Are you looking to purchase a new car or considering buying a house in the next few months? If the answer is yes, you’ll likely need to apply for a loan to make the purchase possible. It’s important to check your credit score beforehand to know what you can expect for the loan’s terms. Learn what you can do to boost your credit score; it may make getting a loan more accessible.
Many factors go into calculating your credit score. Taking small steps to raise your score can significantly impact your financial life for the better. Paying your bills on time, checking your credit report, and paying down debt are all things that can help to boost your credit score.
Why is boosting your credit score important?
A credit score is a three-digit number ranging from 300 to 850, depending on the scoring model used. Information in your credit report is used to calculate your credit score. It helps lenders determine the likelihood that you’ll be able to repay what you borrow.
Lending money is about managing risk, so the bank wants to know that if they give you a line of credit or a loan, you’ll be able to repay them. Banks use credit scores to determine your creditworthiness and if you’re a good bet for returning their money.
People with higher credit scores are considered lower-risk borrowers, making banks more likely to lend them money. Those with a lower credit score might be a greater risk since they may not have managed credit responsibly in the past or don’t have enough credit history to help the lender make an informed decision.
A high credit score can mean a lower interest rate on a loan, mortgage, credit card or other financial product. Credit scores can affect what you pay for insurance or whether a landlord will rent you an apartment. Some potential employers will even review a candidate’s credit score before making a job offer.
How is your credit score calculated?
There are multiple credit scoring systems, and two of the most common are FICO and VantageScore. Both systems use rankings to determine creditworthiness. Although the numbers vary based on your particular lender, they generally correspond to the following:
- 800-850: Excellent
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- 579 and below: Poor
A credit score is made up of different parts of your financial life. The factors that make up your credit score include:
Payment history: 35%
Paying your bills on time is usually the most significant factor in calculating your credit score. Your payment history helps the lender determine how much risk they’re taking, and even one late payment can drop your score.
To boost your credit score as high as possible, pay your bills on time every time. If you miss a payment, contact the lender immediately to request late payment forgiveness.
The amount you owe: 30%
This is often called your credit utilization rate or ratio. It’s the amount you owe across all of your credit accounts divided by your total credit limit.
The amount you owe on your various credit accounts doesn’t necessarily mean you are a high-risk borrower. However, it does factor into your credit score. If you use a lot of your available credit, a lender may interpret that as being overextended and consider you at a higher risk of default.
Lenders generally like to see a credit utilization rate below 30%. If you have $10,000 in available credit but carry a $1,000 balance, you’re using 10% of your available credit (1,000/10,000 = .10, or 10%). Comparatively, having a $3,000 balance on a $10,000 credit limit will bump your utilization rate to 30%, which will likely negatively impact your credit score.
Keeping your rate below 30% can demonstrate you know how to keep your spending in check and that you can handle the credit you already have.
Length of credit history: 15%
Although it doesn’t weigh as heavily on your score as your payment history or utilization rate, having long-standing accounts shows lenders you know how to manage your credit long-term. If you have an older credit account, consider keeping it open, even if you no longer use it. That way, you don’t shorten your overall credit history and accidentally reduce your credit score.
New credit: 10%
Whenever you apply for a new credit card or loan, the lender checks your credit with a credit inquiry. Credit inquiries can be hard or soft. Generally, only hard inquiries—like when your credit report is checked when you apply for a loan—affect your score.
Each hard inquiry lowers your credit score by a few points and can stay on your record for up to 24 months, even if you are denied credit or decide against taking the loan.
Types of credit you have: 10%
Having multiple types of credit, like revolving (credit cards), installment loans (like a car or student loan) and a mortgage, can show that you can manage various accounts responsibly. Having a couple of different accounts can help your score, but you don’t need one of each kind.
Can I boost my credit score quickly?
You can take action to improve your credit score. Though it’s important to remember that the amount of time it takes will vary based on your circumstances and where you’re starting from.
Credit scores are updated based on information received by the credit bureaus about once a month. That exact timing can vary because it depends on how often each creditor reports changes to the credit bureaus.
Those with a low score may see their scores rise faster than someone with a higher score. That’s because small actions like consistently paying your bills on time and reducing the total amount you owe factor more heavily into how your score is calculated. For someone who hasn’t maintained a good payment history, improving that will help boost their credit score in a few months. Meanwhile, someone who has consistently paid on time will have to use different strategies to help them increase their score.
How to boost your credit score
No magic bullet will raise your score instantly. Instead, you have to take small steps and work at them over time. To give you the best chance at boosting your credit score as quickly as possible, consider doing the following:
Pay your bills on time to boost your credit score.
This is the most significant factor in your credit score; even one late payment can drop your score quickly. Consider setting up automated payments for your credit cards and other bills to help ensure you never have a delinquent amount reported.
Fix errors on your credit report.
Review your credit report with all three national credit bureaus (Equifax, Experian and TransUnion) for mistakes, missing information, or signs of identity theft. If you discover an error or fraud, start a dispute to help remove it from your report as quickly as possible.
Lower your credit utilization to boost your credit score.
Reducing your debt can help quickly bump up your score. Keeping your utilization rate below 30% can help boost your credit score in as little as 30 days.
Pay your credit card more than once a month.
Paying your credit card weekly or biweekly can keep more of your overall credit available and help keep your utilization rate low. You may also pay less interest over time since reducing your balance reduces the interest charged. Do what works best for your situation, but consider making two or more credit card payments a month.
Consider a secured credit card.
If you’re building your credit history or trying to repair a low credit score, consider using a secured credit card. Secured cards are backed by a cash deposit, generally used as your credit limit. The card is used just like a standard credit card, and you make monthly payments to replenish the cash balance.
Each on-time payment can help boost your credit score. Just confirm that the card you pick reports all payments to the credit bureaus.
Bottom line for how to boost your credit score
While there are several actions you can take to boost your credit score, there is no overnight solution. Instead of trying to repair a ding to your credit score quickly, focus on maintaining a long record of paying on time and using your credit responsibly to help you raise your score.
Not only will this help you if the unexpected comes up, like having to purchase a new car quickly, but you’re setting yourself up for long-term financial success.
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