new accounts will negatively impact your score, as they will bring down the average length of time that your tradelines have been open.

The fourth factor in a score is your mix of credit. This makes up 10% of your scores total. A good mix of credit will include a few credit cards, installment loans, and a mortgage loan. You will lose points in this category if you have too many credit cards, etc. as opposed to a well rounded mix of accounts.

The last factor, also making up 10% of your score is the number of credit pulls recently appearing on your report. When your credit report is pulled too many times it represents a risk that you may be obtaining new credit at a rapid rate. For example if you were to have 10 recent pulls for credit cards, a lender reviewing your report may consider that you have just opened 10 cards that are not reporting to your credit yet. This could adversely affect your ability to repay them if they were to extend you credit.

Now that you know what is factored in to your report, you can see how to improve your credit. If you have previous late payments, you would be best served to get all of your accounts current, and keep them current, as in that case time must elapse and you must show a willingness to pay on time to improve your score. If your score is being hurt by high balances on your accounts, especially credit cards, you should try to pay down you cards. It is worth noting that if you had $10,000 debt on 1 single card with a $10,000 limit, and 3 empty $10,000 cards, you would be much better served in your credit score to spread the $10,000 you owe over all 4 accounts. In this case you would only owe 25% of your high credit limits verse having a maxed out card. Even if this defies conventional wisdom, in the case of credit scoring, you will have a higher score by spreading your debt over multiple accounts. If your score suffers because you don't have significant account length, you can consider closing some of your newest accounts to raise your average. Otherwise, you want to simply manage your credit over time which will show a quality depth and history. Additionally, for score purposes you should never pay off and close a credit card. It is okay to pay the card to zero, but leave it open, so that it continues to build your credit history.

Each credit situation is different, but if you take the above guidelines into mind, you should be able to apply them to your situation and improve your score.