A good credit score matters. Here’s how to build and improve yours (2024)

Thanks to record-high inflation and rising interest rates, it’s becoming tougher to keep debt at reasonable levels and maintain good credit. In fact, total consumer debt reached a record $17 trillion in the first quarter of this year.

Even so, the average FICO credit score in the U.S. was 714 as of 2022, according to data from Experian. That’s considered “good” based on FICO’s credit score ranges.

But if your score is lower, don’t stress. There are a few steps you can take to improve your credit score—or even build one from scratch. Here’s how.

Understanding your credit score and how it works

Your credit score is a numerical representation of your history with borrowing and repaying money. It’s a three-digit number based on the information contained in your credit reports, which are maintained by the three main credit bureaus: Equifax, Experian, and TransUnion.

The most common scoring models—FICO and VantageScore—both range from 300 to 850. Experian’s senior director of consumer education and advocacy, Rod Griffin, compares a credit score to a grade received in school. “Your credit score represents the quality of your credit history, like a grade represents the quality of the work you did,” he explains. “Like a grade on a paper, it helps lenders predict the likelihood that you will repay a loan as agreed.”

The higher your credit score, the more trustworthy you are in the eyes of lenders. A good score will give you higher approval odds when you apply for a loan or credit card, as well as the best interest rates and terms. On the other hand, a low credit score makes it harder to get approved for financing at affordable rates. It can also prevent you from getting approved for an apartment, utility account, cell phone plan, and more.

How your credit score is calculated

Credit scores are based on a number of factors, and the exact algorithms used by scoring agencies are largely proprietary. Still, we know that when it comes to FICO scores, the model used most often by lenders, there are five general categories of metrics, according to John Ulzheimer, president of the Ulzheimer Group and founder of CreditExpertWitness.com.

In general, FICO scores are based on the following:

  1. Payment history (35%): This examines whether you’re paying your bills on time, and is the most heavily weighted factor.
  2. Amounts owed (30%): This is how much debt you owe in relation to the total amount of credit extended to you.
  3. Credit history (15%): The length of time you’ve been using credit as well as the average age of your accounts make up your credit history.
  4. Credit mix (10%): This considers the types of credit you have, including revolving credit (such as a credit card or home equity line of credit) and installment loans (such as an auto loan, student loan, mortgage, et cetera).
  5. New credit (10%): Finally, the amount of new applications and credit accounts you have on your credit reports will affect your score.

How to build your credit score

To build your credit score, you first need to establish your credit reports.

Credit reports are created using data such as your personal information (name, address, Social Security number, employment history, and date of birth); your past and existing credit accounts, known as “tradelines” (credit cards, mortgages, car loans, and student loans); and public records (court rulings, owed property taxes, and bankruptcy filings). This information is collected independently by the three major credit bureaus, which then compile it into your credit reports. Note that because each bureau collects and reports data separately, there could be discrepancies between your reports.

According to Experian, you’ll need at least three to six months of credit activity on your reports before a credit score can be established. If you’re not sure what you can do to create that activity, here are a few ideas.

1. Apply for a credit card

Griffin says it's good to have one or two credit cards to build your credit score, as revolving credit accounts tend to be weighted more heavily by credit scoring agencies.

“Unlike an installment loan—like a car loan—where you're told you're going to pay this amount on this day every month until it's paid off, with a credit card, you decide how much you're going to charge, and you decide how much you're going to repay each month,” Griffin says. That “free will,” he adds, gives lenders more insight into how you will make borrowing and repayment decisions.

It is important to note that you often need good credit to get approved for a credit card. So if you don’t have much of a credit history yet, or you can’t get approved, you can opt for a secured card instead. These cards are designed for people with no credit or bad credit. You pay a small deposit upfront, which serves as your line of credit and collateral if you fail to make your monthly payments.You charge expenses to the card and pay off the balance, just as you would with a traditional credit card. That payment activity is then reported to the credit bureaus. After several months of using your card responsibly, you may even get upgraded to a regular credit card.

2. Get added as an authorized user

If you don’t want to risk racking up debt with a credit card, you can consider being added as an authorized user on someone else’s card instead. This allows you to benefit from the primary cardholder’s credit card activity (assuming they keep their balance low and make payments on time). As an authorized user, you don’t have to actually use the card to benefit. Plus, you have no liability when it comes to making payments.

