When trying to improve your credit score, it can be tricky to know where to start. There are dozens of different types of credit scores out there, and each has its own unique formula to rate a borrower’s "creditworthiness."
We know that there are five main factors that contribute to your FICO score, one of the most popular scores used by lenders today: payment history, utilization rate, age of credit history, recent credit inquiries, and types of credit used.
Of these factors, if you are trying to improve your credit, there are two you should really focus on:
(1) Your payment history
(2) Your utilization rate
Payment history makes up 35% of your credit score.
Your history of on-time or missed payments is the single most powerful factor in determining your credit score. Any lender will want to know whether or not you’ve paid others who loaned you money on time in the past.
You’ll be rewarded for making consistent, on-time payments. A single late payment can take 60 to 110 points off your score.
Negative public record and collection information — like bankruptcies, foreclosures, debt collection lawsuits, etc. — are considered part of your payment history, too. Most negative information stays on your report for about seven years, although older blemishes and smaller amounts count less than newer marks or those with larger amounts.
Your utilization rate makes up 30% of your credit score.
Your utilization rate is simply how much debt you are using versus how much debt you have available. The lower your utilization rate is, the better your score will be.
Your utilization rate is calculated by adding up all of your credit balances and dividing the total by your total credit limit. For example, let’s say you have three credit cards with a total available credit card limit of $5,000.
You are currently carrying $50 on one card, $200 on the second card, and $250 on the third card. In total, you are using $500 of your available $5,000 credit limit, and your utilization rate would be 10%.
What’s a good utilization rate? Ideally, you want your rate to be below 30%.
Other Important Factors
The length of your credit history: 15%
The longer you’ve had credit, the better it is for your score. This is because of the assumption that with time, comes practice, experience, and, hopefully, wisdom regarding the use of debt.
You usually won’t even have a FICO score until you’ve had a line of credit for at least six months. FICO looks at the age of your oldest account as well as the average age of all of your credit accounts.
Types of credit you use: 10%
Your score will benefit if you carry different types of credit — installment loans, such as an auto loan, non-revolving debt, such as a mortgage or student loans, and revolving debt, such as a credit card.
Recent credit inquiries: 10%
Any time you apply for a new line of credit, it will appear on your credit report as a hard inquiry. If you open a lot of new credit in a short period of time, you’re sending a warning signal to the credit bureau. The FICO score will look at credit inquiries from the last 12 months.
That doesn’t mean that you shouldn’t shop around to get approved for the best deal possible. Multiple inquiries for a mortgage or auto loan are usually treated as a single inquiry if completed within a certain period of time (30 to 45 days, generally). In addition, when you are approved for a new credit line, it increases your credit limit, which affects your score more than an inquiry would dent it.
You can always check all three of your credit reports for free at AnnualCreditReport.com or use tools like Credit Sesame or Credit Karma to see a free version of your report, without hurting your score.
Many banks and money management tools, such as Mint, can also give you a free estimate of your FICO score.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.