Your credit score can have a major impact on your finances. Having a low score could mean that you end up paying as much as $5,000 more for a car loan than you would if you had a high one. Even worse, a low score could make it harder for you to get a loan at all.
But according to a recent survey of approximately 1,500 consumers by U.S. News & World Report, many Americans are underinformed about their credit scores—and especially about how to improve them.
Less than half the survey respondents knew, for example, that consistently making payments on time has a major positive impact on your score. A full 49 percent weren’t sure whether you need to carry a credit card balance to boost your score (you do not).
And close to a quarter of the people surveyed believed that people with higher incomes automatically score higher than those who didn’t make as much money. In actuality, income isn’t considered in determining credit scores. It’s all about how you manage the money you do have.
More about credit scores
What's a Good Credit Score?
Credit Score Myths: What Really Hurts You and What Doesn't
Why Consumers Should Be Wary of the New FICO Credit Score
How to Read Your Credit Report
The brand of credit score used in more than 90 percent of consumer-credit decisions, the FICO score, typically ranges from a low of 350 to a high of 850; good scores begin in the mid-to-high 600s.
If your score is lower than you’d like, it’s worthwhile to learn how to improve it. Just bear in mind that, depending on the reason for the poor score, it could take from 12 to 24 months to improve, says Bruce W. McClary, vice president of communications at the National Foundation for Credit Counseling, a group that represents nonprofit credit counseling agencies.
You can speed up the process by enrolling in a debt-management program and consistently maintaining on-time payments, “but there’s no instant fix,” he says.
Steps to Improve Your Credit Score
- Pay your credit card and other bills on time. Thirty-five percent of the FICO score is determined by your payment history—that is, how often you pay on time. It’s better to pay the minimum each month than fall behind.
- Check your credit reports. Request one free credit report from a different reporting agency every four months through AnnualCreditReport.com. “Hard pull” credit inquiries—from a potential lender and others with permission from you—can lower your scores slightly, but there’s no penalty for checking yourself.
- Don’t apply for multiple credit cards at once. Unlike applying for a mortgage, an auto loan, or a student loan, applying for several credit cards generates multiple hard pulls about your credit history and can hurt your score.
- Don’t open too many new credit accounts at once. By doing so, you reduce the average “age” of your accounts, which can lower your credit score.
- Don’t cancel unused cards (unless they carry an annual fee). Part of your score depends on the ratio of credit used to total available credit. Eliminating a card reduces your credit line and can raise the ratio, which works against you.
- Keep credit balances low. Maintaining a revolving credit balance under 10 percent of your total available credit is wise. A higher ratio indicates an elevated credit risk. “If you use your entire limit or close to it, your ratio will reflect negatively, which in turn will negatively affect your credit score,” says Katie Ross, education and development manager for American Consumer Credit Counseling, a nonprofit that offers guidance to consumers and is based in Boston.
- Maintain a variety of credit types. Successfully paying, say, an auto loan, a student loan, and credit card bills over the same period shows that you’re able to juggle different types of credit. That accounts for 10 percent of your score.
- Pay off debt in collection. Most current versions of the FICO score ignore collections with a zero balance.
- Beware of keeping high balances. If you charge everything on your rewards card for the points, for instance, switch to cash or a debit card for a couple of months before applying for new credit. Lenders can’t tell from your score whether you pay your balances in full every month. But they’ll see from your credit score, a snapshot in time, that you’re charging a lot relative to your credit limit. That can be viewed negatively.
- Get a personal loan to pay off credit card debt. You can improve your credit score by paying off your credit card debt by taking out a personal loan. The interest rate on the loan is also likely to be lower than credit card interest rates.
- Get a secured credit card after bankruptcy. If you’ve been through bankruptcy, start populating your credit report with good credit. Using a secured credit card (that’s linked to a bank savings account) may be an effective way to rebuild your credit. A bankruptcy will have less impact on your score over time as long as you aren’t defaulting on new loans. Keep in mind, though, that Chapter 7 and 13 bankruptcies stay on your credit report for up to 10 years.