3. Open a credit-builder loan

Credit-builder loans are also designed for borrowers with low or nonexistent credit scores. Often found at credit unions, these “loans” allow you to borrow a small amount (usually around $1,000) and then make payments toward the balance. However, instead of receiving the loan proceeds to spend as you like, they’re placed in a savings account and held there until the loan is paid off. Once the loan is repaid, you receive your money back, minus any fees. As long as you make your payments according to the agreement, that positive credit activity is reported to the credit bureaus.

How to improve your credit score

Maybe you already have a credit score, but it’s not as high as you’d like. Ulzheimer says there are two different approaches to improving your credit score, and both stem from different circ*mstances.

If you’re looking to improve your credit score from a lower range, that means you did something to bring it down that needs to be fixed. “The path to a higher score depends on why your score is lower in the first place,” Ulzheimer says. “We don't all end up with lower scores for the same reason, and therefore, we don't all do the same things in order to rehab our scores.”

If your credit score is lower because you’ve missed payments, for example, you’ll need to consistently pay your bills on time and in full to improve your score. If your credit score is lower because you maxed out a credit card, paying down that balance will help your score grow.

If you’re simply looking to improve or maintain a good credit score, it’s a matter of continuing to do what you’ve been doing. “If you're doing all the right things—keeping those balances low, paying in full—it gets really boring because all you have to do is the same thing over and over again,” Griffin says.

Whether you want to build up a bad score to good, or keep growing the great score you have, there are a few steps you can take.

1. Check your credit reports for errors

Regularly checking your credit reports is key to making sure that your personal and account information are correct, as errors can bring down your score. You can request a free copy of your credit report from all three major credit bureaus at annualcreditreport.com.

If you do find an inaccuracy, you can dispute the error with the bureau reporting it. Common errors to watch out for include having your name misspelled, an incorrect account status (like being reported as late or delinquent when it’s really in good standing), or the wrong outstanding balance.

2. Pay your bills on time

As the most heavily weighted credit score factor, paying your bills on time is critical to building a good credit score. According to data from FICO, missing just one payment can cause your score to drop as much as 180 points, depending on how late the payment is and the overall health of your credit. If you have a severely delinquent account that's been sent to collections, bringing that account current can drastically improve your score as well.

3. Keep your credit utilization low

The amount of credit you use in comparison to the total amount of credit extended to you is known as your credit utilization ratio. Since “amounts owed” accounts for 30% of your score, keeping your utilization low will go a long way toward benefiting your credit score. That’s especially true for revolving credit accounts, such as credit cards.

For example, say you have a $5,000 credit limit on your credit card and carry a $2,500 balance. That’s a 50% credit utilization ratio, which isn’t ideal. Paying your balance down to $500 would lower your utilization to 10%—much better.

For an extra boost, you could consider asking your credit card issuer to increase your credit limit. Raising your credit limit while your balance remains the same translates into a reduced credit utilization ratio overall. Still, Griffin cautions against asking for an increase—it can make it easier to accumulate more debt or use the increased limit to get around paying down the balance. So only use this strategy if you’re confident you can keep your debt levels low.

4. Limit new credit applications

Applying for new credit can negatively affect your credit score because it results in a hard credit inquiry. This means a lender pulled your credit report to review it while evaluating your application. One or two hard inquiries may cause your credit score to drop slightly, but many within a short period of time can cause more damage; it’s a red flag to lenders that you may be desperate to borrow money.

if you do apply for a credit card or loan and get rejected due to your credit, take a beat before reapplying. The lender is required to send you a letter explaining what factors, specifically, caused that rejection. You can then use that information to improve your credit score before applying again.

Keep in mind that opening too many new accounts can also negatively impact your credit score because it lowers the average age of your total accounts. So to preserve your credit score, limit new credit applications when possible.

The takeaway

Having a good credit score is important for many reasons. Good credit allows you to borrow money at affordable rates, and gives you greater financial opportunity in general, according to Griffin. “It helps you access lower cost financial tools, [and] a strong credit history helps you break out of cycles of predatory lending,” he says. Plus, it may be a deciding factor when applying to rent an apartment, open a utility account, and more.

Using credit wisely, including paying your bills on time and keeping your overall debt to a minimum, are great ways to grow a strong credit score. But if you have limited experience using credit, there are several tools available to help you establish a score, too. Either way, it’s important to consistently work on building a good credit score and ensure it remains in good shape.

“It's about giving yourself a financial advantage, and using it to your gain, as opposed to seeing it as a barrier,” Griffin says. “So if you have a good credit report, good credit score, it's empowering.”

