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12 Ways to Increase Your Credit Score

Matthew Frankel, CFP, The Motley Fool

Here are a dozen ways you could improve your credit, ranging from the obvious to some lesser-known credit hacks.
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Person holding a cell phone with a screen showing a credit score of 811

The FICO credit scoring formula is a closely guarded secret, but much of the methodology behind it is not. We know the general categories of information that make up the FICO formula, as well as the relative weights of each. While not everyone has the same credit issues, here are a dozen credit improvement tactics that could help you take your score to the next level.

1. Pay your bills on time every month

This is the most obvious way, but it’s also the most important, so it’s worth mentioning. The most important category of information in your FICO® Score, your payment history contributes about 35% of the total. In other words, there’s no more powerful way to increase and maintain your credit score than simply paying your bills in a timely manner, month-after-month, for a long period of time.

2. Pay down your credit card debt

The second most influential category of information in your FICO® Score is the amounts you owe, and revolving debts like credit cards can be a major drag on your score. This doesn’t necessarily refer to the actual dollar amounts of your debts -- after all, a $200,000 mortgage isn’t inherently worse than a $100,000 mortgage. Instead, the most important part is your debts relative to your credit limits or original loan balances.

For this reason, one metric to keep an eye on is your credit utilization ratio, which is the amount of outstanding credit card debt you have as a percentage of your available credit. For example, if you owe $1,000 on a credit card with a $4,000 limit, your utilization ratio is 25%. This is considered in the FICO methodology on both an overall and per-account basis, and experts generally agree that you should aim to keep yours under 30%.

3. Carrying a small balance could be better than none at all

While lower credit utilization is generally better, it’s also true that carrying a small balance can be better than none at all. While this may sound counterintuitive, think about it this way -- lenders want to see that you not only keep your debts low, but that you can be responsible enough to actively use and manage your credit. If you aren’t using your credit at all, how does a lender know you can use it responsibly?

In fact, the average FICO "high achiever," or consumer with a credit score of 800 or higher (average of 826) uses 5% of their total revolving credit limits.

4. Make an extra loan payment

Continuing on the "amounts you owe" category, this also considers your installment debts (aka loans). Specifically, as you pay down your loan balances, it can be a major positive catalyst for your FICO® Score.

So one way to give your credit score a quick boost is to make an extra loan payment (or more) in order to accelerate your repayment. The best part is that when it comes to installment loans, such as mortgages, credit cards, or personal loans, any extra amount you pay gets applied entirely to the principle, and therefore can help your credit score even more than a standard payment can.

5. Keep your starter credit cards open

It’s a common misconception that closing unused credit cards is a positive catalyst for your credit score. In reality, the exact opposite is generally true.

Here’s why. Let’s say that you have two credit cards -- one that you use all the time with a $2,000 balance and a $5,000 credit limit and another with a $3,000 limit that you rarely use. At the moment, your $2,000 balance only represents 25% of your $8,000 in total available credit. If you close the unused card, that same balance now represents 40% of your available credit.

Closing an unused credit card can also hurt you in the "length of credit history" category, which accounts for 15% of your score. Among other factors, this considers the average age of your credit accounts, and the ages of your individual accounts, so if you close an older credit card, it can reduce these time-related factors.

To be clear, there are certainly some good reasons to get rid of old credit cards. For example, if your unused credit card has an annual fee and you aren’t taking advantage of the benefits, it can be worthwhile to cancel and absorb the small credit score impact.

6. Talk to your collectors

If you have collection accounts on your credit report, dealing with them can seem highly unpleasant. However, there’s one key point to remember -- when a collection agency is reporting an unpaid account to the credit bureaus, nobody wins.

My point is that it’s in the collector’s best interest to receive some money -- after all, they probably bought your debt for pennies on the dollar. And it’s in your best interest to get the unpaid collection off of your credit. Therefore it’s in everyone’s best interest to work out a deal.