- Consider getting a little help from alternative data. Consumers with less than stellar scores may now be able to get lenders to take into account other indicators of fiscal responsibility, like regular utility or mortgage payments. Experian Boost allows consumers to give read-only access of their bank account data to Experian to show their payment histories. The service takes into account only positive information and can be turned off at the consumer’s discretion. (A similar new service, UltraFICO, focuses on how well the consumer manages money, looking at things like keeping a balance in savings and avoiding bounced checks.) The leg up is not likely to be large, but it can potentially help many consumers’ credit scores.
Tobie Stanger
Tobie Stanger is a senior editor at Consumer Reports, where she has been helping readers shop wisely, save money, and avoid scams for more than 30 years. Most recently, her home- and shopping-related beats have included appliance and grocery stores, generators, homeowners and flood insurance, humidifiers, lawn mowers, and luggage—she also covers home improvement products like flooring, roofing, and siding. During off-hours, she works on her own fixer-upper and gets her hands dirty in the garden. Follow her on Twitter @TobieStanger.
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Regarding the concepts mentioned in this article, let's discuss each one in detail:
Credit Scores and Their Impact on Finances
Your credit score plays a significant role in your financial life. A low credit score can result in higher interest rates on loans, making it more expensive for you to borrow money. For example, having a low credit score could mean paying up to $5,000 more for a car loan compared to someone with a high credit score. Additionally, a low credit score can make it more difficult for you to get approved for loans.
Lack of Credit Score Knowledge
According to a survey conducted by U.S. News & World Report, many Americans are underinformed about their credit scores and how to improve them. Less than half of the survey respondents knew that consistently making payments on time has a major positive impact on their credit scores. Furthermore, 49 percent of the respondents were unsure whether carrying a credit card balance is necessary to boost their credit scores (it is not). Additionally, close to a quarter of the surveyed individuals believed that higher incomes automatically result in higher credit scores, which is not the case. Credit scores are determined by how well you manage the money you have, not by your income level.
FICO Score Range and Good Scores
The FICO score is the most commonly used credit score in consumer-credit decisions, accounting for more than 90 percent of such decisions. The FICO score typically ranges from a low of 350 to a high of 850. Good credit scores generally begin in the mid-to-high 600s.
Improving Your Credit Score
If you have a lower credit score than desired, there are steps you can take to improve it. However, it's important to note that improving your credit score may take time, depending on the reasons for the poor score. It could take anywhere from 12 to 24 months to see improvements. Enrolling in a debt-management program and consistently making on-time payments can help speed up the process, but there is no instant fix.
Here are some steps you can take to improve your credit score:
- Pay your credit card and other bills on time: Your payment history accounts for 35 percent of your FICO score. Making payments on time is crucial for maintaining a good credit score.
- Check your credit reports: Request a free credit report from a different reporting agency every four months through AnnualCreditReport.com. Checking your own credit report does not negatively impact your score.
- Avoid applying for multiple credit cards at once: Applying for several credit cards at the same time can generate multiple hard inquiries on your credit history, which can hurt your score.
- Avoid opening too many new credit accounts at once: Opening multiple new credit accounts can reduce the average age of your accounts, which can lower your credit score.
- Don't cancel unused cards (unless they have an annual fee): Canceling unused credit cards can reduce your total available credit, which can negatively impact your credit utilization ratio.
- Keep credit balances low: Maintaining a revolving credit balance under 10 percent of your total available credit is advisable. Higher credit utilization ratios indicate an elevated credit risk.
- Maintain a variety of credit types: Successfully managing different types of credit, such as auto loans, student loans, and credit card bills, can demonstrate your ability to handle different financial responsibilities.
- Pay off debt in collection: Most current versions of the FICO score ignore collections with a zero balance.
- Be mindful of high balances: Charging a large amount relative to your credit limit can negatively impact your credit score. It's advisable to keep your credit utilization ratio low.
- Consider alternative data: Some services, like Experian Boost, allow consumers to provide read-only access to their bank account data to show positive payment histories. This can potentially help improve credit scores.
Remember, improving your credit score takes time and consistent effort. It's important to practice responsible financial habits and make timely payments to see positive changes in your credit score over time.
I hope this information helps! Let me know if you have any further questions.
