My credit score was not great when I first started learning about money, but recently I’ve benefited from multiple refinances where my excellent credit gave me huge benefits and saved me tens of thousands of dollars
After refinancing our mortgage AND the parent plus loans I’ve been paying, I’m more convinced than ever that you shouldn’t ignore credit. When you have bad credit you can get denied for loans or have to accept bad rates that end up costing you a lot of money.
Instead we should work to make your credit score better without going into debt. I know not everyone agrees on credit in the personal finance world – everyone gets feisty – but it’s a fact of life for us real life every day people.
Over the years I’ve been able to raise my low credit score to one that is considered excellent. This excellent credit score has helped save me lots of money in interest rates on my loans and has put me in a much better position financially.
Learning how to improve my credit score took some work so I’d like to share some of the tips to improve credit scores that I learned along the way.
Why You Should Improve Your Credit Score
The unfortunate reality is that your credit score matters.
Good credit gets you access to better rates, allows you to pay less on big items like homes and cars, and even determines your ability to qualify for certain jobs or rentals.
You don’t have to love debt or need credit card debt to get a good credit score. In fact, I hate debt. But I also live in the real world and out here your credit score is a tool that can open up doors to a better experience in life.
Having no credit sounds like an amazing idea but in the real world it makes things much harder. You will have access to fewer companies when you apply for a mortgage because many won’t do manual underwriting. You’ll have access to less rental options because many landlords don’t want to (or can’t) go through the hassle of evaluating your finances and manually approving you.
The fact of the matter is that having good credit opens up doors for you.
Here are a few reasons why building a good credit score is important:
- Good credit will get you better interest rates when you need credit for financing a large purchase.
- Good credit means you will pay less overall on those big purchases you have to make on credit.
- Buying a home requires a credit score with most lenders and the better your credit score, the better loan you will be able to get.
- Having bad credit can stop you from being able to buy a home at all until you improve it.
- Your credit score determines your ability to rent an apartment and many won’t accept below 700.
- Your credit score can affect getting certain jobs in certain industries where you have to appear trustworthy.
Clearly having good credit is important. It affects many areas of your life and having bad credit will force you to pay more for the same things others get at a much lower overall cost.
The good news is your credit score is something you can work to improve!
We have excellent credit now so we got great rates and had an easy time with our refinance. I got a great rate on our mortgage and I got to move the rate on student loans from 8.5% to just over 3%. Before that? My mom got denied for a refinance because of credit. She’s been working on her credit and debt payoff but in the real world she is still penalized by companies and forced to pay 5% more interest. Or even worse on other products.
It’s not fair. It’s really not. When you have bad credit you have to pay more when you do need to purchase something with credit. You can also be denied certain jobs, rentals, and more. Pretending like you don’t need good credit might sound cool and counter cultural until you are the one being denied opportunities to make your life better…. because of credit.
The good thing is that credit is something that can be fixed. It’s a game. There are known things you can do to improve your credit. And if you’re smart you can benefit from it. Pretending it doesn’t exist doesn’t work for most of us so I’m more convinced than ever it’s important to understand how credit works, learn to use it responsibly, and benefit from the concept.
What Makes Up Your Credit Score
In order to improve your credit scores, you need to understand what makes up your credit score.
To help you understand how factors affect your credit score, here’s a screenshot of my info in Credit Karma while I have a 823 credit score.
Here are the things that will affect your credit score from highest to lowest impact:
- Payment history – Percentage of payments you’ve made on time
- Credit card use – How much credit you’re using compared to your total limits
- Derogatory marks – Collections, tax liens, bankruptcies, civil judgements on your credit report
- Credit age – Average age of your open accounts
- Total accounts – Total open and closed accounts on your report
- Hard inquiries – Number of times you’ve applied for credit (in the last couple years)
These are the things that impact your score the most. Two of them are things that you do automatically when you start budgeting and paying down your debt – you pay things on time and you use less of your available credit.
So let’s talk more about these factors and how you can use them to actually improve your credit score.
How To Improve Your Credit Score
While I don’t take pride in having a great credit score, it has been something I’ve worked to improve over the years and has benefited me greatly. Ultimately a high credit score wasn’t a point of pride but a practical matter that I needed to improve to help myself and my family.
It is possible to build your credit score but there are some things you need to know about improving your credit score. Having this knowledge is the first step to improving credit and the next will be implementing it.
Here are some important things to know:
- It is possible to rebuild credit responsibly over time.
- There is no QUICK way to fix credit. Any method will take time.
