How to Improve Your Credit Score

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Every citizen in the United States that has ever applied for a credit card or loan has a credit score. In this lesson, we'll briefly discuss what determines that score, and then discuss common strategies to improve your score.

What Is a Credit Score?

A credit score is a number value assigned to every consumer that has ever applied for or has had a loan. This number, ranging from 300 to 850, is essentially a calculation that reflects the level of risk an individual may be for a borrower. Anything over 700 is considered excellent, while anything below 600 starts putting higher rates or more rejections in your file. A low credit score indicates that, for any one or more of a variety of reasons, the borrower presents a risky consumer. The higher the credit score, the higher the certainty that the borrower will be responsible with their debt, borrowing, and paying their bills on time.

There are many factors that go into a lenders decision to lend money to a borrower, but a credit score is always one of the key factors. While the primary objective of this lesson is how to increase your credit score, the first thing that should be said is that you should not let it get low in the first place! To avoid that, pay your bills on time, use only a minimal amount of your available credit, have a good, lengthy credit history, and only apply for credit when you really want to use it.

But what if it's too late, and your score is already low? Let's take a look at ways that you can improve that low credit score.

Factors to Improve Your Score

Understanding the factors that go into a credit score can help you see what can hurt your credit score, as well as what can help your credit score. The following are common considerations the rating agencies use when assigning your credit score - which, by the way, is updated often:

Use of Available Credit

If you have $10,000 available credit on two different credit cards, you don't want to use all $10,000. A good rule of thumb is to use less than 30% of your available credit. Keeping your credit usage lower than 30% helps keeps your credit score strong, and if your credit score dips, this is one of those factors you can check and try to get back into control. For example, if you have two credit cards that have a $5,000 limit each, so you have $10,000 total, don't use more than $3,000. Use it responsibly, and pay it off, but try not to average more than 30% of your total credit availability.

Length of Credit

You generally don't have a lot of control over this one. The length of your credit history is important, because it shows the creditors how long you have been a responsible, or irresponsible, borrower. Generally speaking, the longer your good history, the better - but this isn't something you can really control. A credit card with a small balance that you pay back in full every month, is a good starting place.

Late Payments

One of the most important factors in your credit score is your payment history. If you have late payments, especially some later than 30 days, you will see some negative effects on your credit report. Make sure you pay your payments on time, and again, make sure those payments keep your total debt at or below 30% of your total available debt.

Store vs. Bank Cards

Pay attention to the creditors whose cards you have. Generally speaking, high-interest department store credit cards are judged more harshly than bank credit cards. If you have a customized card for your favorite electronics or department store, don't carry a balance - make sure it's paid off each month and only use it when you know you can pay off the balance soon.

Old Credit

Another easy way to help improve your credit is to you use your oldest credit first. For example, if you have a card you got in college 15 years ago, it becomes the longest open account for your credit profile. Continue using that one, responsibly, and pay it off each month. Using that card strengthens the history of your credit, since it is the account with the most history.

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