How do I boost my credit score?
I find credit scores to be a very polarizing topic. “Polarizing” might not be the right word, as it suggests that people either love or hate credit scores, and that’s not really the sense I tend to get. I think everyone thinks they’re a pain and generally administered by companies that are difficult to reach if something goes wrong on your credit score and woefully unprepared for problems, as evidenced by the Equifax data breach back in 2017. Rather, I find that the polarization occurs in terms of people’s level of interest towards their credit score. To my eye, not many people check their credit score the recommended one time per year. People are either obsessed with their credit scores, as I happened to be during the time when I was buying my house, or largely apathetic and uncaring so long as they can go about their daily business. And it’s that last group that this is really targeted at, because if you’re obsessed with your credit score, you’ve probably already looked into how to raise it. But if you’re someone who has run into some trouble trying to buy a home or finance a car, then there are some great places to start so you can figure out how to boost your credit score.
To begin with, a credit score is a number assigned to you by a credit bureau, or a private company whose job is to rate how trustworthy of a borrower you are. That number is based on a number of factors that are then used by lenders, such as banks and credit unions, as part of the underwriting process to figure out if they want to lend you money or not, based on your ability to pay it back in the future. That’s how credit scores are supposed to work. So in order to figure out how to boost your credit score, what you really have to figure out is what makes up a credit score, where you have issues, and what actions need to be taken to resolve those issues.
Let’s start with the first piece – figuring out what makes up your credit score. It’s pretty straightforward, and here are the factors listed from most to least influential:
- Payment History – Do you have any missed payments in your past? How many? Are they recent or from years ago? Your past history of paying back money lent to you tends to be a good predictor of your future behavior. Lots of people may get into trouble at one time or another, so one missed payment isn’t the end of the world, but it is a negative mark, as it does suggest that you may have had trouble paying bills, if even for a month. Longer missed payment issues tend to represent bigger problems, and as such, they will result in larger reductions in your credit score.
- Current Balances and Amounts Owed – Maxed out all your credit cards and their credit limits? That’s going to hurt your score. Why? Because it suggests that if you have credit made available to you, you are putting yourself in danger of a gap in your payment history because you are borrowing the maximum amount allowed and not making a strong effort to reduce that amount or pay it off over time. I’ve had times where my credit usage has gotten up to almost 50% of my credit limit. Again, this stuff happens to most people at one time or another. And one month of high usage won’t hurt you very much. But consistently keeping your balances near the top end of your credit limit will significantly impact your score.
- Length of Credit History – Did you just open your first credit card or car loan this year? Well, you may have a great payment history and low balances, but you just don’t have much of a track record. And that matters to lenders. Not as much as your payment history or the balances outstanding, but it still matters. So it may take you several years to build a strong enough history to get your credit score up as high as you want it.
- New Credit – While you need to open new accounts to start building a credit history, new credit inquiries do negatively affect your credit score in the short-term. Why? Because until there is a proven track record of paying back those new accounts, they represent additional risk to lenders if you don’t pay them back. So your credit score is negatively impacted in the short term to account for the additional risk you’ve taken on recently.
- Types of Credit – This is the one that can be a challenge for people starting out. Effectively, lenders want to see that not only can you pay back a credit card bill every month, but also that you can pay back loans that are larger, such as car loans or mortgages. This makes up a relatively small portion of your score, but it does create an incentive to start borrowing for things like cars and homes to boost up your score.
So now that we’ve covered what goes into your credit score, let’s look at how you boost it. Each bullet above has some clear guidance for what can help your score:
- Make your payments on time. There isn’t any further explanation needed. Pay your bills when you need to.
- Don’t max out your credit lines. Show that you can responsibly handle credit that is given to you, and that you aren’t simply trying to pile up unpaid bills on a credit card or home equity loan.
- Get started in the credit marketplace early. When I was in college, my dad opened a single credit card in my name. The limit was low, and I was told to use it once a month and then pay off the balance at the end of the month. But I got started in the system at 18 years old, so that when I graduated college, I already had a four-year track record.
- Don’t open new accounts within 2 years of a big purchase. I know I said to get started with credit early. But if you have a big purchase coming up soon, try not to take on any other new credit within a couple of years of that purchase. It may help to boost you score a few points and potentially get you a lower rate on that loan.
- Do not take out a loan just for the sake of buying a car or house. Yup, this goes against trying to diversify into different types of credit. But this is also where I believe the credit scoring system tries to influence behavior too much. Diversity of credit makes up 10-15% of your credit score. It’s not worth reaching to buy a car or home on credit just so you can boost your score. If it happens naturally, that’s great. But I’ve seen people get into trouble trying to max out their score by taking out different kinds of credit when it’s not right for them. So unlike the previous four areas, where playing along responsibly can help you, be careful on this item.
Building good credit is a slow process.
But we’re really talking about employing good, basic financial principles in almost all of these cases. Pay your bills. Don’t borrow too much. Build a track record. Don’t get too aggressive when you think things are good. These aren’t just good guidelines for helping your credit. Their good guidelines for building a strong financial foundation to begin with, and they just happen to apply to boosting credit as well.