How to Improve Your Credit Score: The Complete Guide

What is a credit score?

It’s a score based off of the information in your credit report, ranging from 300 to 850, that dictates how well you have managed credit over the past few years.

Why is your credit score important?

Your credit score is crucial when financing your personal or business life. Lenders will review it to decide whether or not they are going to approve your loan, how much to lend you and what interest rates to put on the loan. The higher your credit score, the more likely you are to receive financing with better terms and rates.

In addition, lenders will look at your credit report as well. They won’t dig into the past too much since they are only interested in your current financial situation (only the payments made during the past 6 – 12 months) but they could if they wanted to because financials, either good or bad, will be shown in the report for six years from the date created.

If you have been late on payments lately or missed certain payments entirely, most lenders would either charger you a higher interest or decline your loan request altogether since they don’t want to risk lending money to an individual or business with poor financial records.

A good credit score will not only allow you to take on loans and other forms of financing but will also help you obtain life insurance at lower rates.

What information can be seen in a credit report?

The information on your credit report may change slightly with certain credit bureaus but in general, it will contain the following.

• Your personal name, date of birth and address.

• Number of pending and approved credit applications.

• Late or missed payments.

• Defaults or bankruptcies filed.

• Number of outstanding loans or balances.

• Total outstanding balance.

• The County Court Judgments that you have not paid on-time & much more.

Your credit report won’t take student loans into account. Some lenders may require you to submit additional information such as your salary, tax arrears, medical history and criminal records when applying for loans.

What’s considered as a good credit score?

Different credit reporting agencies have different opinions on what’s considered as a good credit score. Nevertheless, if you are able to get a good credit score from one of the well-known credit bureaus out there, you will most likely pass the screening process of your lender.

For instance, FICO, the most well-known credit reporting agency in the world, considers any credit score upwards of 670 to be good, whereas it’s 700 and upwards for VantageScore.

That being said, don’t assume the lender would approve your loan for a low interest rate just because certain credit bureaus consider your credit score to be good. They may look at factors that you didn’t account for as well.

How can you check your credit score?

You can check your credit score for free through websites of well-known credit bureaus such as Experian, EquiFax and etc.

However, to get a complete view of your credit report you may have to pay a small fee. Some bureaus may let you access both the credit score and report for free but will charge if you want to a paper version of the report to be filed to your personal address.

Some even offer subscription memberships to people who want a more up-to-date credit report and a more precise credit score.

Be sure to sign up only after confirming that there is a free trial period. Once you have gained access to the credit score and report, go ahead and pause the membership.

Why does my credit score vary?

Different credit reporting agencies may use different credit scoring models so it’s completely normal for your credit scores to slightly differ from one another. Those models decide what information should be prioritized when scoring and etc.

Besides, it’s up to the lender to decide which credit bureaus to report to and what information to submit. So if the lender decides not to report back to a certain credit bureau, your credit score from that bureau will be lower than the ones from other credit reporting agencies.

The most important credit score factors

There are many factors that influence your credit score but not all of them are given the same importance. Some are more influential and important than others.

After reviewing several credit scoring models, I came to the conclusion that payment history and credit utilization ratios are the most important factors that dictate your credit score.

• Payment history

Most likely the first thing lenders would look at to decide whether or not you are capable of making the loan payments on time.

If you have paid your bills and loan payments on time within the last six to twelve months, the lender will be more willing to approve your loan since you have a proven track record of being a responsible payer.

Making payments on-time every month will increase your credit score, whereas late or missed payments will negatively affect your credit score. This holds true for your utility payments such as rent, water, electricity, phone, internet and etc as well.

If there’s just too many payments to remember and handle manually, consider opting in for automatic payments where the can lender automatically deduct the monthly payable amount from your savings or current bank account.

The other option is to use a calendar app or software that will notify you about the payments you have to make on a certain date.

And if you are already late on some payments, prioritize on paying them back as soon as possible because the more time it takes for you to settle a late payment, the greater the negative impact will be on your credit score.

Don’t worry, even though late payments and delinquents are shown in your credit report for seven whole years, the impact they have on your credit score will decline and fade away over time as you make more and more on-time payments.

• Credit utilization ratio

Lenders often look at your credit utilization ratio to determine how good your decision making skills are when it comes to credit management.

The ratio is calculated by dividing the total credit card balance with the total credit limit across all your cards. The lower the ratio, the better.

Typically, an individual or business having a high credit score will often have a low credit utilization ratio. This means that they haven’t maxed out on their cards and most likely know how to make good long-term financial decisions.

Most lenders require the ratio to be 30% or less. If however your credit utilization ratio is higher, you must take the necessary steps to lower it by paying off credit card balances or keeping them to a bare minimum.

You may also consider opening up some new credit cards to increase the total credit limit available, and thus decreasing your credit utilization ratio. The downfall to this method is that there will be multiple hard inquiries on your credit score and report.

