It only takes one Google search to find how to increase your credit score. But the problem isn’t that people don’t know how to do it but what they’ve done already.
See, boosting your credit score isn’t a big deal. Keeping it high is a different story. It takes years to build up your score and only a few days to take it down. If you’re not careful, most mistakes will last years, if not forever.
Make sure you’re following the right steps before you regret not having done it sooner.
What And Why Do We Use Credit Scores?
Your credit score is an accurate indicator of how well you manage your finances. Not only it ensures economic trust, but the system rewards you for keeping your score high.
Credit score comes down to one question: who would you trust your money? Should you trust anybody other than yourself?
Unfortunately, your money isn’t a stable resource. If your finances aren’t improving, they’re worsening. In today’s fast economy, it matters to have your money working at all times. As a result:
- Banks offer an amount in exchange for interest.
- People invest in stocks rather than storing money.
- Lenders provide funds to those with reliable financial history.
Although your score doesn’t directly relate to your net worth, it’s a powerful tool to get privileges and accelerate wealth.
Let’s say you have a perfectly working blueprint for running a profitable business (not surprising, knowing all the information that’s available today). The thing is, your expansion is capped to the amount of money you have. Businesses require funds like any other investment.
What if you had an exceptional credit score as well? Then, you would get far more financial freedom. It’s much easier to approve loans and credit lines, thus borrowing money and saving a lot of time.
Here’s the tricky part: banks love offering money (almost exclusively) to those who don’t need it. Having a high score means you’re an expert in personal finance, and you rarely face any economic challenges. Congratulations! You’re a lender’s ideal client.
Then, what’s the point of getting benefits when you no longer need them? Why can’t they help you when you do need them? That’s precisely why you should start building that score as soon as possible, even if it looks futile at the moment. It can take only a few months to get a score of over 700 for almost no cost.
How Long Does It Take To Build Credit?
Yes, it’s possible to build your credit fast. If you just got started and have no credit history, you can still reach a decent score in a matter of months. We’ll share a strategy you can use to do it, and how fast you should expect it to happen.
Before we start, remember the value of credit history. Building credit fast from zero means your credit length is minimum, so it will be harder to keep that score in the short term.
If you only want a “good” credit score, focus on the most determining factors: credit utilization and payments.
5 Ways To Boost (Or Ruin) Your Credit Score
For a first impression, a high score for institutions means reliability, while a bad one means “bad investment.” There are two credit unions, VantageScore and FICO, who define what a good score is:
- Someone who always pays on time
- A person who can manage various types of credit lines, all at once
- People who have built their score for years prove predictable results
- Those who live below their means, whose expenses don’t grow as income increases
- A person who isn’t running out of money and rarely sends credit applications
In specific, you may have heard of those in the form of:
- Payment Delays (35% of score): How many times have you fallen behind due payments? A rate of 97% is considered poor-bad credit, while 98% is risky, and over 99% is ideal. Making more payments is fundamental to reduce your error margin.
- Utilization Rate (30% of score): How much of the credit available do you use? Your credit score is more likely to drop the higher it is, being 50%+ the worst, 30-50% the barely acceptable, and everything under 29% ideal. Your utilization is shared among all your credit lines.
- Credit Length (15% of score): Lenders take high risks when offering to borrowers with only a few years of credit length. You should at least aim for four to five years worth of history, or over seven to get the perfect score. They only consider the average length of all your credit lines.
- Total Credit Lines (10% of score): How well can you manage different types of debt? Banks trust people who have dozens of credit lines, as long as they can handle those payments well. It’s harder to do it with less than ten lines, although it only stands for 10% of your score.
- Hard Inquiries (10%): How often are you applying for credit cards and loans? Lenders may find it worrisome to see you sending applications in very little time. “Are you running out of money?” Banks expect to receive less than two inquiries per year, and anything higher will lower your score, only temporarily.
Credit Lines And Length
Here’s a dilemma. Your credit score boosts up to 10% whenever you open new credit lines. However, it also decreases by 10% when you create too many hard inquiries in a short time. What should you do?
Mind that whenever you apply for a new credit card, your credit length reduces proportionally. If you plan to open several in the future, create them all at once as soon as you start building your credit. FICO recommends having over a dozen accounts (over twenty-one for the perfect score).
The hard inquiry number will, of course, increase. But since the effect only lasts twelve months, your score will rise by 10% later.
Open as many as you can handle so that your score doesn’t drop whenever you do. You can still open accounts in the future, but how do you think they will impact? If you have five credit cards with five years each, it won’t affect as much as if you only had a single one.
The Best Credit Score
Many will find it more useful to have a good score without caring about excellence. Why? Because it takes too much work to reach those marks, but it takes very little to be “good.”
Your score goes from 300 to 850, and the average is 700. Do you think your benefits will radically change if you move from 750 to 850? How about 400 to 600? And 650 to 750?
As you can see, it’s in the middle where margins are smaller, and things change the most. That’s why it takes a few months or weeks to reach 700, but it takes years to reach the extremes. Knowing how easy it is to drop from 800, most people will stay between ~700-750.
It’s easy to get a good credit score if you pay on time and keep utilization rates low. If you get into debt, your credit score fixes as soon as you pay it back. You can affect 65% of your credit score and change it within a few weeks by being financially responsible.
