I still remember one of the first times I realized how bad my credit score was. I tried to open a credit line at a furniture store so I could buy a couch (my life is pretty exciting), and the salesman came back a few minutes later and politely told me that I wasn't approved.
It was a bit embarrassing, especially because the sofa cost just a few hundred dollars. I realized that if I couldn't get a couch on credit, I had no shot at other things I might need, like a car or house.
I've managed to significantly improve my score since then, but it took years of making my payments on time. If you're in a similar place to where I was years ago, remember that there are three key factors that impact your credit score the most: the length of your credit history, your payment history, and your current debt relative to your available credit.
Short credit history
Let's start with simplest one first. It may seem irrelevant to you how long you've been borrowing money, but creditors want to see that you have an established credit history.
Your FICO (Fair Isaac Corporation) score takes into account the age of your oldest account, when you opened your latest account, as well as the average age of all your accounts. This section of your credit history comprises 15% of your overall score.
You can't really do anything to improve the length of your credit history (unless you find a time machine!), but you can start building a strong history by making your payments on time. And keep your older credit card accounts open and at least somewhat active.
Poor payment history
One of the most important aspects of your credit report is what your payment history looks like -- specifically, what your record is when it comes to paying your bills on time. This section accounts for a whopping 35% of your total FICO score.
A couple of late payments doesn't necessarily mean your score will plummet, but consistently late payments -- or lots of them spread across multiple accounts -- will cost you.
The easiest way to keep your credit score healthy is to make your payments on time. If that's been a problem for you in the past, now is the time get back on track! Remember, the bigger the account is (i.e. a car loan vs. couch loan) the more impact it has if you miss the payment.
Too much debt relative to your available credit
The next-biggest factor -- accounting for 30% of your FICO score -- is how much debt you currently have.
Lenders take into account not just how much debt you owe, but also how much credit you have access to -- like a $15,000 credit line on a credit card -- compared to how much of that total credit you're actually using. If you have two credit cards that are completely maxed out, it will ding your score more deeply than a person who has five cards but is only using a small percentage of their available credit.
If you have too much debt, start paying it down right away. Research has shown that focusing on just one account at a time -- starting with the smallest balance -- is one of the best ways to pay down your debt. When using this technique, be sure you're making the minimum monthly payments on all your other debts (remember, missing payments will send your score plunging), and put whatever you can manage after that toward retiring the smallest debt on your list. When it's paid off, keep going with the next smallest debt.
The benefit to this process is two-fold: You'll not only knock out some of your debts -- and enjoy the victorious feeling of getting creditors out of your life -- but you'll boost your credit score at the same time.
How to improve your credit score
The good news is that your score can be improved, but it's going to take time and effort. Here's how the myFICO website puts it,
It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast.
The myFICO site recommends doing these three things:
- Check your credit report (you can get a free copy here) so that you know what's on it, and dispute an errors that you see.
- Set up payment reminders or automatic payments for your debts. Remember, one of the best ways to improve your score is to make your payments on time!
- Reduce your debt by paying off your accounts. Consider the method mentioned above, and focus on your smallest account first.
After years of making my payments on time, my credit is now in great shape. And I know you can do the same if you focus on a solid debt repayment plan. Check out nine ways to improve your credit score and our quick guide to earning perfect credit for some extra tips. Good luck!