You may be surprised at how effective it can be to simply have a conversation with your debt collectors. If you truly want to reach a reasonable deal, they’re usually willing to work with you. People often have success with offering a partial payment in exchange for reporting the account as "paid in full" or removing it entirely.  (Tip: Get any deal terms in writing before you send any money.)

7. Only open new credit accounts when you really need them

There’s a category in the FICO formula called "new credit" that considers two main things -- any credit accounts that you’ve recently opened, and any times you’ve applied for credit recently, regardless of whether a new account was opened.

So if you have new credit accounts, or have applied for credit within the past year, one effective way to increase your credit score is to simply let them get older and not add any new accounts or inquiries to the mix.

Don’t get me wrong -- if you need to apply for credit, go for it. However, it’s a positive catalyst to your credit score to limit credit applications as much as possible.

8. Check your credit reports

A Federal Trade Commission (FTC) study found that about one-fifth of all Americans’ credit reports contained some type of error. And 5% of all credit reports contained errors that not only lowered consumers’ credit scores but lowered them to the point where they could have otherwise obtained lower interest rates on loans.

While this clearly won’t be effective in 100% of cases, it’s important to regularly check your credit reports (not just your scores) for errors. If you didn’t know, you’re legally entitled to one free copy of your credit report from each of the three major credit bureaus once a year, and the official place to get them is www.annualcreditreport.com.

In addition to errors, also check if any outdated negative information is still being reported. In general, negative items such as late payments, charge-offs, and collection accounts can only be reported for seven years from the date the account first became delinquent.

9. Get a secured credit card

If your credit isn’t exactly good (trust me, I’ve been there), it can be difficult or impossible to get a credit card, especially one with decent terms. The problem is that it can be difficult to rebuild or establish credit unless someone is willing to extend you credit in the first place.

A potential solution to this is to obtain a secured credit card. These work in much the same way as standard credit cards, except that you’re generally required to make a deposit equal to your initial credit limit, thereby taking the risk away from the credit card issuer. Your account activity will be reported to the credit bureaus as if it were a standard credit card and can be a big positive catalyst to your credit score over time.

10. Ask to increase your credit limits

Here’s an outside-the-box way to increase your credit score. When most people learn about the "amounts you owe" category of the FICO formula, the logical answer is to pay down your debt to maximize your score.

However, that’s not the only way. You can also ask your creditors to increase your limits, which will produce the exact same effect.

For example, let’s say that you owe $3,000 on a $5,000 credit card. You are using 60% of your available credit. If you pay off $500 of the balance, you’ll only be using 50%. Alternatively, you can ask your issuer to increase your credit limit to $6,000, and it would also lower your usage to 50%. To be clear, paying down your debt is the better move from a financial perspective, so it’s still important to do that, but raising your limits can be just as effective when it comes to boosting your credit score.

11. Maintain a mix of credit accounts

Your "credit mix," or the variety of credit accounts on your report, counts for 10% of your FICO® Score. In other words, having a few different kinds of installment loans (mortgage, auto, etc.) and a revolving line of credit or two is better than only having a single type of credit account.

The logic here is that lenders want to see that you can be responsible with all types of credit, not just one or two. After all, if you’re applying for an auto loan, but have never had an installment loan, it’s a riskier loan in the eyes of the lender, even if you have a flawless track record with your credit cards.

12. Wait a while

As a final thought, it’s important to mention that many of the suggestions on this list, such as paying your bills on time or obtaining a secured credit card, aren’t effective immediately.

The bottom line is that the most effective way to increase your credit score is a combination of good credit behaviors and time. You can build decent credit fairly quickly, and there are a few things you can do to give you a quick boost. However, truly excellent credit takes time. There’s a reason that the average person with a FICO® Score in the "excellent" 750-799 range is 50 years old, and that the average person with a sky-high 800+ FICO® Score is 61.

So when you’re trying to maximize your credit score, it’s important to be patient and stay the course. It’s worth the wait -- great credit can save you tens of thousands of dollars (or more) over your lifetime.

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