Credit scores are calculated from a lot of different credit data in your credit report. The first step in improving your credit score is understanding what is a credit score and what affects it.
Once you are clear on the basics, here are some things that will improve your credit score:
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Have at least one loan or credit card that is open and in good standing (i.e. it reports every month that you are on time with your payments).
Your credit score will not improve unless there is positive information being reported on a monthly basis. If you can not get a credit card, then put $200 towards a security deposit and get a secured credit card. As long as you place the deposit you will be approved for a secured credit card no matter how bad your credit is. When you get the secured credit card make sure you do not miss a payment. If you do not trust yourself, activate it, pay the annual fee, and do not use it. It will still report every month that you are in good standing, which is what you want. -
Maintain & Build a long credit history.
If you close all of your oldest accounts / credit cards, it will look like you haven’t had credit for very long. You should at least keep your oldest credit card open, even if you never user it and it has a zero balance. By doing that you will be able to demonstrate that you can handle credit responsibly for an extended period of time. -
Do NOT show that you are desperate for credit.
Credit lenders like to see what percentage of the credit that you have available (e.g. the sum of all the credit lines of your credit cards) do you use. This is also known as the ‘debt-to-available-credit ratio’. If you are maxed out on most of your credit cards that is a bad sign, since they think that you are desperate for credit. So our rule of thumb is that you should try NOT to use more than 60% of the total credit that you have available. 60% is not based on any hard data. It is just our guess of what looks good. -
If you do not trust yourself, take precautions.
Some people are not good in remembering to pay on time. If you are one of them, call your credit card company and ask them to automatically withdraw your monthly payment from your checking account. Others get tempted by credit cards and get into unnessecary debt. If you are one of them, the right solution is not necessarily to close all your credit cards, but instead your credit will be in better shape if you keep some of them open but locked into a drawer so that you do not end up using them.
It will also help you a lot if you understand some of the things that a lot of people think will improve their credit score, but in fact it does NOT affect it:
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MYTH: Do NOT pay your credit card in full every month.
The argument behind this urban myth is that credit card companies do not make money when you pay in full and thus it hurts your credit score. This is totally NOT true! If you can pay your credit card in full every month, please do. -
MYTH: If you do not use a credit card you do not build credit history.
Wrong. All of your open credit card accounts report every month whether you are current on your account or not. -
MYTH: Closing old accounts will improve your credit score.
While many people advocate closing old and inactive accounts as a way from improving credit, it many cases it may actually lower your score, as it may change your ‘debt-to-available-credit ratio’ and make your credit history appear artificially shorter. -
MYTH: Once you pay off a negative record, it will be removed from your credit report.
Negative records such as late payments will remain on your credit report for 7-10 years after they are first posted (see How long does negative information stay on your credit report?). Paying off the account before the end of the set term doesn’t remove it from your credit report, but will mark the account as “paid”.
