Simple Ways to Improve Your Credit Score

The Squeeze

• Understanding the information used to determine your creditworthiness is the first step to rehabilitating your credit score.
• Paying bills on time, keeping older accounts open and lowering your credit usage percentage are sure-fire ways to give your score a boost. 
• Low credit scores are simply a record of your debt-to-income ratio and ability to pay your bills on time — not a judgment on your character.

The average American has a personal consumer debt of $90,406 — an eye-popping number that includes student loans, mortgages, car loans and credit card balances. Borrowing money to pay for education, buy houses and cars, and yes, fund some short-term "must-haves" (hello, credit cards!) is a regular part of life. But if your debt gets ahead of you, it shows, in your credit score. 

Having your credit score dip from time to time when you are dealing with momentary life emergencies that lead to late or missed payments on your debt is a totally ordinary part of being a debt-carrying citizen in the modern age — but that doesn't mean it feels great. 

Here are some tips for understanding just what drives movement in your credit score, whether up or down, as well as a few steps to take to give yourself a credit-score boost.

Understanding your credit report

Before you worry about rehabilitating your credit, first focus on understanding the five factors — based on your credit activity — that fuel your credit score. 

• Payment History = 35%  
  Whether you pay your bills on time impacts your credit score the most. Late payments and missed payments will register in your score 30 days after their due date.
•  Amounts Owed = 30%
  This figure is commonly referred to as your “credit utilization ratio,” meaning how much of the credit available to you you are actively using. Simply put, the lower the percentage the better, and usage of 30% or less is considered ideal. So if your credit cards have a collective $10,000 limit, using just $3,000 of that credit yields the highest score. 
•  Length of Credit History = 15%
  The longer you have held a credit card, the better, because it provides a long history of responsible credit use. 
•  New Credit = 10%
  Ten percent of your score is based on how many recent credit inquiries have been registered because you applied for new credit, whether credit cards or a mortgage or loan.  
• Types of Credit Used — 10%
  This figure assesses your credit mix, i.e. how many loans and credit cards you have, and the types (e.g. car loan, mortgage, unsecured personal loan; retail store accounts, national store accounts). You want a mix of different kinds of credit for the best score.

Now, looking into your credit score will have a little more meaning. You are allowed a free copy of your credit report from each of the major credit reporting bureaus — Equifax, Transunion and Experian — once a year. Take them up on it both to track your score but also to check for any errors, such as incorrect payment delinquencies.

The Fixes

Pay your bills on time. No matter how much debt you may be carrying, know that paying your bills on time is paramount for your best credit score. Paying back the money you owe according to the terms of that credit agreement is the surest path to proving your creditworthiness and stabilizing your score, no matter how much debt you have.

If you are struggling to make payments, consider paying half of the bill twice a month. Using this method will result in 26 half-payments. You’ll end up making 13 total payments in a year rather than 12 monthly payments, which puts you ahead of the game.

Don't max out your cards. As explained above, the percentage of available credit you actually use is a big factor in your score. So don't think of a $10,000 credit limit as what you have available to spend; spend only what you need, and never max out a credit card. This factor represents 30 percent of your credit score, so any move to pay off debt and will boost your score (as well as help your financial bottom line). 

Keep credit cards open, even after you pay them off. Since your length of credit history accounts for 15 percent of your score, you will want to hold on to the credit card you have had the longest. The more positive history the credit bureaus can "see," the more creditworthy you are. If you are paying down debt, you definitely want to keep those cards open — but go ahead and remove them from your wallet. 

Don't add to your total credit. It might be tempting to sign up for a low rate credit card when it gets offered to you, but if you are already managing a taxed credit score, don't do it. Increasing your credit might seem like it will lower your credit utilization score — but taking on new credit when your credit score is already low means your rate may suffer. 

Investigate mortgage rates or new credit cards all at once. Sometimes you really do need to take on more credit — buying a house, a medical emergency — so shop for your best rates within a single two-week window. Shopping for rates means your potential creditors (banks and credit card companies ) will be pulling a "hard credit inquiry," to check out your credit history. And when your profile receives many of these at once, it can force a short-term drop in your score. However FICO has made allotment for the fact that consumers need to "shop" for credit, so many inquiries within a tight timeframe will not impact credit score as much. 

In the end, repairing your credit score is something that happens over many months, and ultimately, is driven by good financial habits. So be a smart consumer of credit — not just all the things that credit lets you buy.

As your credit score improves, you’ll have more flexibility in many areas of your life — from better interest rates on home mortgages to an easier time getting insurance. Step by step, you can get this done and give yourself the breathing room you need.