Improve Your Credit Score

One number could stand between you and your dream house. It may seem unfair for one number to define you, but to many lenders, it does. Not only can that number determine whether you get a loan, it can dictate the exorbitant or reasonable interest rate attached to it. Insurance companies, landlords, employers and even utility companies routinely use the number to learn about you and your financial reliability.

Your credit score can dramatically affect your life, and, luckily, you hold the power to change it. Knowing how to improve your score has become an important skill in today's credit-dependent society. To learn how to improve it, we need to understand what it means and how it's calculated.

Your score is based on your debt history and your existing lines of credit. The companies you do business with report information about your account activity to credit reporting agencies, such as Experian, TransUnion and Equifax. The agencies gather your information and pull it together in a credit report. You are entitled by law to a free credit report once every 12 months. It's a good idea to take advantage of this opportunity, especially if you plan to apply for a mortgage soon. You can see it by going to AnnualCreditReport.com. With that report, the agencies calculate your FICO credit score, a three-digit number between 300 and 850 that is supposed to accurately assess and succinctly sum up your creditworthiness.

In the past, the agencies kept the method for determining credit scores secret, lest people try to manipulate their scores artificially [source: Curry]. Under pressure, however, they released the method they use to establish a credit score. Here's a list of the different factors and their weights, according to myFICO.com:

Payment history: 35 percent
Debt: 30 percent
How long you've had accounts: 15 percent
New accounts: 10 percent
Types of credit: 10 percent

For a fee, you can find out your credit score from the different reporting agencies. A score less than 620 might land you on a do-not-approve list, but a score greater than 760 could position you nicely for the best interest rates [source: Lankford, Weston,]. If you think your score might need a boost, there is one action you can take that will improve it the most. On the next page, we'll discuss what that is.

How to Raise Your Credit Score

Dozens of things can improve your credit score, but one thing helps more than anything else: always paying your bills on time. Because payment history makes up the biggest percentage of your score (35 percent), it makes sense that you should focus your attention on that factor.

If you are dismayed that this is not a quick fix, take heart: This strategy has short-term advantages. That's because your recent credit history actually carries more weight [source: Weston]. In other words, if you plan to ask for a loan in the next year, and you are late on a payment in the meantime, it will hurt your score more than a late payment from a few years ago [source: Sahadi].

In addition to paying your bills on time, you can bump up your score a few other ways. For instance, the amount of debt you have represents 30 percent of your score, so if you can pay down debt, you will give your number a significant boost. You also can try to lower the ratio of debt-to-credit limit. This means that you should keep your credit card balance below 25 percent of your credit limit [source: Lankford]. If you're worried about opening new accounts, ask your current credit card company to raise your limit. You also can keep the debt-to-credit ratio low by keeping old credit card accounts open, even if you aren't using them [source: Sahadi].

Keep in mind that reporting agencies make mistakes. Errors occur frequently, especially for the John Smiths out there or anyone else with a common name [source: Huddleston]. If you discover an error, you can dispute it and perhaps improve your score dramatically.

Late payments aren't the only thing that can drag your score down. Surprisingly, even unpaid parking tickets or library fines can lower it. Taking out new loans looks bad -- not only because it increases debt, but also you look desperate when too many lenders inquire into your score. However, if many lenders inquire within a short time (14 or 45 days, depending on the FICO formula used), the score counts this as one inquiry, as it's assumed you are shopping for a single loan [source: myFICO.com]. These are referred to as hard inquiries, and can only happen with your permission. Soft inquiries, on the other hand, such as looking into your own score do not affect the number.

Depending on your particular situation, there may be an even more effective way of improving your score. Understanding the process will help you make better decisions about your credit and help you to avoid costly credit counseling. Still have credit concerns? Visit the links on the next page.

Changing the Playing Field

Recent changes in the FICO formula make it tougher on those people who have repeatedly paid bills late, but easier on those with only a few blemishes on their record. The new grading system, known as FICO 08, is an effort to make credit scores more accurately predict whether someone will default on a loan. Other changes include granting more points to those who successfully carry multiple kinds of loans (e.g., mortgages, car loans and credit cards.) Although in the past, a parent could help jump-start the credit career of a child by listing him or her as an "authorized user" on a credit card, the new system does not reward this practice. However, lenders can choose which scoring method they want to use, and they don't have to switch to FICO 08. [Source: Kim]

What one thing will improve your credit score the most?

How to Raise Your Credit Score

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