The average American has a FICO credit score of 700, but in order to qualify for the lowest interest rates on loans as well as the best credit card offers, you'll need a score that's significantly higher. If you have an average or below-average credit score, here are five suggestions that could help you improve your credit score by 100 points or more and have access to the best possible offers from lenders.
What your FICO credit score is made of
The vast majority of lenders use the FICO credit scoring model when deciding whether or not to approve you for a loan or new line of credit. So, the first step toward improving your credit is understanding where your score comes from.
The specific formula used to compute your FICO score is a closely guarded secret, but fortunately, we do know the five broad categories of information that are used, and how much each one is weighted.
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
The first category is perhaps the most obvious, and I probably don't need to tell you that paying your bills is good for your credit. However, there are some less-obvious ways you can improve your credit score. To be clear, there's no way of knowing what behaviors will result in an improvement of exactly 100 points, but with these suggestions, a 100-point improvement certainly isn't out of the question.
1. Reduce your credit utilization
Notice that the second-largest category of information in your FICO score is "amounts owed." This doesn't simply refer to the actual dollar amounts you owe, but also considers something called your credit utilization, or the percentage of your available credit you're using. And, this is considered on an overall basis, as well as on an account-by-account percentage.
As you might imagine, paying off your credit card balances is one way to improve this area of your FICO score. However, not everyone can simply pay off their credit cards all at once. So, here are a couple of less-obvious credit utilization tips that can help you improve your score.
- First, calculate your credit utilization for all of your credit cards, and focus on paying down the card with the highest utilization percentage. In other words, if you have one credit card that is maxed-out, and another with a relatively small balance, focusing on the maxed-out card first could be a smart idea.
- Another suggestion is to ask your credit card issuers for higher credit limits, which could also improve your credit utilization. For example, if you owe $1,000 on a credit card with a $2,000 limit, your credit utilization is 50%. On the other hand, if your credit limit is raised to $4,000, your credit utilization drops to just 25%, without you paying a cent. According to a report by CreditCards.com, 89% of cardholders were given a higher limit when they asked, so this could certainly be worth a try.
2. Keep old credit cards open
The "length of credit history" category considers a variety of time-related factors, including the age of your credit accounts, and the average ages of all of your accounts. If you close an older, unused credit card, it can drag this average down and ding your score. Conversely, the longer your individual accounts stay open, the more they'll help this category.
In addition, closing an account reduces your total available credit, which can have a negative effect on your credit utilization.
3. Let your credit accounts age
The most surefire path to an excellent credit score is responsible credit behavior over a long period of time. By paying your bills on time, you're maximizing the most important FICO category, and by allowing your credit to age, you're boosting the "length of credit history" category.
One important point everyone should realize is that there is no quick-fix for shaky credit, unless your score is bad as the result of inaccurate information. Simply allowing time to pass can be a highly effective tool, and you might be surprised at how much of a difference time can make. In fact, according to a myFICO.com credit simulator (available to myFICO.com subscribers), if I were to do nothing other than pay my credit cards on time for the next 24 months, my score would go up by more than 50 points.
4. Wait for negative information to drop off
If you have negative information on your credit report, such as collection accounts, charge-offs, or judgements, there may not be much you can do about them in an immediate sense.
It's true that a paid collection account looks better on your credit than an unpaid collection, but it can still show up and drag down your score. In some cases, it can be possible to get a collector to agree to remove a collection account entirely as a condition for payment in full, but be sure to get any such arrangement in writing.
Fortunately, adverse information won't stay on your credit report forever. The vast majority of negative information, including late payments, collections, charge-offs, and judgements, will drop off of your credit report after seven years (10 years for Chapter 7 bankruptcy). The negative information will contribute less and less as time goes on, and you could see your score shoot up dramatically once the information is finally removed.
5. Use your credit
During my time at The Motley Fool, I've interviewed quite a few credit experts, some of which even have perfect FICO scores. And while there is some disagreement in regards to the best way to achieve a maximized credit score, the consensus is that making use of your credit is a positive factor.
The "credit mix" category takes into account the variety on your credit report. In other words, having an active mortgage, auto loan, and credit card could look better to creditors than just having one of the three.
To be clear, I'm not saying to borrow money if you don't need to. However, if you currently don't use credit cards, it might actually help you to start charging some purchases and paying them off shortly after.
There's no quick way to dramatically raise your FICO score
One major theme here is that there's no way to realistically add 100 points or more to your credit score overnight. I often tell people that you can boost your score by a few points rather quickly, but for major improvements, there's no substitute for time.
However, there's also no magic formula you need to know. As you can see from this discussion, most ways to improve your credit aren't much more than good old-fashioned common sense financial behaviors. With a combination of responsible behavior and time, it's certainly possible for the average American to add 100 points to their credit score.