How To Improve Your Credit Score in 7 Easy Steps

When I first moved to America from Canada, I had to make some adjustments. I had to learn to measure by the imperial system instead of metric. I got coffee from Starbucks instead of Tim Hortons. And I had to rebuild my credit from scratch.

It took time and a lot of effort (much like figuring out the imperial system), but I eventually figured out how to build up credit score from sub-par to amazing.

So, whether you are newly creating credit, repairing bad credit, or you just want to maximize your credit score (which is a great idea!), I'm going to explain exactly how to improve your credit score.

Understanding Your Credit Score

Before I explain how to improve your credit score, let's just take a minute to review some basic facts about your credit score.

What is a credit score?

Basically, a credit score predicts the likelihood that you will pay off a loan on time. It's calculated using a mathematical formula called a scoring model, and they create your credit score from information in your credit report.

What affects the credit score?

Your credit score is based on five factors:

1. Payment history: Whether or not you pay off your credit card is 35% of your FICO® score, making it the biggest factor in determining your credit score.
2. Credit usage: Also called “credit utilization,” this refers to how much of your available percentage you use. It is 30% of your FICO® score, making it the second most important factor in deciding your credit score. I'll explain this more later.
3. Age of credit accounts: This includes the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores. It makes up 15% of your FICO® score.
4. Credit mix: People with high credit scores often carry a diverse portfolio of credit accounts, such as car loans, credit cards, student loans, and mortgages. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix makes up 10% of your FICO® Score.
5. New credit inquiries: The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders make when you apply for credit, affects 10% of your FICO® Score. Too many accounts or inquiries can indicate increased risk, and consequently hurt your credit score.

What is a good credit score?

In the U.S., ratings work like this…

• 800 to 850 is an exceptional score
• 740 to 799 is very good
• 670 to 739 is good
• 580 to 669 is fair
• 300 to 579 is poor

Why does my credit score matter?

Your credit score is used by lenders and other parties that are considering doing business with you to determine how trustworthy of a borrower or a renter you will be. Your credit score can affect your ability to rent, obtain a mortgage, secure a car loan, even your ability to gain utility service or employment.

A good credit report and score establish you as a trustworthy person to be in business with.

How To Improve Your Credit Score

All right, now that you understand the lay of the land, let's get into how to improve your credit score. And to help you implement these, I've rolled everything into a handy checklist, so you can follow it step by step and take action.

1. Review Your Credit Report

In the U.S., you're entitled to one free credit report a year from each of the three reporting agencies — Equifax, Experian, and TransUnion — and requesting one of these has no impact on your credit score. In fact, until April 2022, these reports are available weekly to help consumers manage their finances.

Using annualcreditreport.com is the quickest way to get your reports, but you can also request them by calling them or downloading a report request form and mailing it in.

Once you get the report, review it closely. You're going to look to make sure that everything you see on there is accurate as errors do happen. In fact, they happen a lot. A government study found that 26% of consumers have at least one potentially material error on their credit report.

You want to look for any accounts that are not yours or that you didn't authorize; incorrect, negative information; and negative information that's too old to be included. (Most negative information should be excluded after seven years. So, if you see anything that's older than that, you may be able to dispute it.)

If there's anything inaccurate, then you're going to…

2. Dispute Credit Report Errors

Some mistakes are simple mistakes, like a misspelled name or address. Or sometimes it happens because an account belongs to someone else who has the same name as you, but it's not actually your account.

Other errors are costlier, such as:

• accounts that were incorrectly reported late or delinquent
• debts that were listed twice
• closed accounts that are reported as still open
• accounts with an incorrect balance or credit limit

Federal law allows you to dispute inaccurate information on your credit report, and there is no fee for filing a dispute.

You can submit your dispute to the business who provided the information to the credit reporting company, and to the credit reporting company that included that misinformation on your report.

The Federal Trade Commission's website has information about how to dispute these errors on your credit reports, and the Consumer Financial Protection Bureau's website provides additional guidance on disputing information on credit reports.

3. Avoid Late Payments

Of the five factors that your credit score is based on, payment history has the biggest impact on your credit score. So always, always, always pay the minimum balance. Don't ever miss a payment or be late on a payment.

