By understanding the five factors that make up your credit score, you will be better equipped to improve your score:
> Your payment history – 35%. Do you make payments on time, are they late, or have you missed payments? Payment history is the largest determining factor of your credit score because it really represents how good of a borrower you are.
> Amount you currently owe – 30%. This refers to your capacity; in other words, how much of your available credit are you using? Borrowing less than 35% of your capacity will help to keep your credit score from being negatively affected. For example, if you have the capacity to borrow $20,000, you will want to only truly borrow less than $7,000 of that to show your responsibility of money management.
> Length of your credit history – 15%. The longer you have had credit available to you, the better. If you’re considering closing accounts, don’t close the ones you’ve had open for a long time; it is better to close the newer ones.
> Number of new accounts – 10%. Don’t open new accounts too rapidly, particularly if you have a short credit history. New accounts will lower your average account age, which could impact your score if you don’t have a lot of other credit information.
> Types of credit – 10%. It’s best to have a balanced mix of credit cards, retail accounts, installment loans, and/or mortgage.
So now that you know what helps to determine your score, let’s dive into how you can proactively increase your credit score.
1. Pay down your credit cards
The second biggest factor in determining your credit score is your capacity. By paying down on your credit cards, you are immediately increasing your capacity which will, in turn, drive up your score. For example, if you have a credit card with $10,000 in available credit on it and a balance of $5,000, you are borrowing 50% of your capacity. If you can pay down that card to say $1,000, then your capacity to borrow just increased…and so does your score!
2. Ask your credit card carrier for an increase in credit limit
In addition to paying down your credit card, another way to increase your capacity is to ask for credit limit increases. In many cases, credit card issuers will increase limits to customers with a good credit history. If you can’t secure an increase with your current card, consider opening a new credit card. Although a hard inquiry on your credit report can temporarily decrease your score, the additional borrowing capacity will outweigh the decrease, particularly since capacity is 30% weighting on determining your score.
3. Automate your payments
A few late payments is not an automatic score killer; however, if you are making late payments, then you may want to start automating your payments using online banking. Making on-time payments is one of the biggest factors to your score, so make it as easy as possible by establishing automatic payments.
4. Check your credit report
Make sure there are no late payments incorrectly listed and the amount owed for each account is correct. If you find errors, dispute them with the credit bureau. You have three FICO credit scores, one for each of the three bureaus: Equifax, TransUnion and Experian. You are entitled to one free report from each agency every 12 months. You can get your report online at annualcreditreport.com or by calling 877.322.8228.
Improving your credit takes time, but the financial rewards are high! If you would like a free credit score analysis and to get personalized recommendations, then let's get started.
