If your credit score isn't quite where you want it, life can be tough, especially if you're planning on any big purchases like a house or a car in the near future. While the actual recipe for a great credit score is a well-guarded secret, the folks at myfico.com give us some helpful guidelines on how to increase your credit score. If you make use of the information available to you, raising your credit score could be easier than you think.
Use what you know about the "magic formula"
The FICO score is by far the most popular credit-scoring system. It is used in more than 90% of lending decisions and can be obtained from all three major credit bureaus (Experian, Equifax, and TransUnion) from the website myfico.com.
Pay your bills on time, even if you've messed up in the past
According to the website, 35% of your FICO score comes from your payment history, meaning your track record of paying your bills. More recent payments are more heavily weighted, so a late payment made five years ago won't affect your score as much as one made three months ago. And, after seven years, most adverse information drops off of your report entirely.
Use your credit lines the right way
The second-most important piece of the puzzle is the amounts you owe, which makes up 30% of your score. Now, let's eliminate some confusion here. "Amounts owed" does not refer to the actual dollar amount of your debt, but your debt relative to the credit available to you. In other words, if you have $2,000 in available credit among all of your credit cards, and you use $1,800 of it, you owe 90% of your total credit line, and it's a drag on your score.
On the other hand, if you have $100,000 of available credit, but you only use $10,000 of it, it will be better for your score, even though the dollar amount is higher. It really doesn't matter how many credit cards you have, or how high your credit limits are, so long as you use it responsibly.
It takes time
Fifteen percent of your score comes from the length of your credit history. In other words, if you're young (say, in your 20s), it's next to impossible to have "perfect" credit because your credit history isn't fully established. If your oldest credit account is only two years old, it's difficult for a lender to tell how you'll pay your bills during a five-year car loan.
However, if you have credit cards that have been open for 20 years, it makes a statement to lenders. They know it's an accomplishment to hold your finances together for an extended period of time; as a result, they're much more eager to loan money to people with longer credit histories.
On that note, don't be so quick to close out your "starter cards" just because you can qualify for credit cards with better terms. You're probably better off keeping your oldest accounts open, so long as the fees and charges aren't ridiculous, as it will go a long way toward maximizing this 15% of your score.
Don't apply for every credit offer that comes along
Even if your score is good, it doesn't mean you should apply for every credit card offered to you in an effort to build up your credit line. Ten percent of your score comes from "new credit," which includes recently opened accounts and credit inquiries. When you apply for credit, the lender's credit check appears on your credit report and stays there for two years. Too many inquiries can hurt your score, as it gives lenders the impression you're opening too many new credit accounts and possibly overextending yourself.
Variety is good
The last 10% of your score comes from the types of credit you use. In other words, you don't want just a mortgage, or just a car loan on your credit file. Lenders want to see you responsibly borrow for a variety of reasons, as it makes you appear to be a more responsible, well-rounded consumer.
What's not included
Nowhere in the credit score formula does it include your age, income level, race, religion, sex, or marital status. It also doesn't matter whether you're employed, where you live, or whether you're seeking credit counseling.
Learn from the best
Maybe the best way to get started is to look at how those consumers with the highest credit scores got there. According to myfico.com, a "high achiever" refers to a consumer with a FICO score higher than 800.
The average high achiever carries a credit card balance of around $3,500. However, this amount represents less than 7% of their total credit limit. Also, the average credit account on a high achiever's report was opened 25 years ago. Ninety-six percent of high achievers have no late payments at all in the past seven years, which is essential, because it's the largest factor in the FICO formula.
Patience and responsibility will pay off
Your credit score won't improve overnight. Truly impressive credit scores take years of responsible credit use to achieve. There are no magic tricks that will cause your score to jump higher quickly, but if you pay consistent attention to your credit usage and applications and make it a point to pay your bills on time or even early, you'll see your score gradually rise over time until it's right where you want it to be.