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The good news is that you have more control over your credit score than you might think. How you approach credit has the power to affect your rating – the key is understanding which actions will help your score and which actions will hurt it.
Here are four tips on how to improve your credit score.
There’s more than one way to look at credit scoring. The FICO score is one model used by many lenders. Another is the VantageScore, developed more recently by credit bureaus.
Both models use these general factors to determine your credit score:
Payment History: Your record of making on-time payments on your balances.
Credit Utilization: Your current credit usage compared to the maximum you could be using. (More details on this below.)
Credit Age/Types: The average age of your accounts and the type of accounts you have (e.g., credit cards, personal loans, mortgages).
New Credit Applications: New credit applications and accounts opened within the last year.
Look at each of these factors when you’re considering how to increase your credit score. For example:
To help strengthen your payment history, set up auto pay for your bills and confirm each payment went through within 30 days – this will help you catch any missed payments before they have a chance to damage your credit score.
Avoid applying for more than one or two lines of credit within a year. It can be a red flag for lenders when too many credit inquiries show up on your credit report within a short span of time.
Before thinking about how to raise your credit score, know where it stands.
You can request a free copy of your credit reports each year from the three credit reporting agencies – Equifax, Trans Union and Experian. This will provide annual insight into your credit history.
But you still need a way to monitor your score month over month. If requesting your formal credit reports is like visiting the dentist, then monitoring your score regularly is more like brushing and flossing. You need to do both to keep your “financial hygiene” in check.
Clarity Money, a personal finance app that’s part of the Marcus family, offers a free credit-monitoring tool for its users. You’ll need to enter your name, social security number and address to unlock your score.
Once you know your score, you’ll be able to see where you fall within the credit score ranges for FICO and VantageScore. A score of at least 670 (FICO) or 661 (VantageScore) puts you in the "very good" or "excellent" category.
Do you know what percentage of your total available credit you currently use? To find out, simply divide the sum of how much you owe across all of your credit cards by your available credit. The result is known as your credit utilization ratio. You can calculate it cumulatively across all of your cards or per individual card.
Say you have three credit cards with lines of $5,000, $6,000 and $7,000 respectively. And on those cards you have outstanding balances of $500, $1,000 and $3,500 respectively. If you divide your total balance across all cards ($5,000) by your total available credit ($18,000) you’ll get an overall credit utilization ratio of about 28 percent. However, your utilization on your highest line of credit ($3,500 / $7,000) is 50 percent.
The ideal credit utilization rate falls below 30 percent – total, and for each of your lines of credit. Why? Because the more credit you’re using, the riskier you appear to lenders. This is why maxing out your cards can lower your score, while maintaining a low utilization ratio is part of how to improve your credit score.
It can seem tempting to clean house by closing your old credit cards, especially if you rarely or never use them. But doing so lowers the average age of your accounts and affects your credit utilization ratio, as you’re taking some of your available credit off of the table.
If you really want to get rid of the physical card, just remove it from your wallet, rather than closing the account. You can then reap its contributions to your credit score, even while leaving it dormant.
Marcus by Goldman Sachs® and Clarity Money® are both brands of Goldman Sachs Bank USA.This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.