How To Increase Your Credit Score In 30 Days
Everyone knows that it’s important to have good credit, but few realize how big a role your credit score can play in your ability to move forward in life. Whether you’re looking to buy a house, apply for a loan or even find a job, your credit score can be the difference between achieving your goals or having to overcome expensive roadblocks along your journey.
The good news is that raising your credit score isn’t difficult. In fact, you can take steps to improve your credit score TODAY!
What Is A Credit Score?
A credit score is a numeric based scoring system used by lenders to help predict how risky a potential borrower will be. The scoring system you’re most likely familiar with is the FICO scoring system.
FICO scores range from 300 to 850 and represents a consumer’s creditworthiness. If your score is high, it signals that you’re less of a risk to lenders. If your score is low, it tells lenders that you’re more likely to pay your debt late.
FICO Scoring Scale
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
Who monitors your credit score?
Your credit score is based on the credit reports created by three reporting agencies: Equifax, Experian, and TransUnion. The rating agencies collect your consumer data to determine how much of a risk factor you are for potential lenders.
These agencies collect information on you such as:
- Personal identification information (name, date of birth, addresses, and Social Security Number)
- Records from banks, businesses, public court records, and lenders
- Credit card accounts
- Credit limits
- Credit balances and payment history
- Bankruptcies
- Hard inquiries caused by applying for loans
The information collected by these reporting agencies is then used by lenders to predict the likelihood of you paying a bill 90 days late. Poor borrowing habits will erode your credit, while paying your bills on-time builds your credit.
How can you get a copy of your credit score?
You can get a FREE copy of your credit report every 12 months from each credit bureau through AnnualCreditReport.com. Make sure you take advantage of this every year to check for inaccuracies and other red flags that might affect your credit score.
What Makes Up Your Credit Score?
The three credit reporting agencies determine what your credit score is based on your credit report — a statement that tracks your credit history and activity. Your credit report is made up of five criteria: payment history (35%), amount you owe (30%), length of credit history (15%), new credit (10%), and credit mix (10%). If something is not reported on your credit report (i.e., how much money is in your checking or savings account), then it can’t affect your score.
Payment history — 35%
Your payment history makes up the biggest percentage of your credit score. This part of the report lets lenders know if you consistently pay your bills, if you’ve missed a payment, and how long it takes you to make your payment if it’s late.
Amounts owed — 30%
Making up 30% of your credit score, the amount you owe is the second biggest factor that effects your credit score. This is also known as credit utilization and is calculated by looking at the amount of debt you carry compared to the amount of credit that’s available to you.
Length of credit history — 15%
The longer your credit history the better. Having a longer history provides more data points to show how you manage credit. Three things are taken into consideration when examining your credit history: the age of your oldest account, the age of your new accounts, and the average age of all your accounts.
New credit — 10%
New credit makes up 10% of your credit score and refers to how many new accounts you open up. Opening up too many lines of credit back-to-back is a red flag for the credit reporting agencies because it may signal that you’re in financial trouble.
Credit mix 10%
Your credit mix is determined by the different types of credit you use. A mix of credit would include things such as a car loan, a mortgage, and credit cards. The credit reporting agencies use this information to see how well you manage different types of debt.
Why Is Your Credit Score Important?
Your credit score is important because it determines your ability to qualify for financing and determines the amount of interest you’ll pay over the life of the loan.
What are the benefits of having a good credit score?
A good credit score is considered to be anything that is 700 or above. Having a good credit score is not only a badge of honor that shows you know how to manage your finances, but it also comes with many cost saving benefits as well.
The benefits of having a good credit score include:
- Lower interest rates on loans. A lower interest rate means you’ll pay less interest over the life of the loan, saving you money and creating the opportunity to pay off the loan quicker.
- More likely to be approved for a loan. Having good credit increases your chances of being approved for credit because it shows you can be trusted make your loan payments on time.
- Higher credit and loan limits. Along with your income, having a higher credit score can help you get approved for higher credit limits or loan amounts since you have a good track record of being able to manage debt.
- Easier approval for rental property. Landlords and apartment complexes use your credit score as part of their tenant screening process. A good credit score signals you have stable income and can pay your bills on time. On the other hand, a bad credit score due to an eviction, or late rent payments can make it difficult to move into your next place.
How does a bad credit score effect you?
A bad credit score is considered anything 669 or lower. Having a low credit score affects you negatively because it signals to lenders that you’re a riskier borrower and might not pay your loans back in a timely matter. Because you’re deemed a riskier borrower, lenders will take precautions that’ll end up costing you some serious money.
Some ways a lower credit score can affect you include:
- Higher interest rates. The lower your credit score, the higher the interest rate on your loan. This means that you’ll end up paying more money over the life of the loan than someone borrowing the same amount of money but with a higher credit score.
