How to Improve Your Credit Score by This Time Next Year

Your credit score is essential when it comes to borrowing money. Having a higher score can pave the way for you to take out a loan, make it easier to rent or buy a home, and even save you money in the long run. If your credit score isn’t where you want it to be, rest assured you can improve it.

Here’s what makes up a credit score, where to find yours, and some smart ideas on how to boost your credit score by this time next year.

How Credit Scores Are Calculated

There are three credit reporting bureaus—Experian, Equifax, and TransUnion—and each uses a different model to calculate your score. As a result, you have multiple credit scores, but they should all be reasonably similar to each other. Scores range from 300 to 850, and scores at or above 800 typically qualify you for the lowest interest rates.

While many behind-the-scenes details go into credit scoring, your scores are based on the following key factors, which may be weighted differently depending on the bureau doing the calculating.

• Payment history. This refers to whether you’ve consistently paid your bills on time.
• Debt ratio/utilization. This is how much debt you have in total as well as the amount of your credit line you are using. For example, you might have a credit line of $5,000 but only be using $1,000 of it.
• Length of credit history. This is the time that has passed since you established credit.
• Types of credit: Revolving vs. installment. Credit cards are an example of revolving debt, which is a type of debt that allows you to borrow money up to a limit, pay it back, and borrow again. A car loan or mortgage are examples of installment debts, which have a term and set monthly payment (though your mortgage payment can go up, even with a fixed rate).

This information is found in a credit report, which covers your credit accounts, collection items (such as missed payments), credit inquiries, and public financial records including bankruptcies and foreclosures.

How to Access Your Credit Score and Credit Report

Knowing your current credit score will help you set a clear, realistic goal for improving it. You can do a credit score check in a few ways.

• Your credit card company may offer you free access to your score, which you can access online or by checking your monthly statement.
• Credit score services, which may be free or come with a fee, are available online, such as Credit Karma (which works with Equifax and TransUnion).
• A credit or housing counselor trained by the U.S. Department of Housing and Urban Development can help you access your score.

You can access your credit reports for free at AnnualCreditReport.com. Despite the site’s name, you can access fresh data every week online. Bear in mind that these reports don’t contain your scores, so you must access those separately.

How to Improve Credit Scores Quickly

Whether you want to increase your score by hundreds of points or just a few, here are some strategies that can help you do it.

• Pay on time, every time. According to Investopedia payment history is the single biggest factor in your credit score. It tracks how you pay credit cards, store cards, student loans, and mortgages. To raise your credit score, pay all your bills on time every month. If you missed payments or paid late in the past, be patient. It takes time for the impact of those slipups to fade from your credit history. But the good news is that the older the credit issue, the less impact it has on your current score.
• Lower your credit utilization rate. How much money you owe—the second biggest factor in your score—includes credit utilization. This is the amount of credit you use compared with your total available credit. Keeping your credit utilization rate above 0% and below 30% is considered ideal. Your credit utilization rate tracks both revolving accounts and installment accounts but puts more weight on revolving accounts.
• Check your credit reports for errors. If you see one, ask to have it fixed. Errors are more common than you might expect. According to a recent survey from Consumer Reports nearly half of credit reports contained errors, and 27% of errors were potentially damaging to the individual’s creditworthiness.
• Increase your credit. You can ask your credit card company to increase your credit limit, but doing so could temporarily reduce your credit score. Also, be sure to keep your spending in check so it doesn’t increase along with your new, higher limit. If you spend more, you won’t lower your credit utilization rate.
• Be thoughtful about opening or closing accounts. Opening new credit accounts can increase or decrease your credit score. The impact is usually small, but even a few points of improvement could qualify you for a lower interest rate on a loan. If you’re going for every point, remember two things: Don’t close your oldest credit account. And avoid opening multiple new credit accounts in a short time.

Remember That Your Credit Score Is Only Part of the Picture

A higher credit score can make your financial life easier in many ways, but it’s typically just one factor lenders look at when making decisions about your credit. Others include your income and employment history. If you want to increase your credit score to reach specific financial goals, such as purchasing a home, buying a new car, or financing a home project, be sure to find out what lenders may require to qualify for those products.

What to Do Next

• Stay refreshed on the above credit score tips.
• Get your credit reports for free at AnnualCreditReport.com.
• Learn more about making sound credit decisions.