Today I’m going to talk to you about how to increase your credit score. I’m going to tell you what a credit score is, how it’s calculated, and then how to increase it. However, before we discuss those issues, we need to ask one question –  why are you looking to increase your credit score?

There are three possible reasons and the answers will determine how you approach increasing your score. The first one is the short term reason. For example, you want to buy a car immediately or you want to get into a new apartment. Another is the long term. For example, planning to get a house in three years. The third option is what I call the debt overload. This is where you already have a high debt load and you’re looking to increase your score because you want to borrow money to help pay down this debt.

If your reason is the debt overload situation, then you really should be considering other options as there are better ways to deal with this problem. I am one of a limited number of qualified professionals in Hawaii that can assist you with this. I have helped thousands of people over the last 25 years to get a fresh financial start and I expect I can help you as well.

What is a Credit Score?

A credit score is a number between 300 to 850 that is a sort of a snapshot of your credit worthiness. The higher the score, the better you look to potential lenders. Lenders use these scores to determine the probability that you’ll be able to pay them back timely. There are many different credit scoring systems. The score number called the FICO score is the one used by almost all lenders. It gets its name from the name of the company that created it, the Fair Isaac Corporation.

A credit score can play a significant role in your financial life. It’s the primary decision making tool for lenders. If your score is under 640 for example you’re going to be considered a subprime borrower and your interest rates and repayment terms are going to be much more unfavorable. It will also determine if you need a cosigner or even if they’ll lend to you at all. 

Your credit score may also determine how much money you have to put down for a deposit to get a phone or your cable or electric bill, or to rent an apartment.

How Your Credit Score is Calculated

There are three major credit reporting agencies in the United States: Experian, Equifax and TransUnion. They all report on your credit history with your accounts. This information is used in determining your FICO score. What are the factors used when calculating your credit or FICO score?

1. Payment history. This is the most important scoring element. Lenders want to know If you’ve had the ability to pay back your debts over a long period of time. Your payment history accounts for about 35% of your FICO score.
2. Credit utilization. Credit utilization is the amount of credit you’re using compared to the amount of credit you have available. This is called your credit utilization ratio. It is calculated by dividing the total amount of credit you’re using by the total amount of your credit limits. Using more than 30% of your available credit will be looked upon as negative by your creditors. Ideally they want to see a 10% or lower utilization ratio. This is about 30% of your FICO score.
3. Credit history length. This factor makes up about 15% of your score. With this one they want to look at your oldest credit account, your newest a credit account and the average of all your accounts. Generally the longer your credit history, the better your score is.
4. Credit mix. Creditors want to see that you’ve been able to handle a wide range of different types of accounts. Credit accounts such as car loans. credit cards, student loans and mortgages. Credit mix accounts for about 10% of your FICO score.
5. New credit. They want to look at how many new accounts you’ve recently opened as well as the amount of hard inquiries, which is the amount of times a creditor has searched your credit when considering lending money to you. This counts to 10% of your FICO score.

How to Increase Your Credit Score

Please understand that when it comes to increasing your credit score, you can often do as good a job on your own as a credit repair company. The credit repair industry is littered with scams and fraud. And by doing it on your own you can save yourself hundreds and sometimes thousands of dollars.

The first thing you should do is get a copy of all three of your credit reports. An easy way to do this is to go to annualcreditreport.com. Federal law requires the three major credit reporting agencies to provide you one credit report for free every year. However, because of the Covid epidemic they are offering one free report every week. 

1. Disputing Items on your report.

After you get your credit reports, the most important thing to do is to look at every single negative Item on your credit report to determine if you recognize each item. If you don’t recognize the lender or the amount or think that the aging on your report is wrong, you should fully dispute it. Remember credit history Is the most important factor in your credit score and this is your only real chance of changing your negative credit report history. 

You can dispute these items on your credit report several different ways. But since you want to make sure you dispute these negative credit items with all three credit reporting agencies, you can go to their websites and dispute negative credit reporting online. 

2. Decreasing credit utilization.

Because utilization is the ratio of use as compared to the amount available to you, you should not close any accounts even if you’re not using them.

Credit reporting agencies report your balances on the closing date of each month. Make sure your payments are credited to your account with your creditors before the closing date of the month. The credit closing date is not the same as the billing date or the due date. You can find this information on your statement or online.

Your credit utilization score is calculated on a per account basis and then on an overall basis. Spread your credit use over as many accounts as you have in order to lower each per account ratio.

Despite what you have heard, it doesn’t help your credit at all to keep a balance on your credit cards. This will actually hurt your score and will leave you paying interest. If possible, pay your credit cards off in full by the closing date every month.

3. Become an authorized user.

Put your name as an authorized user on a person’s credit card who has an excellent credit history. While this might have a lower positive impact than having the card in your own name, it is an excellent way to improve your credit since you are not obligated to pay that debt.

If you’re having trouble getting credit at all, there are some ways to get some positive credit history.

1. Get a secured credit card. A secured credit card is where you put money into the card account and can only use up to the maximum amount you put into the account. It is very similar to a debit card but because it has a credit designation it will be listed on your credit report.
2. Take out a secured loan from a bank. This is where you put a certain amount of money into your bank account and the lender will allow you a loan for that amount. So while you’re not allowed to take out that money, this loan will be considered on your credit report. You have a good chance of getting one of these because they’re low risk.
3. Send a goodwill letter. This would be sent to any creditor you’re in good standing with but have a little bit of a negative history. What you are saying in this letter is basically that you have been a good customer who had a couple of bumps in the past so please remove these negative remarks. Just Google “goodwill letter example” and you’ll find plenty of templates to use.

A word about Experian boost. 

This is a new product created exclusively by Experian. What they are doing is allowing you to use your payment history with items on your bank statements such as utility payments. From what I have seen it will likely increase your credit score  a bit but since it is so new I can’t recommend it because I don’t know its long-term consequences.