As financial counselors we often get asked how a client can improve a credit score. Most of us aren’t privy to the complete super-secret formula, including me. But there are actions you can take to improve your credit score. Scoring models differ and can change a bit over time and we are focusing on the most common score, the FICO score. But here are 5 solid tips.
- The most obvious is to pay your bills on time. Payment history is about 35% of the weighting for the credit score. If you have old outstanding debt-the kind that is lingering, perhaps in collections – then coming up with a plan and addressing them can make a big impact as well.
- Keep the balances of revolving accounts (like credit cards) well below the utilization limit. The amounts owed weigh in at about 30% of the score. So generally you want to always keep the balance on an individual card less than 30% of the limit. I usually tell clients less than 25%. The same is true for the overall credit limit for all the revolving accounts combined. So 25% below each card limit and 25% below the total available credit limit. If you really want to make sure you are maximizing your score, perhaps when buying a home, you may want to consider keeping it even lower. Note that this does NOT mean you should keep a balance. It is better to fully pay off the statement balance each cycle and avoid paying interest. It does NOT hurt your score to pay off revolving accounts every month.
- Keep an account or two for a long time. Length of credit history weighs in at about 15%. How long ago you opened accounts and how recent any activity may be. Sometimes closing accounts is the right answer if you need to do that to control spending. But if you can keep your oldest credit card or two that can be beneficial to your score. Even if you have a long history with other accounts, closing an account can cause a short term drop in the score. Also, if you have cards you don’t typically use, you may want to consider using them occasionally. Even just a couple of times a year can be help this calculation. Just make sure you don’t forget to pay it off.
- Don’t ask for any new credit or debt. New credit weighs in at about 10%. So whenever your credit report and score are checked for getting new credit or debt it causes what is usually referred to as a hard hit or hard inquiry. This causes a small dip in your score. It often typically recovers in a few months. I usually tell clients to assume 6 months, although it depends on all the factors. One of those is if you actually take on more credit or debt, therefore impacting tip #2. Opening multiple new accounts in a short period of time can be particularly detrimental to the score.
- Check your credit report relatively frequently. There are quite a few ways to do this today, often for free from companies that want to sell you something else. As long as you are not overly susceptible to their marketing, their websites can often provide useful information. I am not talking just about the score, but the report that shows what is actually being considered to develop your score. Please note that many sources for a free credit score use the Vantage score or another scoring system rather than FICO. There are typically some differences in the scores. FICO is the most commonly one looked at by lenders. The government recommended site is annualcreditreport.com. You can get a free report from each of the big 3 credit bureaus once a year, every 365 days. One way to approach this is to check a different bureau every 4 months. You will NOT get a free credit score this way. Look over these reports carefully to find errors and then take action to correct them as needed.
These tips can help you maximize your score. If they don’t seem to be working, then you may want to consult a financial counselor or coach to help you look over your particular situation. One thing to remember is that taking on more credit or taking on debt just to improve your credit score is often an unwise move. If you keep these tips in mind and follow a relatively normal progression in your life then the high credit score can just develop. I was going to say develop naturally, but there is nothing natural about it.
Keep moving forward in your money journey.
Gerald Zeigler, MBA, AFC, EA