How to Improve Your Credit Score – The Long View

How to Improve Your Credit Score - The Long View

Photo courtesy of Erik Drost

You know that your credit score is important. You know that having a better credit score will lead to better interest rates on things like mortgages and car loans. It may even help you get a job or rent an apartment.

A good credit score can potentially save you hundreds of thousands of dollars over your lifetime.

So, naturally, you want to improve your credit score.

I want to help you do that. But if you’re here for quick-hit tips and tricks for improving your credit score right now, you’re out of luck.

We’re not going to try and game the system. Instead, we’re going to focus on the small number of good habits that will not only improve our credit scores, but make us stronger in all parts of our financial lives.

This is the long view on improving your credit score. If you can nail this short list of habits, you won’t ever have to think about your credit score again. It will be that good all by itself.

Step 1: Check your credit report

Your credit report is where all of the information that goes into your credit score is stored.

Checking your credit report on a regular basis will help you stay on top of all your accounts, correct any errors that might make it on there, and keep an eye out for identity theft. All of those things are good for both your overall financial health and your credit score.

There’s only one place where you can pull your credit report for free, and it’s here: AnnualCreditReport.com. Those other sites that advertise free credit reports on TV actually try to subscribe you to a paid service, so ignore them and go here.

You won’t get your actual score here, but the report has all of the information that goes into your credit score, and therefore all the information you need to start making improvements.

There are two main things you’ll want to do with this information:

  1. Take note of any debts or other accounts that you didn’t remember and aren’t currently handling. Write these down and call the company if you have to just to make sure you can start factoring them into your plans going forward.
  2. Make sure that all of the information is accurate.
    • If there are any errors, you can file a dispute with the credit reporting agency to get it fixed. Here’s some more information on how to do that: Disputing Errors on Credit Reports.
    • If there’s anything that you just completely don’t recognize or accounts listed that you definitely didn’t open, you’ll want to do a little more work to make sure you aren’t a victim of identity theft. Here’s some more information about recognizing identity theft and steps you can take to address it: Protect your identity.

Your credit report is the foundation of your credit score, so staying on top of the information in it will go a long way towards improving your score.

Step 2: Make all your payments on time

This is the single biggest factor in your credit score. It’s also just a good common sense piece of financial advice.

Pay all of your bills on time. This includes monthly services like internet and electricity, as well as the minimum payment on all of your debts each month (at least).

Personally, I try to set as many of my bills on auto-pay as possible. For any that don’t have auto-pay I’ll use my bank’s Bill Pay system that emails me reminders whenever something’s due and lets me pay all my bills from one location.

However you do it, simply making all of your payments on time, every time, will go a long way towards improving your credit score.

Step 3: Don’t take on more debt than you can afford

The second biggest part of your score is the amount of debt you actually have. In general, more debt means a lower score.

Now, this one isn’t black and white, and there are some tips and tricks here for keeping your debt level in the “right” range in order to optimize your score.

But I’m ignoring those things here because to me, they miss the bigger picture.

Which is this: debt isn’t always bad. But in general, you only want to take on debt to buy something that goes up in value. Otherwise, it’s usually trouble. And if you already have debt, find some ways to pay it off a little bit faster.

You can even automate your extra debt payments just like you automate your savings. The more automatic these things are, the better!

Taking those lessons to heart will make you a richer person over time. And oh yeah, they’ll also improve your credit score.

Step 4: Think about getting a credit card

As we talked about in Step 2, part of having a good credit score is having a regular history of paying your bills on time.

A credit card is a really easy way to build up that history without having to take on a ton of debt like a mortgage or car loan. You don’t even have to use it all that much. You can literally use it once per month, just to buy gas or some groceries. Then when you pay that bill off in full each month, it gets reported to the credit agencies and your credit score will naturally climb.

There are other benefits to credit cards when they’re used responsibly, so if you’re comfortable giving it a shot, start small, pay it off in full every month, and watch your credit score rise.

