How to Improve Your Credit Score

Quick credit score facts

What is a credit score

A credit score is a way banks, credit unions, and other lenders assess a person’s likelihood of paying back a loan based on their credit history. Your score is a 3-digit representation of your creditworthiness. Most commonly, these scores range from 300 to 850. The higher the number, the better your score.

So what’s a good credit score

The following is based on VantageScore, the credit model used by MoveCU.

300 - 499 - Very Poor

Securing a loan is going to be difficult if not impossible. Steps should be taken to repair your credit score.

500 - 600 - Poor

You can still most likely get a loan, but you should be prepared to pay a higher interest rate unless your credit score is improved.

601 - 660 - Fair

You should be eligible for loans and credit cards at good rates.

661 - 780 - Good

You should be eligible for loans and credit cards at competitive rates, if not the best rates available, when you decide to borrow.

781 - 850 - Excellent

You have a fantastic credit score. You should be eligible for the best lending and credit cards interest rates if you decide to borrow.

How is a credit score determined?

In the U.S. credit scores are calculated based on information accessed from the three major credit bureaus: Experian, TransUnion, and Equifax. These credit bureaus take a look at five factors when determining your score:

• 1. Payment History - Your payment history considers whether or not you make payments on time, how often you miss payments, how many days past the due date you pay the bills, and how recently payments have been missed. This includes items like credit cards, but also utilities payments, rental payments, and more.
• 2. What You Owe - This is based on the entire amount you owe and the types of accounts you have. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.
• 3. New vs Old Credit - If you’ve recently opened a new credit account, this may calculate in and impact the length of your credit history.
• 4. Types of Credit Used - This includes revolving debt (like credit cards) and installment loans (like mortgages, home equity loans, auto loans, personal loans, and student loans). How many of each type of account you have may also have an impact.
• 5. Recent Credit Activity - If you’ve opened a lot of accounts recently or applied to open a lot of accounts, it may suggest potential financial trouble and thus may lower your score. However, credit scoring models are also built to recognize that consumers who are shopping for a loan aren't necessarily extra risky.
• 6. Credit History Length - The longer your history of making timely payments, the higher your score will be. While it may seem wise to avoid applying for credit and carrying debt, it can actually hurt your score if lenders have no credit history to review.

The two most common credit scoring models are FICO and VantageScore.

Though FICO and VantageScore credit scores are calculated in slightly different ways, the premise is the same: To determine if you, given the opportunity, are able to and willing to pay back a loan or credit card on a timely basis, given your past behavior.

NOTE: Though credit unions historically are more lenient when it comes to credit scores and lending, even they have lines they don’t like to cross because of the risk it puts on them.

How to improve your credit score

Keep in mind that improving your credit score is very situation-dependent, so we can not give you exact steps to take without knowing your situation. However, here are some of the steps many take to see some improvement.

• 1. Dispute credit report errors - This should be your first step. A mistake on one of your credit reports can drastically pull down your score. To request your free annual report from each of the three major credit bureaus, use AnnualCreditReport.com. Be sure to dispute any errors that you see. You can report errors using the following online dispute forms: Equifax dispute form, Experian dispute form, and TransUnion dispute form.
• 2. Pay any revolving debt down strategically - The portion of revolving debt you are using at any given time is called your credit utilization. If you can, stick to using 30% of your limit or less at any given time. The highest scorers use below 7%. Credit cards are the most common type of revolving debt, so if you, for example, have a limit of $10,000, you should keep your balance at $3,000 or below at all times.
• 3. Request higer credit limits - If your credit limit increases but your balance stays the same, you INSTANTLY increase your credit utilization, thus potentially improving your credit score. The key is, you must keep your balance the same or lower for this to work.
• 4. Pay bills on time, every time - Late payments are one of the biggest ways people lower their credit score. And more unfortunately, this type of mistake stays on your report for 7.5 years, so it’s the sort of mistake that sticks. However, it can be fixed if you start paying bills on time, every time. That includes paying off credit cards and other revolving credit in full and on time every month.
• 5. Get added as an authorized user - If you have a close friend or relative who has a credit card account with a high credit limit and good history, ask if you can be added as an authorized user. You can benefit from their positive payment history - the account holder doesn’t even have to let you use the card or give you an account number for this to work. Just be sure the account reports to all three major credit bureaus.
• 6. Address collections accounts - If you have collections agencies after you, paying them off and removing their debt from your reports will help improve your score. You can also remove collections accounts from your report that aren’t accurate or that are too old to be listed.
• 7. Used a secured credit card - A secured credit card is backed by a cash deposit (aka you pay it upfront and the deposit amount is generally the same as your credit limit). Use it like a normal card, make payments on time, and it can help build your credit.
• 8. Add variety - Having a variety of account types in good standing can help your credit. If you only have credit cards, consider a credit-builder loan - though make sure it reports to all three credit bureaus first. If you only have loans, adding a new credit card can help, etc.

For more resources and information on how to improve your credit score, and your financial life, visit our blog