- You do not need to pay someone else to fix your credit. You can do it.
My own credit score went from the low 600s to the high 700s and now to the 800s. This has improved my loan interest rates and helped us get a good mortgage rate which saved us tens of thousands of dollars in interest.
The Basics Of Improving Your Credit Score
If you want to improve your credit score, there are some basics you need to know about how to improve your credit and therefore your credit score.
The basics of improving your credit score:
- Check your credit score AND your credit report
- Pay your bills on time
- Reduce the amount of debt you owe
- Increase your credit limit
Those are the very basics of building your credit over time.
Of course, there are lots of little things to do with each item and in certain situations so we will walk through them all in the coming sections and action steps. You can do this!!
For action steps you will want to do the following items:
- Check your credit score for free with multiple sources.
- Check your credit report and make sure it is accurate.
- Pay your bills on time every month and never be late.
- Keep your balances low on credit cards and revolving credit.
- Do not close old accounts you don’t use.
- Apply for and open new credit only as needed.
- Pay off debt as you can rather than moving it from account to account.
- Make responsible purchases on credit that you know you can pay off.
- Don’t obsess about your score, just let it improve over time.
These are the basics for improving your credit score. I’ll break each one down further below.
Check your credit score for free.
Improving your credit starts with knowing your credit score and knowing where you stand with credit. Once you know what you are working with you will know how much it can improve by implementing the basic ideas for improving a credit score.
You can check your credit score for free from a number of sources these days. You should never have to pay to get your credit score.
Check your credit score from 3 different sources.
I recommend checking your credit score in at least 3 locations so you can get an average and see what different scores are saying about your credit worthiness. Different sources will report a different FICO or Vantange score so checking multiple sources gives you a clear idea of what different places are seeing.
Here are a few places where you can check your credit score for free
- Experian app
- Credit Karma
- Creditwise – offered within Capital One accounts
Checking your score is the first step because you have to know where you are starting. It may be hard to see and face the facts if your score is very low but finding out where you start is the only way to improve.
Check your credit report and make sure it is accurate.
When you are trying to improve your credit you have to not only find out your credit score but also check your credit report to see what the credit bureaus are seeing.
Luckily, once a year you can pull your credit report FOR FREE thanks to the federal laws in the United States. You can get a free copy of your credit report every 12 months from each credit reporting company from annualcreditreport.com.
There are multiple reasons to check your credit report:
- Checking your credit report gives you an idea where you can start improving credit.
- Reviewing credit reports helps you catch signs of identity theft early.
- It allows you to ensure that the information on all of your credit reports is correct and up to date.
Here’s how you complete this step:
Step 1: Check your credit report.
There is ONE website in the US where you can pull your credit reports for free thanks to this law: annualcreditreport.com
You don’t need to pay for your report from any bureau or any other website. This is the only website you need! It is the only official site explicitly directed by Federal law to provide them.
Sign up and enter your information on the website to get your three credit reports.
Next, review the information. If there is any incorrect information, make a note of it for the next step.
Compare the three credit reports against each other. Do they match? Where are the discrepancies between the different bureaus? Mark these for your information for future steps.
Step 2: Dispute and remove any incorrect information.
Sometimes there may be mistakes on your credit report. That’s why it is important to pull and double check your credit report every year.
Once a year you can should pull your credit report for free and make sure nothing has changed or been reported incorrectly. Staying on top of your credit makes sure when you do build good credit it will be there for you when you need it.
Pay your bills on time every month and never be late.
On time payments is a huge factor in your FICO score and all other credit scores. Paying your bills on time is actually one of the biggest factors in determining your credit score. FICO says it is 35% of their calculation for your score.
Unfortunately missed payments or late payments will negatively affect your credit score. Paying your current bills on time should be the first active step you take toward improving your credit score.
If you’re having trouble with late or missed payments, here are a few things to try to pay your bills on time:
- Make a list of every bill you have to pay. You should have an accurate and up to date list of all bills you owe each and every month. If you have a lot of bills to pay it’s easy to let one fall through the cracks if it’s not listed.
- Check your credit report to make sure you’ve included every bill due on your list. Your credit report lists all lenders you owe money to so you can add any debts you’ve either missed or forgotten entirely.
- Review your bank accounts and credit card statements for recurring bills you pay each month. This will include things like subscriptions, memberships, cell phone bills, etc.
- Add the due dates to your list of bills to pay. You have to know when bills are due in order to pay them on time or early.
- Set up automatic payments for bills. It’s easy to forget a due date when your life gets busy so make sure your bills are paid automatically when it’s an option.