What if you want to get over the exceptional 800 consistently? It will require patience and some discipline at the beginning:
- Passive score increase. The ideal score requires over seven years of credit length. That’s the benefit you would get if you started building early, even if you didn’t need it back then.
- Good history. Some critical events may affect your score for almost a decade. If you have one of those, you likely won’t be able to get over 800 until they leave your history.
- History length. Let’s say you’ve been building for years/decades. The time it will take you to reach 800 depends on how close your average score is from there and how long you’ve been building. The longer you do it, the longer it takes, and the closer you are, the sooner.
- Awareness. How unrealistic does it sound to build credit consistently for years without making a single mistake? Since errors can last years, knowing what not to do matters more than knowing how to boost your score.
For the perfect score, it’s safe to expect five to ten years to get close to 850. Nobody disagrees: it’s worth it. The question is, do you have the time and commitment?
How To Prevent Your Credit Score From Dropping?
#1 Check your credit report often
Many of us take this step for granted. Especially when there’s little activity, why should you bother in checking it? Whether you used it or not, it still matters. Some factors outside of your control may change it as well:
- A person steals your bank account and applies for loans.
- A seller/lender makes a mistake with the numbers and charges you more than you owe.
- FICO updates its scoring system, so your previous strategy may no longer work.
It becomes easier to fix your score when you revise your credit report. If you haven’t, how do you expect to improve a score you don’t know?
#2 Set realistic credit score expectations
It is 100% possible to go from 600 to 800 within 60, even 45 days, as marketers advertise. It’s not the general rule, but only an optimistic scenario.
- It assumes you didn’t go through any major, negative events: bankruptcy, foreclosures, late payments, loan default.
- They tell you how to increase it instead of how to prevent it from dropping. You learn how to get the credit score, not how to keep it.
- You can increase your score no matter how low it is. Just don’t expect it to happen overnight. Accept it may take longer. The longer your history is, the harder it becomes to change it. Consistency is essential in finance.
#3 Start as soon as possible
According to the previous statement, a long history helps if you’ve always had good credit. It means mistakes will have less impact on your score because of their small proportion in comparison.
As the golden rule of lending says, people who don’t need money are the best lender clients, who have more chances to pay it back. Do you think you don’t need it right now? That’s precisely the best time to start building your score.
Since your credit length determines ~15% of your score, the sooner you start building, the better. Open a few accounts with credit cards to prove your payment consistency. It may be useless today, but in the long term, you’ll save a lot in interest.
#4 Time your credit utilization
How does your debt affect your credit utilization rate? If you want to keep the score high, keep the percentage as low as possible.
Before you take action, make sure your limits are as high as they can be. You can also open credit cards with zero balance to boost it.
Take advantage whenever you find your credit exceptionally high. Life is uncertain, and you don’t know how long that will last. Someone could have made a mistake, or the scoring formula changed temporarily.
Use that credit to get better deals before it drops. Of course, the more often you check your report, the more likely you are to find this opportunity.
#5 Keep high awareness
Understand that, no matter what you do, your credit may still drop for no apparent reason. Although you should be the first person to blame, also be open to disputes if you think the credit bureaus made a mistake.
What if they say you caused the credit score to drop, and you don’t recognize the events they mention? Then, someone else could have got into your accounts and done it.
Despite the many red flags and prevention tips, one simply cannot guarantee 100% protection. You never know when identity thieves may have access to your account. The safest measure is to set updatable verification steps and revise your reports more often.
Prevention can be tricky, especially when dealing with thieves posing as trusted brands. If you’d like to learn more about how to secure your accounts, check the ultimate guide of identity theft on our website.
#6 Make debt simpler
When we mention debt, some people won’t even want to think of it. They have such a complex situation that has become intimidating to deal with it without feeling overwhelmed. As a result, they don’t know what they owe and don’t want to know it, because it’s probably terrible.
Although the situation isn’t ideal, your debt may be lower than you think once you estimate it objectively. But you can’t pay it back if you don’t know what you owe.
Simplifying not only helps you manage debt better. It also improves your credit score (or at least, be less negative), since having a single big debt is better than having two or more.
You might find a few surprises too:
- Perhaps your lender overstated the owed amount, and you can request a revision.
- They may not require you to pay the amount in full. If you negotiate, they may offer a more comprehensive repayment plan.
- If you have a plan, you could increase your credit limit despite how counter-intuitive it sounds. It could help to win time to pay everything back without hurting much your score.
#7 Always consider debt negotiation/forgiveness
Just as you shouldn’t overestimate how quickly you can improve your score, you shouldn’t underestimate your chances of getting out of debt.
Some of us have the bad habit of hiding from problems rather than solving them. We somehow convince ourselves the problem isn’t critical, or it will resolve itself, so our excuses disable our brains from thinking of solutions.
They won’t forgive my debt.
The lender won’t renegotiate our loan.
Debt grows faster than my income, so I should default on it.
Did you tell them about it, or is it an assumption? If you’re not paying it back, lenders still prefer getting something than nothing. Maybe they do forgive you part of it, so you pay it back sooner and fix your credit. You don’t lose anything for trying, and the potential benefits are substantial.