If you’ve got a low credit score and know you’ve got to boost it, you’re not alone. According to FICO, around 37% percent of Americans have FICO scores in the 300-850 range. (Read on to learn more about FICO scores.)
If you think it seems overwhelming to try increasing your credit score, start little by little and follow Benzinga’s steps for building credit. You’ll get there, slowly but surely.
What's a credit score?
A credit score is a three-digit number designed to determine how likely you’ll be delinquent in meeting your overall credit obligations. The most famous credit score of all is the FICO score.
According to Experian, FICO score ranges fall into the following categories:
Credit score ratings:
- 300-579 Very poor
- 580-669 Fair
- 670-739 Good
- 740-799 Very good
- 800-850 Exceptional
The elements that affect your credit score include:
- Payment history (makes up 35% of your FICO score)
- Amounts owed (makes up 30% of your FICO score)
- Length of credit history (makes up 15% of your FICO score)
- Types of credit used (makes up 10% of your FICO score)
- New credit (makes up 10% of your FICO score)
No information about your background or demographic affect your credit score. For example, age, race, income and employment, etc. will not make a difference to your overall credit score.
FICO score chart
How do you know if you have a low credit score?
The only thing you can do to know everything about your credit score is to check it out. A relatively painless process, it’s better to check now, especially if, unlike those who know their credit score, you have no idea. You don’t want to receive a nasty surprise when you’re planning to make a major purchase and find out for the first time that you can’t borrow due to bad credit.
Check your credit reports by going to one of the three major credit bureaus: Experian, Equifax and TransUnion. It’s advisable to check your credit score on all three, as it’s possible that one of these credit reporting bureaus could have made a mistake in calculating your credit score.
Reasons to improve your credit score
If you fall in the 300-580 range of scores, it’d be advisable to consider bumping up your credit score.
The drawbacks to having a low credit score include:
- High interest rates on credit cards and loans
- You might not be approved for credit and loan applications
- Difficulty renting
- Required security deposits on utilities
- Higher insurance premiums
- Decreased job prospects, particularly in upper management positions
- More difficulty starting a business
How to bump up your score
The most important thing to know is that it will take time to improve your credit. If you notice ads or services that claim to your credit score quickly, stay away. Improving your score will not happen overnight.
Here are the steps you’ll actually need to take:
- Check your credit score. This bears repeating, as you’ll want to check for errors. You can get one free credit report from each of the three major credit bureaus once every 12 months. Unbelievably, as many as 80 percent of consumer credit reports have an error or inaccuracy that can cost up to 50 credit points. Once the mistakes are fixed, your credit score will show a positive boost within a month.
- Make sure you make all payments on time. All of them. Every single one of them. Whether it’s a credit card payment or a mortgage payment, you may want to consider making all payments automatically. (However, with credit cards, it’s recommended that you pay off more than just the minimum per month.)
- Reduce or, better yet, get rid of debt. Lenders want to be sure they’re not lending you more than you can afford to pay back. Not to mention, there’s some real feel-good perks to paying off that debt.
- Diversify. Your credit mix, that is. Lenders like to see a mix of revolving credit accounts and installment loans. The more you have of different credit types, the better off you’ll be. However, if you’re already drowning in debt as it is, this really isn’t a good idea.
A few more tips
First of all, whatever you do, don’t apply for ten different credit cards all at one time. Because you’ll have done careful research (right?) and know which cards you’ll likely be approved for, you’ll want to apply for one at a time. Too many inquiries can further damage your credit score.
On the flip side, don’t call your credit card company and shut down all of your existing credit cards. Doing so could further damage your credit. Here are a few good rules of thumb for not closing a credit card.
- Don’t close a credit card that still has a balance. It’ll look like you’ve maxed out the card. When your credit score is calculated, it considers the amount of credit card balance relative to your credit limit, which is a process called credit utilization. You could be penalized because a closed credit card doesn’t have a credit limit; having a card with a balance and no credit limit could become a problem.
- Don’t close your only credit card. You’ve got to keep open at least one credit card as a demonstration of your experiences with credit. Don’t let the trail go cold.
- Don’t get rid of your oldest credit card. Think of you and your oldest credit card in terms of your relationship with your oldest, best friend. You two have a history that can’t be replicated with a new best friend (credit card). Lenders like to see longer credit history, period.
- Don’t get rid of the card with the best perks. (This can include low interest rate, no annual fee or can’t-pass-up rewards.
As mentioned in the beginning, building your credit score won’t happen overnight.
The biggest takeaway from all of this information is to ultimately fix the errors in your credit history. (Outstanding bills hurting your credit? Pay them off!)
A slow, disciplined approach toward maintaining a good, solid credit history will pay dividends for the rest of your life. Give yourself a pat on the back for making a concentrated effort toward boosting your score. This is one of those things you just can’t possibly regret.