A good credit score matters. Here’s how to build and improve yours (2024)

FAQs

What is the #1 way to build a good credit score? ›

Pay bills on time and in full

In fact, payment history is the most important factor making up your credit score. Your credit score considers whether you make payments on time or late and if you carry a balance month to month or pay it off in full.

What are 3 things you can do to improve your credit score? ›

Ways to improve your credit score
  • Paying your loans on time.
  • Not getting too close to your credit limit.
  • Having a long credit history.
  • Making sure your credit report doesn't have errors.
Nov 7, 2023

How to get a 720 credit score in 6 months? ›

15 steps to improve your credit scores
  1. Dispute items on your credit report. ...
  2. Make all payments on time. ...
  3. Avoid unnecessary credit inquiries. ...
  4. Apply for a new credit card. ...
  5. Increase your credit card limit. ...
  6. Pay down your credit card balances. ...
  7. Consolidate credit card debt with a term loan. ...
  8. Become an authorized user.

What are the 5 C's of credit? ›

The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.

How to raise your credit score 200 points in 30 days? ›

How to Raise your Credit Score by 200 Points in 30 Days?
  1. Be a Responsible Payer. ...
  2. Limit your Loan and Credit Card Applications. ...
  3. Lower your Credit Utilisation Rate. ...
  4. Raise Dispute for Inaccuracies in your Credit Report. ...
  5. Do not Close Old Accounts.
Aug 1, 2022

What habit lowers your credit score? ›

Late or missed payments can cause your credit score to decline. The impact can vary depending on your credit score — the higher your score, the more likely you are to see a steep drop. Late or missed payments can also stay on your credit report for several years, which is why it is extremely important to avoid them.

What brings your credit score down the most? ›

5 Things That May Hurt Your Credit Scores
  • Making a late payment.
  • Having a high debt to credit utilization ratio.
  • Applying for a lot of credit at once.
  • Closing a credit card account.
  • Stopping your credit-related activities for an extended period.

Should I pay off my credit card in full or leave a small balance? ›

Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt.

How to get 800 credit score? ›

Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.

How to rebuild credit fast? ›

8 ways to help rebuild credit
  1. Review your credit reports. ...
  2. Pay your bills on time. ...
  3. Catch up on overdue bills. ...
  4. Become an authorized user. ...
  5. Consider a secured credit card. ...
  6. Keep some of your credit available. ...
  7. Only apply for credit you need. ...
  8. Stay on top of your progress.

How can I raise my credit score 100 points overnight? ›

10 Ways to Boost Your Credit Score
  1. Review Your Credit Report. ...
  2. Pay Your Bills on Time. ...
  3. Ask for Late Payment Forgiveness. ...
  4. Keep Credit Card Balances Low. ...
  5. Keep Old Credit Cards Active. ...
  6. Become an Authorized User. ...
  7. Consider a Credit Builder Loan. ...
  8. Take Out a Secured Credit Card.

How to raise fico score fast? ›

Reduce the amount of debt you owe
  1. Keep balances low on credit cards and other revolving credit: high outstanding debt can negatively affect a credit score.
  2. Pay off debt rather than moving it around: the most effective way to improve your credit scores in this area is by paying down your revolving (credit card) debt.

What is the highest possible credit score? ›

According to research by credit bureau Experian®, a score above 760 could qualify you for the best interest rates. Read on to learn more. Generally speaking, the highest credit score possible is 850, according to the most common FICO and VantageScore credit models.

What is a good credit score? ›

There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.

What are the 5 Ps of credit? ›

The document discusses the Five Ps of Credit - People, Purpose, Payment, Plan, and Protection - as a framework for evaluating credit risk when considering a loan.

What is #1 factor in improving your credit score? ›

1. Payment History: 35% Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores.

How can I raise my credit score by 1? ›

Paying your accounts regularly and on time will improve your score as you build a credit history. Missed payments, defaults and court judgments will stay on your credit report for six years. However, the impact of any missed payments or defaults will likely reduce as the record ages.

What is 1 way to start earning a credit score if you don t have one? ›

Becoming an authorized user on a family member's or friend's credit card is one way to build credit that doesn't involve applying for your own credit card. As an authorized user, you'll be added to the primary cardholder's account and get your own card you can use to make purchases.

How to increase credit score 100 points in 1 month? ›

Here are 10 ways to increase your credit score by 100 points - most often this can be done within 45 days.
  1. Check your credit report. ...
  2. Pay your bills on time. ...
  3. Pay off any collections. ...
  4. Get caught up on past-due bills. ...
  5. Keep balances low on your credit cards. ...
  6. Pay off debt rather than continually transferring it.

References

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