Manage your credit accounts responsibly to increase your credit score.
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Credit scores serve as one of the most important factors in determining whether a lender will extend credit to you and what your interest rate and finance fees will be. Higher credit ratings indicate a lower risk, which lenders look at favorably. Understanding your credit score and the role it plays is the first step to increasing the score and building a sound financial future. FICO scores are the most commonly used scores, which are based on a model created by the Fair Isaac Company.
Step 1
Order a copy of your credit report along with your FICO score so you can view the information together, as your score is directly derived from the information on your report. Annualcreditreport.com is the official website where you can order all three of your credit reports once per year for free. Each credit reporting agency, Transunion, Experian and Equifax, will have a different score based on what their specific report contains.
Step 2
Look at your score. FICO uses a rating that ranges from 300 to 850, with 850 being the highest score you could possibly have. Ratings scored at 599 or below are considered high risk, while scores between 600 and 719 are considered fair. 720 and above is considered good and typically earns the best rates when borrowing or financing.
Step 3
Pay attention to your payment history. Thirty-five percent of your score depends on your payment history. Late payments decrease your score, while on-time payments increase it. The older the payment history is, the less of an impact it has.
Step 4
Calculate how much of your available credit you're using. Thirty percent of your score depends on the amount you owe versus how much credit you have available. Keeping your balances to less than 50 percent of your available credit will result in a higher FICO score.
Step 5
Assess the history of your accounts. Fifteen percent of your score is determined by the length of your credit. The longer you have positive credit history, the higher your score. An account that has been open for nine years contributes more to your score than an account that has only been open for one year. It's possible to have a good score without having years of credit history under your belt.
Step 6
Consider new accounts carefully. Ten percent of your score is determined based on new accounts, such as having your credit pulled for new credit and the amount of new accounts you've opened. FICO advises shopping for a loan over a short period of time, such as 14 days, so the inquiries on your credit count as one rather than several.
Step 7
View the types of accounts you have, such as revolving credit cards, retail credit cards, auto loans, bank loans or a mortgage. The remaining 10 percent of your score is calculated based on various factors, including the type of credit you have. Diversifying the type of credit you have can increase your score since it shows you can handle different types of credit responsibly.
Step 8
Write dispute letters to the credit bureaus and creditor if there are any mistakes listed on you report. False or incorrect negative information can have a huge impact on your score.
Tips & Warnings
- Don't close your old accounts in hopes of increasing your score. Instead, leave them open and charge something every couple months to keep the account active, and then pay it off.
- Information, whether negative or positive, stays on your report for seven years. Some information, such as bankruptcies or judgments can stay on your report for up to 10 years.
References
Resources
Photo Credits
- Jupiterimages/Comstock/Getty Images