How long does it take to improve your credit score?

You can find so many articles and videos with clickbait titles such as “How to increase your credit score over night” and etc but they are just aren’t true. The build up of credit score is very slow and would require a significant amount of full on-time payments.

Even if you missed a payment, take the necessary steps to make up for it as soon as you can because the longer it takes for you to pay off a late payment, the greater the negative impact it makes to your credit score.

If you were planning engage in credit card stacking, be sure to hire a stacking lender so that you won’t end up hurting your credit score too much with multiple credit score pulls.

Those lenders know how to strategically submit credit card applications to banks while minimizing the number of requests made on your credit score and report.

Late payments, missed payments, loan defaults, bankruptcies and other negative financial records will appear in the credit file at least for six to seven years after the date of creation. After that, the old records will be deleted.

Should you hire a credit repairing firm?

You may have come across certain Facebook or YouTube ads featuring a company that claims to repair credit scores within a few days no matter how low it is.

This is false advertising because there is nothing an external company can do to hack your way up to the peak of credit scores. Only consistent on-time payments would help to increase your credit score.

Most credit repairing firms only offer advices regarding how to obtain your credit report for free and tips on how to improve your credit score.

Even this completely free article covers more things than that so stay as far away from those companies as you can or you will end up with more problems than you previously had.

Steps you can take to improve your credit score

• Set up payment reminders

It’s easy to forget the payment due dates when you have multiple loan and utility payments each month.

Most banks allow you to set up payment reminders through their online portal, assuming that you have access to their online banking services. It will send you an email or text message on the day where a certain payment is due.

If your bank does not offer such a feature, you could use apps such as Google calendar to keep track of all the payment due dates.

Forgetting to make the payments on time, especially County Court Judgement fines, will badly impact your credit score and would take you weeks or even months to get the old score back.

• Consolidate payments

One of the factors that influence your credit score is the number of outstanding loans and credit card balances you may have. The higher the number, the lower your credit score will be.

A solution would be to take on a larger loan with the sole purpose of paying off small loans and credit card balances you may have. This reduces the number of outstanding loans or balances, thereby positively impacting your credit score.

Don’t try to use multiple credit cards for payments. Keep one or two go-to credit cards.

• Keep old debt records

Most people think that bad debt, whether good or bad, hurts your credit score. This is not entirely true.

Yes, there will be a negative impact on your credit score if you had missed or paid late some payments back in the day, however, you are bound to have paid off the majority of those payments on-time, and that’s a plus.

So removing old debt records from your credit report will result not only in your bad records getting removed but also the good ones.

Besides, the more new on-time payments you make after a certain missed, late or half payment, the less impact that one payment will have on your credit score.

Trying to get rid of your old debt records just because of one or two bad payments is like re-trying the entire exam just because of one failed subject of lesser importance.

• Make use of credit cards

Here, I’m not talking about regular credit cards. I’m talking about credit-builder credit cards, which are designed specifically for people with bad or poor credit history.

When compared to normal credit cards, these cards have a very low credit limit but a very high interest rate.

You would be paying an APR of 30% or higher depending on the card issuer. By making your monthly loan and utility payments on-time each month using credit-builder credit cards despite the crazy-high interest rates, your credit score will go up.

Once you start using this strategy, your credit score will slowly but surely improve over time and when that happens you can gladly put aside the credit-builder cards and apply for loans and credit cards with more favorable terms such as higher credit limit and lower interest rate.

• Don’t hint at risk

The two things that negatively impacts your credit score more than late payments are missing payments entirely or suddenly paying less than what you agreed to pay each month.

If you did miss some payments, be sure to pay them off immediately because the longer they stay unfulfilled, the more your credit score depletes.

Your existing lenders may allow you to make half-payments for several months depending on your financial situation but that’s a straight up red flag for future potential lenders.

• Make use of joint accounts

If your credit utilization ratio is high, forming a joint account with your spouse, friend or family member who has a good credit score and history would increase your own personal credit score over time.

Conclusion

A credit score, once damaged, will take a lot of time and commitment to build up. Make it a habit to check your credit report often for any mistakes or fraudulent activity.

The only real working method of increasing your credit score is to make on-time loan and utility payments in full each month for the next several months.

This will slowly but surely increase the credit score. Besides, the negative impact of late, missed or half payments will gradually decrease over time as you make new on-time payments.

It’s the first thing lenders look at when extending loans and deciding what credit limits and interest rates should be offered. Not only that, it also influences how much you have to pay for life insurance and sometimes even landlords may request your credit score to guess what kind of a tenant you are financially.

Personally, for me, the best ways to increase your credit score is to keep your credit utilization ratio low and consolidate monthly payments by taking on a new bigger loan.

Do you have any questions regarding credit scores? Let me know in the comments section below.