Ways to Improve Your Credit Score

The average credit score in the U.S. is currently at 714, a number that has been rising over the past four years. What if you want to raise yours, too? Fortunately, there are things you can do now to help nudge that number upward.

Since having good credit can help you get better rates on loans and mortgages, as well as show that you've been responsible with your finances, it's worth putting in the effort. Here are three ways to improve your credit score over time.

3 ways to boost your credit score 

First, you should know that credit scores aren't updated in real-time. Any action you take today won't be reflected on your score for weeks or even months. Some actions won't affect your score more than a few points, while other actions may cause a dramatic change in three months or less.  Here are the things you can do to both positively affect your score and help you work towards a better financial position over time.

1. Lower your debt

While it may be the most difficult to do, especially if you are already on a tight budget, paying off credit cards and loans can have a positive influence on your credit score. There are a couple of reasons why:

    •  Paying off debt adds to your history of on-time payments, a factor that makes up 30% of your FICO score. It may also lower those minimum payments, making it easier to pay each month. This is a win-win if you want to avoid late payments due to financial difficulty.

    •  Paying off debt lowers the total amount of debt owed compared to what's available. This ratio, known as your debt to income or utilization ratio, should be kept under 30% for the best score. (Even lower is better, too.) Since your utilization ratio accounts for 30% of your FICO score, this can have a big impact.

Pro tip: If you have a lot of debt and can't make a big enough payment to put a very big dent into it, consider paying off a card or loan with just a little left all the way to zero. This will show up as a paid tradeline in your credit history and can help bump your credit score a bit with just one payment.

2. Don't open new lines of credit

Length of credit history is another factor in a credit score. It considers how long each account has been open, as well as the age of your oldest and newest accounts. If you haven't had credit for very long, you will likely have a string of newer accounts, which may signal to lenders that you don't have enough experience to prove your creditworthiness.

Because the only way to take advantage of this factor is to wait for your accounts to get older, opening up a new line of credit can set your progress back. Unless you absolutely need credit, avoid lowering your average age of accounts. Don't impulsively apply for another card or loan.

3. Apply for new credit wisely

What if you need to open a new credit card or loan? There are things you can do to make the new account work in your favor, and it can even help you boost that credit score.

First, consider the type of account you are opening. If you already have credit cards, they are considered revolving accounts, and they are just one type of credit. Mixing things up a bit with an installment account, like a car loan or personal loan with a set end date and payment amounts each month, can help your credit score by contributing to what FICO calls a credit mix. Having a little of this and a little of that can account for 10% of that FICO score.

Finally, any time you open a new account, you are getting access to more credit. That can be a good thing if you don't charge it all up. In fact, if you open new credit and don't use much (if any), you may see your credit score go up through a better utilization score.  

Here's one example of how it could work:

If you already owe $4,000 on $10,000 of credit cards, you will have a utilization ratio of 40%. By opening a new $5,000 credit card account, you will now have access to a total of $15,000 in credit. If you don't charge more to that new account, you will only be using 27% of your total amount, a much better utilization ratio than the 40% you had before. 

What happens if you do need to spend on that new credit card? Just be sure to pay it off right away or pay the same amount on one of your older credit card accounts. The goal is not to get deeper into debt but reduce it over time while building your score.

Personal finance is still very personal

Remember, there are many ways to improve your credit score, but not all will work for you. By setting larger personal finance goals than simply "boost my score," you can help ensure that the steps you take to raise your credit score won't derail you from your overall plans. Seeing the big picture is essential so that when your credit score is where you want it to be, you are in a great position to act on your financial goals.

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