Along with a low debt-to-income ratio and a solid financial history, a higher FICO® score may help you secure better interest rates. A FICO score is a number that shows how good you are at managing money and paying back loans.
Boosting your FICO score is not an overnight process. Although it takes time, you can improve your credit score by focusing on the following factors.
- PAYMENT HISTORY: Your payment history is important. If you have missed payments in the past, get current and stay that way. Even paying a few days late can have a big impact on your credit history. If you have trouble making timely payments, consider setting reminders on your calendar each month or automating the process as much as possible.
- AMOUNTS OWED: If you owe a great deal compared to your available credit, that can have a negative impact on your FICO score – especially if the bulk of your credit owed is in the form of revolving credit accounts like credit cards. You can make relatively easy improvements by paying down your debt and keeping your balances low.
- LENGTH OF CREDIT HISTORY: It is better to build your credit history slowly and over time. Don’t go all in after opening your first credit account. At the same time, don’t close older accounts the first time something shiny and new comes along. Those older accounts show that you’ve developed long-term relationships with creditors, and that’s a great thing for your FICO score.
- CREDIT MIX: There are two essential types of credit. Asset-building credit, which is generally referred to as good credit. This credit is used to purchase homes or real estate, invest in businesses, and pay for education. The other type of credit is revolving credit accounts, including auto loans and credit cards. These accounts are generally referred to as bad credit.
You want more good credit than bad in your credit history. This shows a habit of living within your means and making investments in your future.
- NEW CREDIT: Avoid opening new lines of credit, especially if you plan to apply for a large amount of credit.
ADDITIONAL STEPS YOU CAN TAKE
Check your credit report. There are three major agencies that record credit scores and share them with lending agencies, employers, banks and insurance companies. You should check your credit report from all three agencies at least once per year to see if there are any errors, mistakes or signs of potential problems.
Dispute any errors. Removing errors from your credit report can greatly improve your FICO score in a relatively short amount of time. You must present your dispute in writing and the creditor (or collection agency) will investigate. Once the investigation is complete and the error is confirmed, it will be removed from your record and improve your score.
Negotiate with creditors. You may have had a period of unemployment or other financial hardship that caused you to miss payments or even go into collection. Ask creditors if they will remove the debt from your credit report or report it as “paid as agreed” on your credit report for prompt payment of the remaining balance.