If you’ve ever applied for a loan, tried to finance a new car, or qualified for a mortgage, you know that your credit score has a big impact on nearly every element of your financial life. Any lender will look at your credit score to determine if you are a good candidate for financing—and if you have things in the past that have hampered your score, you might be wondering if it is even possible to get your numbers back into the green again.
The good news is that it is possible to raise your credit score as long as you know the rules of the game. By understanding what factors into your credit score and what actions you can take that make the biggest difference, you can make sure you’re qualified for any loan you’d like to pursue.
What Things Factor Into My Credit Score?
While there are many different elements that factor into your overall credit score, they are not all weighted equally. Here are the general categories that constitute a credit score and the percentage of the score that they make up:
- 35% - Paying your bills on time
- 30% - Your revolving credit utilization
- 15% - The length of your credit history
- 10% - The types of credit you have
- 10% - The number of credit inquiries found in your history
So while all of these things do matter when you consider your overall credit health, if you’re focusing on raising your score, it is wise to hone in on the categories that make up the largest percentages (i.e. paying bills on time and your revolving credit usage) as this will be the fastest way to see an impact.
What is the Best Way to Raise My Credit Score?
By knowing what factors into your credit score, you can begin strategizing your spending and debt repayment to have the most impact on raising your score. Here are some things to prioritize to get that score to start inching higher:
#1. Pay all of your bills on time. Making up 35% of your overall score, paying your bills on time is the best thing you can do to improve your score consistently. It’s important to remember that every bill you have factors into this, too—not just your credit card payment. Your utility bills, loan repayments, and phone bills can also give your score a boost if paid in full and on time every month.
#2. Keep your revolving utilization low.Revolving utilization is an often misunderstood element of credit building, but because it makes up 30% of your score, it’s worth taking the time to graph what it is. The most common example of a revolving credit account is a credit card, so that’s what we’ll use for this example. Every credit card has a credit limit, which shows how much you are able to charge to it before “maxing out.” Getting close to or hitting your credit limit shows lenders that you could be a higher-risk borrower, which is why it factors so heavily in your score. The best way to keep this number low is by paying off as much of your credit card balance as possible every month so you don’t get anywhere near maxing out your credit account.
#3. Don’t close old credit accounts. Lenders like to see people who have been building up their credit score for a long time, which is why the length of your credit history is worth 15% of your score. If you close your oldest credit account, the length of your credit history will automatically be shortened—so if you aren’t paying exorbitant annual fees to keep the accounts open, it’s wise to hang onto them so your length of credit is that much longer.
#4. Consider multiple types of credit accounts. There are three main types of credit accounts: revolving credit, installment credit, and open credit. While open credit is rare, revolving credit consists of accounts such as credit cards, and installment credit refers to loans that have a set installment payment each month, such as a car payment or mortgage. Having both revolving credit and installment credit can help your score out.
#5. Don’t apply for too many things at once. Every time you apply for a new loan or credit card, there is an inquiry that can chip away at your score. Too many of these close together can indicate to lenders that you are attempting to acquire more credit than you could handle, so it is best to only apply for one thing at a time. If you are applying for a big loan, such as car financing or a mortgage, make sure to not apply for any other types of credit until the loan goes through as this can impact your financing qualifications.
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Links to external sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services and make no representation as to the completeness, suitability, or quality thereof.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 4201 Congress St., Ste. 295, Charlotte, NC 28209; 704.552.8507. Securities products offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Consolidated Planning is not an affiliate or subsidiary of PAS or Guardian. 2020-108468 Exp 09/22