Ideally, pay your credit card off in full every month. If you miss a payment by 30 days or more, call your creditor immediately arrange to pay up and ask if the creditor will consider no longer reporting the missed payment to the credit bureau.

4. Apply for New Credit Sparingly

Every time you apply for credit, the lender does what is called a “hard inquiry” or a “hard pull” on your credit score. This means that a creditor has requested to look at your credit file to determine how much risk you pose as a borrower. Hard inquiries show up on your credit report and can affect your credit score.

Essentially, what's happening is you're going out there looking for more credit. Consequently, you become riskier to people who have already loaned you money because you're borrowing even more.

Be thoughtful about when you were applying for new credit and how you are planning to use it. Don't fall for those in-store promotions, where they ask if you want to apply for a credit card to save 10% on your Home Depot order today. It's probably not the best card for you long-term and it isn't worth the ding to your credit score to apply for the card.

5. Don't Close Unused Credit Card Accounts

This may sound a little counterintuitive, but closing unused credit accounts can negatively affect two out of the five factors that determine your credit score: your credit utilization and the length of your credit history.

Credit utilization is the percentage of your total credit that you're using, so if your total credit limit is $5,000 and you spend a thousand dollars on your card, your credit utilization would be 20%. If you spend $5,000 on your card, your credit utilization would be a hundred percent.

The lower your credit utilization, the better it is for your credit score. And this one really matters. It's the second biggest factor in determining your credit score. So, right behind never missing a payment, you want to make sure that you're keeping your credit utilization low.

When you close a credit card account, you are shrinking your available credit and your credit utilization will automatically go up even if you don't purchase anything new, because now your total available credit has shrunk.

The second factor that closing an unused account negatively affects is the age of your credit history. A longer credit history is better.

If you absolutely have to close credit accounts, close newer ones. Although, in general, it's better to keep credit cards open, even if you don't use them and they have a $0 balance. Just make sure to log into your account or look at your statement each month to make sure that your card hasn't been compromised and keep them somewhere safe. I don't even keep the cards that I don't use in my wallet.

Every six months or so, buy something on that card, and then make sure you pay it off in full. This will keep that credit account active and prevent the lender from closing your account.

I made this mistake with the first card I ever got in America. I didn't use it for two years because I had graduated to some better cards, and they closed my account without notifying me. My credit score took a huge hit because that was my oldest credit history, and I lost all of it when they closed my account.

6. Make Payments Throughout the Month

You don't have to wait until your bill is due to make a payment. Pay early. If you've put a big expense on your card, this helps keep your credit utilization low and improve your credit score.

A good credit utilization rate never exceeds 30%, and the lower it is, the better, so if you have a credit limit of $10,000, you should never use more than $3,000 at a time.

If you have to put a big expense on your card, go ahead and make a payment — even a partial payment — quickly so that your credit utilization doesn't ding your credit score.

7. Ask for Higher Credit Limits

Another way to lower utilization is to increase the amount of available credit that you have. Your credit utilization is calculated both on a per card basis and across all of your cards as a total.

Let's say you have card A, which has a limit of $6,000, and card B, which has a limit of $4,000. Your total available credit is $10,000.

You want your credit utilization to stay below 30%, which means not using more than $3,000 total. You also wouldn't want to spend more than $1,800 on card A or $1,200 on card B so that your utilization stays below 30% on each card individually.

If you increase your available credit and you don't spend more, you automatically lower your credit utilization, which will instantly improve your credit score.

Now, depending on your lender, they may do a hard pull to determine if they're going to increase your credit limit or not. You can ask them in advance if they will need to do this to help you determine if you want them to actually check. If they do a hard pull, this will usually lower your credit score by five to 10 points temporarily, but it will increase it over the long run because you have improved your credit utilization ratio.

However, this strategy does not work if your balance grows along with your credit limit. So do not do this strategy if you know, you'll be tempted to spend more money on your card. The possible bump in your credit score is not worth the risk of putting yourself further into debt.

Improving your credit score, it does take time, but it is possible. If you want to improve your credit score fast, just follow these principles.

Whew. I know that was a lot. So, I put these steps together into a free checklist for you. Because to be clear, just reading this article will not improve your credit score, but following the actions that I've laid out will.