Going from a 550 credit score to above 700 may seem overwhelming, but itâ€™s doable.
First, letâ€™s quickly review the components of your credit score. Your FICO score is the one most commonly used by lenders who are reviewing your application for a loan or credit. There are five components to a FICO score:
Your payment history makes up the largest percentage of your score, at 35%. This includes your history of making on-time or late payments. This means a late payment can really put a dent in your overall score â€” this should be avoided at all costs.
Your current credit use includes the amount of debt you have overall, the amount you owe on each of your accounts, the number of your accounts with balances, your remaining balance on installment accounts and your utilization rate. Credit use makes up 30% of your overall score.
Next comes length of credit history, which is 15% of your FICO score. The longer you have responsibly maintained credit accounts, the better you will look to lenders.
Finally, new credit and your credit mix both make up 10% of your FICO score. Applying for new credit or loans can have a short-term impact on your score, particularly if a â€śhard inquiryâ€ť is made. This is when your credit report is pulled by a lender ahead of their decision, as opposed to a â€śsoft inquiry,â€ť which occurs when you are pre-approved by a lender.
Lenders will also look at the different kinds of credit accounts you have, including revolving accounts, such as credit cards, and installment loans, which include student loans, auto loans and mortgages. It can help your score, or your chances with specific lenders, to have a healthy mix of credit accounts.
If your current score isnâ€™t what you want it to be, or if you donâ€™t even yet have a credit score, weâ€™re here to help. If you follow these six simple steps, you should ultimately find yourself with a score you can be pleased with.
In order to establish credit history, you need to have a form of credit. The simplest way for you to begin will be to open a credit card. If your score is low or non-existent, youâ€™ll need to apply for a secured or store card.
Secured Card: Youâ€™ll use your own money as collateral by putting down a deposit of a few hundred dollars with the bank. Typically, that amount will then be your credit limit. Once you prove youâ€™re responsible, you can get back your deposit and upgrade to a regular credit card. [Our favorite is the Discover itÂ® Secured<!–Discover it® Secured–>. You can <a href="https://www.magnifymoney.com/redirect?&MzAyMQ&QlND&YmxvZw&Yl8zOQ" class="linkTrackingWidget" data-redirect="card" data-url="6-simple-steps-to-improve-your-credit-score1106518423" data-brand="Discover Bank" data-card-name="Discover itÂ® Secured” data-cat-name=”Credit Cards” data-variant=”Secured Credit Cards” data-cardname=”ImpactRadius”>apply here, or learn more about secured cards in general here]
Store Card: People with a low credit score can often still get store cards because banks are more likely to approve users who apply through the store. The catch is that the interest rates are often very high, so you should do your best to pay off your balance every month. [Read more here]
Utilization is the amount of your credit limit you spend each month. For example, if you have a $500 credit limit and spend $50 in a month, youâ€™re utilization will be 10%. As discussed above, your utilization ratio is part of what determines your credit score.
Your goal should be to never exceed 30% of your credit limit. Ideally, you should be even lower than 30%, because the lower your utilization rate, the better your score will be.
We recommend you make one small purchase a month, then pay it off as soon as the balance is due, to keep your utilization low and help increase your credit score at a faster rate.
The easiest way to prove youâ€™re responsible is to only charge what you can afford. Never use your credit card to buy an item you wonâ€™t be able to pay off on time and in full each month.
Being late on your payments has an extremely negative impact on your credit score.
Contrary to what some people may tell you, there is also no advantage to only paying the minimum amount due on your card. That will only result in you paying interest on your purchases, and it does nothing to help your credit score. Donâ€™t fall into the minimum payment trap â€” your wallet will not be pleased.
This goes hand-in-hand with step three. By only purchasing what you can pay off in full, youâ€™ll never accumulate credit card debt.
If youâ€™re already in debt from the misuse of credit cards, make sure you continue to pay at least the minimum due on time each month. Paying on time is the number one indicator of a responsible borrower.
You could also consider applying for a personal loan, and using the money from the loan to pay off your credit card debt. Personal loan companies have interest rates that start as low as 4.25%, and some will approve people with credit scores as low as 550. You can shop around for a personal loan without hurting your score, because the lenders will approve you using a soft pull (which doesnâ€™t impact your score). A study by MagnifyMoneyâ€™s parent company Lending Club showed that people who paid off their credit card debt with a personal loan saw their score increase by 31% on average, right away. You can look for the best personal loans using this personal loan tool at LendingTree. [Disclosure: LendingTree is the parent company of MagnifyMoney.] With a single application, you can check your rate with dozens of lenders. And the best part: LendingTree uses a soft pull, which means your credit score will not be negatively impacted.
After you pay off your credit cards with the proceeds from the loan, do not build up your debt again. Instead, just make one purchase each month and pay it off in full.
Once you pay off your cards, resist the urge to close them. Closing your cards will not only lower your utilization rate but remove history, which damages your score in the â€ślength of credit historyâ€ť category.
Youâ€™ll start to get credit card offers as you begin to build your credit history and improve your score. Credit card companies still love sending snail mail.
Beware of any offers, especially for cashback cards, while your score is below 650. These cards typically provide little value and can smack you with high interest rates if you fail to follow step three.
Once you get your credit score above 680, the good credit card offers will start rolling in. You can have your pick of the top-tier reward credit cards and start using your regular spending to get cash back or rack up points for travel.
Once youâ€™ve achieved a higher credit score, but sure to protect it by following these steps:
Always pay on time â€“ late or missed payments will cost you dearly
Try to keep your credit used below 30% of your available credit