Review Your Credit Reports

To improve your credit, it helps to know what might be working in your favor (or against you). That’s where checking your credit history comes in.

Pull a copy of your credit report from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. You can do that for free once a year through the official AnnualCreditReport.com website. Then review each report to see what’s helping or hurting your score.

Factors that contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of different credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments are major credit score detractors.

Get a Handle on Bill Payments

More than 90% of top lenders use FICO credit scores, and they’re determined by five distinct factors:

• Payment history (35%)
• Credit usage(30%)
• Age of credit accounts (15%)
• Credit mix (10%)
• New credit inquiries (10%)

As you can see, payment history has the biggest impact on your credit score. That is why, for example, it’s better to have paid-off debts, such as your old student loans, remain on your record. If you paid your debts responsibly and on time, it works in your favor.

So a simple way to improve your credit score is to avoid late payments at all costs. Some tips for doing that include:

• Creating a filing system, either paper or digital, for keeping track of monthly bills
• Setting due-date alerts, so you know when a bill is coming up
• Automating bill payments from your bank account

Another option is charging all (or as many as possible) of your monthly bill payments to a credit card. This strategy assumes that you’ll pay the balance in full each month to avoid interest charges. Going this route could simplify bill payments and improve your credit score if it results in a history of on-time payments.

Aim for 30% Credit Utilization or Less

Credit utilization refers to the portion of your credit limit that you’re using at any given time. After payment history, it’s the second most important factor in FICO credit score calculations.

The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you can’t always do that, a good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit. From there you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score.

Another way to improve your credit utilization ratio: Ask for a credit limit increase. Raising your credit limit can help your credit utilization, as long as your balance doesn’t increase in tandem.

Most credit card companies allow you to request a credit limit increase online; you'll just need to update your annual household income. It’s possible to be approved for a higher limit in under a minute. You can also request a credit limit increase over the phone.

Limit Your Requests for New Credit—and 'Hard' Inquiries

There can be two types of inquiries into your credit history, often referred to as "hard" and "soft" inquiries. A typical soft inquiry might include you checking your own credit, giving a potential employer permission to check your credit, checks performed by financial institutions with which you already do business, and credit card companies that check your file to determine if they want to send you preapproved credit offers. Soft inquiries will not affect your credit score.

Hard inquiries, however, can affect your credit score—adversely—for anywhere from a few months to two years. Hard inquiries can include applications for a new credit card, a mortgage, an auto loan, or some other form of new credit. The occasional hard inquiry is unlikely to have much of an effect. But many of them in a short period of time can damage your credit score. Banks could take it to mean that you need money because you're facing financial difficulties and are therefore a bigger risk. If you are trying to improve your credit score, avoid applying for new credit for a while.

Make the Most of a Thin Credit File

Having a thin credit file means you don’t have enough credit history on your report to generate a credit score. An estimated 62 million Americans have this problem. Fortunately, there are ways you can fatten up a thin credit file and earn a good credit score.

One is Experian Boost. This relatively new program collects financial data that isn't normally in your credit report, such as your banking history and utility payments, and includes that in calculating your Experian FICO credit score. It’s free to use and designed for people with no or limited credit who have a positive history of paying their other bills on time.

UltraFICO is similar. This free program uses your banking history to help build a FICO score. Things that can help include having a savings cushion, maintaining a bank account over time, paying your bills through your bank account on time, and avoiding overdrafts.

A third option applies to renters. If you pay rent monthly, there are several services that allow you to get credit for those on-time payments. Rental Kharma and RentTrack, for example, will report your rent payments to the credit bureaus on your behalf, which in turn could help your score. Note that reporting rent payments may only affect your VantageScore credit scores, not your FICO score. Some rent reporting companies charge a fee for this service, so read the details to know what you’re getting and possibly purchasing.

A new entry into this field is Perch, a mobile app that reports rent payments to the credit bureaus free of charge.

Keep Old Accounts Open and Deal With Delinquencies

The age of credit portion of your credit score looks at how long you've had your credit accounts. The older your average credit age, the more favorably you appear to lenders.

If you have old credit accounts you’re not using, don’t close them down. Though the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other cards would lower your available credit and increase your credit utilization ratio. That could knock a few points off your score.

And if you have delinquent accounts, charge-offs, or collection accounts, take action to resolve them. If you have an account with multiple late or missed payments, for instance, get caught up on the past due amount, then work out a plan for making future payments on time. That won’t erase the late payments, but it can improve your payment history going forward.

If you have charge-offs or collection accounts, decide whether it makes sense to pay off those accounts in full or to offer the creditor a settlement. Newer FICO and VantageScore credit-scoring models assign less negative impact to paid collection accounts. Paying off collections or charge-offs might offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven years—bankruptcies for 10.

Consider Consolidating Your Debts

If you have a number of outstanding debts, it could be to your advantage to take out a debt consolidation loan from a bank or credit union and pay them all off. Then you'll just have one payment to deal with and, if you're able to get a lower interest rate on the loan, you'll be in a position to pay down your debt faster. That can improve your credit utilization ratio and, in turn, your credit score.

A similar tactic is to consolidate multiple credit card balances by paying them off with a balance transfer credit card. Such cards often have a promotional period during which they charge 0% interest on your balance. But beware of balance transfer fees, which can cost you 3–5% of the amount of your transfer.

Use Credit Monitoring to Track Your Progress

Credit monitoring services are an easy way to see how your credit score changes over time. These services, many of which are free, monitor for changes in your credit report, such as a paid-off account or a new account that you’ve opened. They typically also give you access to at least one of your credit scores from Equifax, Experian, or TransUnion, which are updated monthly.

Many of the best credit monitoring services can also help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account that you don’t remember opening has been reported to your credit file, you can contact the credit card company to report suspected fraud.