If you’re just establishing your credit or correcting prior mistakes, understanding the factors that can improve your credit score will set you up for success down the line. Though your credit score doesn’t really change on a daily basis, taking small steps to improve your score makes you more likely to qualify for financing. This is especially the case if you’re planning a big purchase within the next few years.
So, if you want to invest in your financial health for something down the line, you can use the following five steps to improve your credit score.
What Does Your Credit Score Mean?
Your credit score is a number that ranges from 300-850 and is calculated based on a number of factors. Individually, these factors may not seem impactful to your score, but when combined they make up a single number that tells lenders whether you qualify for financing for loans, credit cards, mortgages, and more.
In general terms, your credit score number signifies the following:
- 300-600: Poor credit score
- 600-660: Fair credit score
- 661-780: Good credit score
- 781-850: Excellent credit score
The better your credit score, the better your odds are that you’ll both qualify for financing and receive lower interest rates. If you have poor or fair credit, you may still be approved for financing, though your interest rates will likely be high. The lower your score, the more invested you should be in improving it.
What Affects Your Credit Score?
Your credit score doesn’t require daily monitoring, but checking on it once a month or so ensures you’re on the right path to an excellent score. There are a number of factors organizations use to calculate your credit score, with three factors being of high impact and three factors being of low impact:
- Payment history, credit card usage, and derogatory marks have a higher impact on your credit score.
- Credit age, total open accounts, and number of hard inquiries have a lower impact on your credit score.
Any time you open a new account, miss a payment, or max out your credit card, it’s going to be reflected in your credit score. Also, as your total open accounts and credit age (how long you’ve had a loan, credit card, etc.) go up, the effect your individual accounts have does go down.
However, high impact factors will always have more effect on your score, so it’s best to pay more attention to your payment history, credit usage, and derogatory marks.
Below, we’ve outlined five simple steps you can take to make improvements to your credit score. Keep in mind that these steps will take effect over time. So, one on-time payment may not have much effect, but a year’s worth of on-time payments will.
1. Don’t Miss Payments
The first step you should take on your journey to improving your credit score is to make sure you’re making all your payments on time. Doing so proves to lenders you have a history of making good on payment plans, and it also just lowers your overall debt.
To accomplish this step, make yourself a guide to all your monthly payments. Include the amounts, the date they’re due, and whether you’ve paid them or not. Then, throughout the month, refer back to this guide to ensure you’re on the right track and haven’t missed anything.
It can be hard to keep track of what funds need to go where. You can make a budgeting guide in Excel, Google Sheets, or using online platforms like QuickBooks. Once you’ve got a good handle on your monthly budgets, you’ll notice your credit score start to improve. Generally, you want your payment history to reflect around 97% of on-time payments.
2. Limit Credit Checks
With new or poor credit, the likelihood of a lender passing on your application is much higher. Therefore, while you’re establishing or rebuilding your credit score you should limit the number of credit checks on your report. Try to avoid applying for a ton of credit cards and avoid sites that continuously run credit checks to match you with a lender.
In general, keep hard credit checks to once every six months to a year. If you know you’re going to be applying for a loan or mortgage in the near future, try to avoid credit checks at all costs. Most hard inquiries stay on your report for around two years, so choose wisely.
3. Address Derogatory Marks
Derogatory marks are added to your credit score when you fail to pay a lender back for funds issued. Once your account is closed due to delinquency, your lender will pass your debt to a debt collector, who will do just about everything to get you to pay back the money you owe. This delinquency will be reflected on your credit score as a derogatory mark, and it will immediately cause your score to drop.
Derogatory marks can appear for amounts as little as $1, up to any maximum. They stay on your credit report for 7 years if not addressed, and these remarks have a massive impact on your credit score.
If you notice a derogatory mark on your credit score, you should address it. This is especially true if you’re trying to improve your score. If you can afford it, paying off the sum can get you back around 20-25 points on your credit score. Or, if you don’t have any big purchases coming up, the impact of derogatory marks on a score drops off after about 2 years (but, again, it’ll stay on your report for 7 years).
Alternatively, if you see a derogatory mark on your credit score and you don’t believe it belongs there, you can dispute it either directly with the company or through a credit reporting agency like Credit Karma. The dispute will tell you definitively why the mark was added to your score, and if it’s incorrect, it can be removed entirely.
4. Make Extra Payments
If you’ve checked your score and don’t have any immediate concerns, your next course of action can be to make extra payments toward your debt. Doing so can both increase your credit score and save you money on interest.
When determining where to make extra payments among the different sources of debt, you can go with one of two options:
- Pay off the debt with the lowest balance. You’ll pay off your debt quickly and get one notch on your monthly budget eliminated. Plus, it feels great when you pay a debt in full.
- Pay off the debt with the highest interest. This will be a money saver, as you are making payments on the item with the greatest potential to end up costing more in the long term.
5. Build Your Credit Age and Total Number of Accounts
The final step you can take for improving your credit score is to just allow your credit to age. This is especially the case for those who are just starting to build credit. Though credit age doesn’t have a huge impact on your score, lenders favor borrowers with more credit history to evaluate. By forming good credit habits and paying off debt, you’ll automatically build your credit age.
Similarly, if you’re in good standing with all your debt and not looking to make a big purchase right away, opening a new account can improve your credit score. Consider that you should resolve any derogatory marks or missing payments before you take this step.
It Takes Time to Improve Your Credit Score
Even if you immediately implement all five of the steps listed above, you likely won’t see any immediate changes to your credit score. That’s because your score is calculated primarily using your history with lenders and making payments. It’s going to take some time to get your score where you want it to be.
