Boosting your credit score is a lot like going to the gym: it’s painful at first, requires consistency and patience, but is ultimately worth the (financial) effort.
The key is to develop or re-establish good spending habits, set realistic financial goals and stay the bill-paying distance during the long process of boosting or rebuilding your credit score.
Why does it matter? Achieving and maintaining a so-called healthy credit score gives you access to better interest rates on your mortgage, car, credit card or personal loan. A lower score limits the kinds of credit you can have access to because it signifies to a potential lender that you’re a bigger risk. (Related: Credit Card Debt: The Problem, Fixes and Prevention)
A credit score is derived from payment history, the amount of money owed, the account mix and the amount of available credit, said Ken Chaplin, senior vice president at credit ratings agency TransUnion, in a recent email exchange.
Credit scores can drop fast – one missed payment on a mortgage or credit card can knock a score down as little as 50 points or as much as 300 points, said Bruce McClary, vice president of communications with the nonprofit National Foundation for Credit Counseling, in an interview.
“Climbing out of a small hole could take more than 12 months,” McClary said. “Climbing out of a 300-point drop could take years.
“Over a 12-month period, people can adopt habits that increase their score by 50 points,” he said. “That’s a realistic goal if you are trying to make healthier changes.”
He said that a key threshold to focus on is the number 600: anyone with a score below 600 should focus on getting their score above 600.
That’s because scores in the 300 to 600 range are considered subprime, while a score of 601 to 660 is considered near prime, making the borrower seem like a better bet for creditors. Scores between 661 and 720 are considered low prime; scores between 721 and 780 are high prime; and scores between 781 and 850 are super prime.
The highest score is 850, but it doesn’t bring any special privileges you can’t already get in the super prime range, McClary said.
Credit tends to improve with age
As people age, they tend to take on greater debt in the form of mortgage payments, auto loans and even personal loans, not to mention credit cards. The ability to manage debt and improve credit scores also seems to increase.
To illustrate, TransUnion randomly sampled 10 million consumers from its broader database. It found, according to numbers supplied by Chaplin, that 32.1 percent of people aged 18-36 had subprime credit under 600; 26.2 percent of people aged 37-51 had credit below 600; 14.4 percent of people 52-69 had bad credit; and only 7.8 percent of people 70 and older had the lowest credit.
The numbers at the opposite end of the spectrum were reversed: only 6 percent of people 18 to 36 had super prime credit, or credit between 781 and 850; 31.2 percent of people between 52 and 69 and 16.5 percent of people between 37 and 51 had the best credit. Older Americans had the best credit overall: 46.2 percent of people 70 and older had scores between 781 and 850.
Specific tools to boost your credit score
The top priority for boosting your score is to know your score in the first place. While this seems obvious, most people don’t know their score. The top three credit rating agencies — TransUnion, Experian and Equifax — provide a free credit report once a year. Spread that out and you can check your credit for free almost once a quarter. Go to www.annualcreditreport.com to begin the process.
"Monitoring really helps," said McClary. "It's like when runners track their workouts to see how fast they are going or how far. You may not have to fix anything, but you can see how you're moving along toward your financial goal and make changes along the way."
This is particularly important if you need to correct errors on your report that are wrongly dinging your credit.
Committing to make future payments on time will also help, McClary said, since your payment history accounts for one-third of your credit score.
Keep the number of credit cards you have low — such as one for everyday purchases and one for gas. If you're going to swap out a card for one with a better promotional offer, don’t do it more than once a year, he said. Opening and closing a handful of accounts in a short period of time can temporarily lower your credit.
Have a diverse range of debt, showing you have been granted access to a variety of loans such as a mortgage, auto, student or personal loan is more beneficial than just having credit cards.
Stay well below your credit ceiling by keeping your balances at 20 percent or less of your assigned limit. For example, if you have a total credit limit of $5,000, keep your balance below $1000: having available credit that is unused helps lift your score.
If you pay off a card completely, shut down the account to reduce your number of cards, but only if that particularly account’s closure won’t have a big impact on your credit ceiling. For example, if you have four cards and one consists of 50 percent of your total credit ceiling, don’t shut that account down, even after you’ve paid it off; shut down one of the smaller ones.
If you have really bad credit or are coming back from a bankruptcy, get a “score builder card” or “secured credit card.” With these kinds of cards you make a cash deposit which the issuer holds as collateral. These essentially pre-paid credit cards require no credit check and can help you rebuild your credit. However, depending on the issuer, they can have higher fees and interest rates.
By contrast, pre-paid debit cards don't get reported to the ratings agencies and therefore don’t count.
If possible, get someone with good credit to be a co-signer and essentially vouch for you by putting you on their account and helping you build off their history. But be sure you can actually pay what you owe each month before doing this or you can hurt that person's credit history.
Finally, touch base with a credit counselor or financial professional if you're struggling as it's not just about building good credit, but maintaining it, McClary said. Scores are always tenuous, he said, and therefore you always want to practice good financial behavior.
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