- Higher down payments. You may be required to pay a higher down payment on purchases because you are perceived to be more likely to default on your loan.
- Rejection for loans and lines of credit. A bad credit score rises the potential for getting rejected for a mortgage, car loan, credit cards, or even applying to rent an apartment.
6 Tips To Increase Your Credit Score In 30 Days
Now that you have a better understanding of what a credit score is, what it’s comprised of, and why it’s important to have a good credit score, it’s time to talk about strategies that you can implement today to improve your credit score quickly.
- Check for errors on your credit report
- Pay your bills on time
- Keep your credit utilization rate below 30%
- Don’t close your credit card accounts
- Don’t apply for multiple credit cards at once
- Get credit counseling
1. Check for errors on your credit report
Under the Fair Credit Reporting Act, you can dispute any errors on your credit report and the reporting agencies must investigate the claim within 30 days.
Errors can range from the mundane such as simple clerical issues to things as serious as identify theft. Other errors you might find on your credit report include: late payments that were actually paid on-time, hard inquiries you didn’t authorize, and accounts you didn’t open. Make sure you check your credit report from each rating agency at least once a year, for FREE, at AnnualCreditReport.com.
2. Pay your bills on time
Payment history makes up 35% of your credit score and is the most important factor effecting your credit score. The longer you can show you pay your bills on time, the more your credit score will improve.
Paying your credit card on time and in full every month is the best way to maintain a high credit score. But if you aren’t able to pay your bill in full ever month, even just paying the minimum balance on your credit card will protect your credit score and actually help build it up!
In general, you have roughly 90 days to pay a late payment before creditors report it to the credit reporting agencies. You can learn more on why paying your credit card balance in full every month is one of the keys to achieving financial freedom.
3. Keep your credit utilization rate below 30%
In order to determine how risky a borrower you might be, lenders like to know how much credit you’re using compared to the amount available to you. This is called your credit utilization rate (CUR), and it is calculated by dividing the amount you owe on your credit cards by the amount of credit available to you.
Your credit utilization rate indicates to lenders how well you can manage your finances. A low CUR suggests that your credit balance is manageable, while a high CUR suggests that you may be having a hard time paying your debts. Most credit experts suggest keeping your CUR under 30% to maintain a good credit score.
An example of how CUR works is, say person A has a credit limit of $5,000 and owes $1,000, their CUR would be 20% ($1,000/$5,000). On the other hand, person B has a credit limit of $1,500, but only owes $500, their CUR would be 33% ($500/$1,500). So, even though person A has more debt than person B, because person A has more credit available to them, their CUR is lower and lenders would see them as less of a credit risk. A low credit balance doesn’t automatically mean you’re less of a credit risk.
There are two ways to keep your credit utilization rate below 30%:
- Pay down the balance on your credit cards and don’t make any additional purchases.
- Increase the amount of credit you have access to. Call your credit card company and ask them to increase your credit limit. This shouldn’t be a problem if you’re in good standing with the company or your household income has increased.
If you’re looking for tips on how to pay down your debt and increase your CUR, check out our article on how to get out of debt using the debt snowball method.
4. Don’t close your credit card accounts
This might seem counterintuitive, but hold off on closing any credit cards you no longer use or recently paid off — you might inadvertently decrease your credit score in one of two ways.
The first way closing out an account can negatively affect your credit score is that it’ll increase your credit utilization rate since you’ll now have less credit available to you. Your credit utilization makes up 30% of your credit score, so while closing out an account might sound like a good idea you could actually be doing more harm than good.
The second way closing out an account can negatively affect your credit score is that you’ll be erasing years of credit history. Length of credit history counts for 15% of your credit score. Even if you have no balance on the card, you’re better off leaving the account open and maintaining a long credit history than closing it out.
5. Don’t apply for multiple credit cards at once
When you apply for a new credit card, what is called a “hard inquiry” occurs. What this means is that a creditor has requested to look at your credit file to determine how much risk you pose as a borrower. A hard inquiry can stay on your credit report for roughly two years.
Any hard inquiry done by a lender will show on your credit report and will only have a minor negative impact your credit score. BUT, be careful opening up multiple credit cards in a short amount of time. Multiple hard inquiries during a short period could signal to lenders that you are a high-risk borrower that may be short on cash or planning to take on a lot of debt.
If you do want to apply for a new credit card, the effects of opening up a new card can be mitigated through a decrease in your credit utilization rate. This is due to the fact that more credit is now available to you (assuming you’re not maxing out the new credit).
6. Get credit counseling
If you find yourself seriously underwater, or if your credit score is holding you back from moving forward in life, then you might want to consider contacting a credit professional.
The National Foundation for Credit Counseling (NFCC) is a non-profit organization that provides resources and tools to help you make a plan to get a handle on your debt and get back on track to reaching your financial goals.