WARNING: There’s a myth out there that it’s good for your credit score if you keep a balance on your credit cards. NOT TRUE!!!!!! It IS a good idea to use a credit card at least once a month (to build that payment history), but the best thing for both your overall financial health and your credit score is to pay that balance off in full at the end of each month. Carrying a balance might actually hurt your score AND forces you to pay unnecessary interest charges. Bad deal!

Step 5: What if you have no credit history at all?

If you have no credit history, it can be tough to find a way to build up your score. A lot of companies want to see a positive history before trusting you with any kind of loan, but how are you supposed to build a positive history when no one but those scammy companies are willing to extend you any credit?

This is where a secured credit card can be a huge help. Here’s how these cards work:

  1. You give them some money as a deposit.
  2. That deposit amount becomes your credit limit.
  3. From there, it works pretty much just like a regular credit card. You can charge up to your credit limit, and you have to pay the bill each month.
  4. The big difference is that if you ever default, the company has your deposit on hand to make themselves whole. Because they don’t have that risk of losing money, they’re more willing to extend credit to someone without a history.

If you go this route, you’ll want to make sure of a few things:

  1. The fees are reasonable. These cards will charge you some kind of an annual fee, but it shouldn’t be more than $25-40. It’s not a fun fee to pay, but the good news is you’ll probably only have to pay it once (see below).
  2. Make sure that the card will be reporting to the credit bureaus. If not, find a different card. After all, the whole reason you’re getting the card is to build that history.

If you can use this card for 6-12 months and pay it back in full each month, even if you only use it for one purchase per month, you can probably build your history up enough to the point that you will qualify for a basic credit card without the annual fee. And then you can just continue on doing the same things, building that credit history more and more over time.

Here’s a link to help you find a decent secured credit card: Bankrate secured credit cards.

FYI: This can also be a good route for anyone with a negative credit history.

Step 6: Be patient

Just like anything else worth having, building a good credit score takes time.

Sure, there are some quick-hit tips and tricks if you’re buying a house soon and need to get your score in the best shape possible. If that’s what you need right now, you can find some here.

But over the long-term the best thing you can do is simply practice those good habits over and over again, the same habits that will improve all areas of your financial life. Do that long enough and the quick tips won’t even matter. Your score will be good enough that you won’t need them.

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  • Done by Forty July 28, 2014

    We only rarely care about our credit score, and that’s when we’re applying for a mortgage. Oddly, they just seem to take the “middle” score from the three credit agencies, which is the dumbest averaging approach I’ve ever heard of with three data points.

    In any case, I typically don’t worry about it too much. We travel hack, churn credit cards, and haven’t seen any real adverse consequences on our scores. After like 760, it’s all kind of gravy…

    • Matt Becker July 29, 2014

      You can do all of those things and still have a top-notch credit score because your long-term habits are so good that the short-term behaviors don’t matter all that much. Those little tips, tricks and warnings don’t matter when the big things are consistently in place.

  • This is a great post. My husband basically started with no credit. We had to do the whole “pay money” for a credit card. At the time, I thought it was absolutely ridiculous to pay to use a credit card. But it did build his credit history pretty quickly and we only had to do it once. Once it was reporting to the credit bureaus, after a period of time we cancelled it and ended up getting him an actual credit card. I try to check my credit report at least once a year (I may have to do it more). I recently did it (through Equifax) and it was nice that they let you either check all three, or just one, or two, and then you can save the others that you did not look at until later in the year in case something came up (new car loans, etc.) I did not like that I could see all of the inquiries that looked at my credit score when I purchased my car.

    • Matt Becker July 29, 2014

      Sounds like you guys did it exactly right! The good news with all the inquiries during your car purchase is that they’ll usually see those and just count them as one. It doesn’t typically ding you extra when you have multiple inquiries in a short time period for the exact same thing (like a mortgage or auto loan). After all, you’re expected to comparison shop.

  • Michelle July 31, 2014

    I always have a sense of dread and anxiety when going through my credit report. Not that I would have anything that I would be shocked by (unless it was identity theft), but I still get very nervous. But once I am done combing through it, I feel much better knowing what I am being judged upon.

    • Matt Becker August 5, 2014

      I can definitely be a little nerve-wracking, especially if you’ve never looked at it before but even if you have. But like you say, better to know than not know!

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