Updated December 29, 2014

How to Improve Credit Score


Your credit score has the power to determine whether you get a credit card, a car loan, a student loan, or even whether you can rent an apartment. This means a bad score can negatively impact your life in a variety of ways. The good news is it's never too late to try and fix a bad score — even the lowest scores can be repaired.

Why Credit Score is Important

Many people don't realize the true value of having a good credit reputation. In many cases, a good credit score is worth more cash than getting a promotion at work.

The interest rate that consumers pay on loans usually depends on their credit score. The better the score, the lower the interest rate they pay to get a loan. In other words, people with higher credit scores can save a ton of money compared to people with bad credit scores.

While this fact translates into thousands of dollars of savings on credit cards, car loans, and personal loans, people with good scores will see the biggest and most obvious benefit from mortgages.

Consider the following: Today's mortgage rates are around 3.6% for a 30-year, fixed-rate loan. Only people with the best credit scores – usually at 720 or better – will qualify for this rate. Someone with a lower credit score – say, around 650 or below – will never get this rate on their own. Instead, if you have a lower but decent credit score, you will probably qualify for a rate of 5.6%.

What does that mean? For a 30-year mortgage of $300,000 at 5.6% interest, you will end up paying $320,005 in interest over the course of the loan. Yes, the interest paid is even greater than the price of the house itself.

If that same homebuyer had a higher credit score and locked in the 3.6% rate reserved for the most qualified applications, the interest paid on that same 30-year loan would come to only $191,016. In other words, by having a higher credit score, the buyer could save over $128,000.

That's a lot of money.

Tips on Improving Your Credit Score

So how do you improve your credit score? Three general rules will help you build up a solid credit history over time and ensure that you qualify for the best possible rate.

  1. Pay your bills on time – The most commonly used credit score, the FICO score, is calculated by analyzing several data points from your credit background. The part that carries the most weight is your payment history. If you are late paying your bills, your FICO score will go down. The later the payment, the lower your score drops – and the harder it will be to get your score back up. On-time payments, on the other hand, will make your score go up, so pay your bills on time – whether they are student loans, credit card loans, car loans, or home loans – to show you are responsible with credit.

  2. Manage your credit use – The second most important component of your FICO score is your credit utilization ratio. This is a simple calculation of how much credit you have available (in other words, your total credit limit), divided by how much you owe. The less you owe and the more credit you have available, the better your credit utilization ratio. To manage this ratio, make sure that you owe as little on your cards at any given time, and constantly seek to raise the credit limit on your cards. By raising limits and lowering owed amounts, your credit score will eventually climb higher.

  3. Be choosy when applying for credit – People who apply for too much credit are seen as a credit risk, so if you sign up for too many lines of credit (whether it’s credit cards, personal loans, or something else) in a year, your credit score will drop. As a rule of thumb, you shouldn't apply for more than five lines of credit in one year. The only exception is public student loans, which do not require a credit report. Private student loans, however, will register as an application for credit. Keep in mind, that FICO scores also take into account how long you’ve had credit and what kind of credit you have available.

It is a complex business, but paying your bills on time, refraining from maxing out your credit cards often, and selectively applying for credit will ensure your credit score gets as close to perfection as possible.

Don't forget to monitor your credit report. Checking your credit reports will not count against your score and will give you the opportunity to spot errors that may negatively affect your score.

Remember, a poor credit score doesn’t have to be a permanent obstacle to getting approved for credit. The keys to improving your score are committing to make payments on time (even if you haven’t in the past) and paying down your debt. Staying focused on these two goals will markedly improve your credit score, and the impact of past credit problems will eventually fade.

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