How to raise your credit score

Your credit score is a numeric representation of how you handle credit transactions, based on information in your credit report. Once you know how your credit history affects your credit score, it’s time to learn how to improve your score. By understanding which types of debt and other financial actions make the most impact, and by tailoring your priorities to those actions, you can take more control of your credit score.

How to raise your credit score: Four money moves

1. Get a credit card. One of the ways to establish and build your credit score fast is to get a credit card, use it, and pay it off regularly. Credit cards help your credit score for several reasons:

• Your payment information is reported each month, helping you to establish a credit history quickly.
• Paying off the balance each month demonstrates financial discipline and tells potential lenders that you’re someone who honors your financial obligations.
• By keeping your credit card balance low, you increase your credit score. How much of your credit line you use counts for 30% of your FICO credit score. Pay off your card each month for best results.

2. Use different types of debt. You don’t want to get bogged down with debt, but paying attention to the types of loans you have can help you raise your credit score. About 10% of your FICO credit score is based on your credit mix:

• Revolving credit. Revolving credit, like credit cards, remains open and usable up to a maximum balance. As you pay down your balance, you have more room to spend.
• Installment credit. These are loans with a fixed payment term, such as car loans, personal loans, and mortgages.

If you need a loan to buy a car or home, having one of those loans in addition to a credit card can help you raise your credit score.

3. Make your payments on time and in full. One of the best ways to build and maintain good credit is to make all your payments on time and in full. A missed or late payment can immediately lower your credit score. The higher your credit score is to begin with, the bigger the impact of a missed payment.

Even if your on-time payments aren’t reported to a credit bureau, missed payments can affect your score. For example, your monthly gym membership payment probably isn’t helping raise your credit score. But if you miss payments or don’t cancel correctly, the gym can report these negative items and that can lead to a drop in your credit score.

Although the credit bureaus don’t publish their exact credit score calculations, a single missed payment could lower your score by as much as 100 points—and that payment stays on your record for seven years.

4. Keep your credit card accounts open. Do you have old credit cards you rarely use? You might think canceling them will help your credit score, but it’s likely the opposite. Open credit card accounts help you in two main ways:

• Better credit utilization score. Your credit utilization score (30% of your FICO credit score) measures how much available credit you’re using. Once you close a credit card, that gets rid of available credit. Let’s say you have two credit cards, each with a $3,000 limit, for a total limit of $6,000. One card has a zero balance, and you haven’t used it in several months. You use the other one for all your monthly expenses and pay it off at the end of each month, but its average balance during the month is $1,500. Your utilization is 1,500/6,000, or 25%. But if you were to close the other card, your utilization would double to 1,500/3,000, or 50%.
• Longer credit history. The longer your credit history, the better your credit score. Did you open a low-limit credit card at a clothing store in the mall back when you were a teenager? Keep it open. Closing a credit card with a long history will shorten your overall credit history.

What debt affects your credit score?

Credit scoring formulas change regularly, and not all debt has the same impact. For example, medical debt has less of an impact on your credit score, and—unlike other types of credit blemishes—once an outstanding medical debt is paid or resolved, it will be removed from your credit report.

A debt that’s been referred to a collection agency (or collections department) is treated differently depending on how it’s reported. For example, if you’ve agreed to a settlement and you stick to the repayment plan, you’re likely to be listed as “paid as agreed,” which has a less negative impact than simply having a collections account reported.

Not all creditors report to credit bureaus. Double-check to make sure your lender or creditor is reporting to the bureaus if you want your on-time payments to help raise your credit score.

And remember: You’re entitled—per federal mandate—to receive one free credit report each year. Visit AnnualCreditReport.com every year and ensure everything checks out. Errors do occur, and if you think your credit score is being dragged down by a reporting error, you can usually get it fixed by contacting the lender who submitted the incorrect data.