- Set up payment reminders. You likely can’t pay every bill automatically so you will never to make sure you have a system for making manual payments on time. You can do this on some banks or just use your calendar. Put all your bill due dates into your calendar and set up automated reminders so you can pay the bill on time or double check autopay to make sure it was paid.
This might seem like a lot of work but always paying your bills on time will help you maintain good relationships with companies and improve your credit score.
Getting current on your bills and staying current without missing payments or paying lae will help you improve your credit score. The longer you pay your bills in a timely way the higher your credit score will increase and the less your past payment mistakes will count against you.
If you are truly struggling just to make ends meet or feel like you are drowning in debt, then reach out to a legitimate credit counselor or financial coach. Don’t go to a disreputable credit repair place with big promises but look for help to get out of the hole you’re in right now. This solution won’t hurt your score and will give you a plan to manage your credit by paying on time and improving slowly over time.
Keep your balances low on credit cards and revolving credit.
How much credit you are currently using will affect your credit score. If you are only using a small percentage of the credit you could be using then your score will be higher.
Having a good credit score doesn’t mean you need overwhelming amounts of debt. In fact, having large debt balances usually hurts your credit score because of the credit utilization factor.
Your credit utilization is the balance of your debt compared to the available credit you have access to. This contributes 30% to FICO score’s calculation which means it is something you need to work on asap.
The goal here is to pay off debt while still keeping your credit limits high. This lowers the amount of credit you are using compared to the amount you could actually use.
The first step of course is paying off debt so we will focus on that step here. It is one of the easiest areas to work on but it does require discipline, focus, and organization.
Do not close old accounts you don’t use.
While this is debated by some in the personal finance world, I found that not closing accounts helped my credit score.
When I finished paying off a debt or simply moved on to a new credit card for rewards, I never closed the old account unless it had an annual fee.
If a credit card did have an annual fee, I did close the account but asked the company to roll the credit limit to another card without a fee or to another existing card. This trick helps raise your credit limit drastically!
Having old accounts still open for use will help increase your credit score since age of accounts is a big factor in your score. You don’t have to use your older credit lines often but just enough to keep them open.
Apply for and open new credit only as needed.
Having multiple accounts open for long periods of time can help your credit score but that doesn’t mean more is better.
You don’t need to open 25 different accounts to get a good credit score. In fact I have less than 10 and have an excellent credit score.
Be selective in the credit lines that you open. Don’t max yourself out with too many new open lines of credit. It will drop your credit score temporarily and it could potentially put you in a precarious situation.
If you are in a credit building stage, then you should work on opening new cards strategically over time but never all at once. Wait 6 months or more between opening new credit lines.
Pay off debt as you can.
I don’t carry debt balances and pay off all my debt but still keep my credit score high so it is available for me to use if I need it.
Paying off debt rather than moving it around with transfer balances is a smart move for your overall financial situation. It also helps your credit score because the lower your debt utilization the better your score will be.
Paying off debt can help improve your score if you are reducing the amount you owe and freeing up space you can use. Debt utilization amounts are a part of the credit score as we discussed before. Your score will rise when you have lower amounts of debt because you are utilizing less of the credit available to you.
Here are some practical ways to pay off debt:
- List out all of your debts and make a plan to pay them down using either the debt snowball (lowest balance to highest) or debt avalanche (highest interest rate to lowest).
- Pay off debt instead of moving it around. Paying off your debt will lower your overall utilization amount which will increase your score.
- Use extra money in your budget and from side hustles to pay down your debt faster.
- Keep balances low on credit cards and any other revolving credit you have open. High balances on credit cards will negatively affect your score.
- Do not close your unused credit cards when they are paid off unless there is a yearly fee for keeping them open. If you do close a credit card, ask the company to roll that credit limit to another card you have open with them.
Always make sure you make responsible purchases on credit that you know you can pay off.
Don’t obsess about your score, just let it improve over time.
It might be tempting to pay someone to help improve your credit score quickly, but be cautious of these services. Many are not helpful but take your money for something you can do yourself.
You can improve your credit score over time by following common sense credit guidelines and getting on a budget.
The less you obsess about your credit score the better off you will be. Ultimately a credit score isn’t the most important thing in your financial life and there are ways to operate around a bad credit score or no credit score at all.
If you are planning to use credit less and don’t need it for a future mortgage or car loan or new job then your credit score will be less important.
Remember that even if you are planning to use credit in the future, you can work with what you already have, pay things on time, use credit responsibly, and build your credit score from there.
Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.