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- Your credit score is largely determined by your payment history and credit utilization ratio.
- You can look into credit-building products such as secured credit cards or credit builder loans.
- Finally, you should always monitor your credit report to ensure there are no errors or inaccuracies.
- See Insider's list of the best credit monitoring services »
Your credit score is a number that represents how likely you are to pay off your debts, from credit cards to car loans to mortgages. The higher your credit score, the lower the risk you pose to lenders. This will qualify you for better interest rates and other perks which can save you thousands of dollars when you start taking out larger loans or make milestone purchases such as a home.
When building or improving credit, it can be difficult to get started since bad credit is self-perpetuating. If you have bad credit, your loans have greater interest rates because lenders see you as a risky investment. You have a harder time keeping up with payments, which causes you to fall behind. That cycle repeats.
Re-building credit is an uphill battle, though there are ways to reverse the cycle.
Understand how credit scores work
Credit scores from the two biggest credit scoring models, FICO and VantageScore, fall between 300 and 850, though scores rarely go that low. According to FICO, over half of consumers have a credit score between 650 and 799 with the average credit score at its all-time high of 716.
VantageScore and FICO break all possible scores into five risk categories. They are as follows:
| Credit score category | FICO | VantageScore |
| Poor/Very Poor | 300-579 | 300-499 |
| Fair/Poor | 580-669 | 500-600 |
| Good/Fair | 670-739 | 601-660 |
| Very good/Good | 740-799 | 661-780 |
| Exceptional/Excellent | 800-850 | 781-850 |
Credit scores are a reflection of your credit report, which are documents created by the three major credit bureaus — Experian, Equifax, and TransUnion — that record your credit history. For example, it will list a credit card account, when it was opened, the current balance at the time of the report, and your payment history (on-time, late, and missed payments).
These companies keep their exact algorithms under wraps, but we have a general gist of how your credit score turns into your credit score.
| FICO | VantageScore |
Payment history (35%) Credit balance (30%) Length of credit history (15%) New credit (10%) Mix of credit accounts (10%) | Payment history (40%) Length & type of credit (21%) Percent of credit used (20%) Total debt/balances (11%) Recent credit behavior and inquiries (5%) Available credit (3%) |
With a general understanding of how your credit information turns into your credit score, we can start considering ways to improve your credit.
1. Consider credit-building options
If you're starting with bad or no credit, you will need to seek out products that are available to you. This often comes in the form of credit-building products, which are designed so you can borrow money without posing too much risk to the lenders that offer these options.
Secured credit card
Secured credit cards give you a line of credit backed by a security deposit you place when you first open the card. The deposit also becomes your credit limit. Because you're technically borrowing against your own money when you use your secured credit card, your credit activities pose very little risk for credit card companies. This means you can qualify for a secured card with bad credit or even no credit at all. There are some (though not many) secured credit cards that don't even require a hard credit check when you apply.
Credit builder loans
Credit builder loans are another great way to build credit from scratch. When you take out one of these loans, the lender sets aside the money that you "borrow." You will then make monthly payments over the payment term, usually 12-36 months, that the creditor reports to the three credit bureaus. Once the term is complete and your loan is paid off, you get that money that the lender set aside.
Related: The best loans for fair credit »
Similar to secured credit cards, the lender's money is never really at risk. Many credit builder loans don't even conduct a hard inquiry on your credit. Application credentials, if any, usually rely on the information from your primary checking account.
Rental reporting services
Much of your credit score is determined by how well you can keep up with monthly balances. Yet there are plenty of non-credit-related monthly payments that you're keeping up with, the most significant of which is your rent. A rent reporting service is a third-party company that reports those payments to the credit bureaus, so you can build credit on payments you're already making. There are similar services, such as Experian Boost, that report other monthly payments such as your monthly subscription fees and utility bills.
While these can help, there are some limits. For one, this requires the approval of your landlord. Additionally, not all credit bureaus will receive this information. As a result, not all your scores will benefit from these services.
Become an authorized user
If you know anyone who would be willing to add you to their credit card, becoming an authorized user on someone's credit card will help you build credit. This option is popular for parents building credit for their children. "Authorized users can see an increase in their credit score because the payment history for the primary cardholder will be reported under their credit file," says Brandon R. Amaral, a Certified Financial Planner and founder of Amaral Financial Planning.
While becoming an authorized user will affect your payment history, it will also affect your credit utilization ratio, the amount of credit you're using compared to your total available credit. This can end up hurting you. For example, let's say you're an authorized user on a card with a $4,000 limit. The primary cardholder has a credit limit of $30,000 including other cards they use while you just have the one card. They can spend $1,500 on that card, and they'll only be using 5% of their credit. Meanwhile, that charge leaves you with a utilization ratio of 37.5% already.
2. Request a credit limit increase
It's generally recommended to keep the credit utilization ratio on your revolving credit accounts under 30%. That said, every dollar that you're in debt has an impact on your credit score. If you're having a hard time keeping that down with your current limit, you should consider requesting a credit limit increase on your credit cards. "If your income has increased, most credit card companies are happy to increase your credit limit," Amaral says.
Most of these credit card companies have some kind of portal through which you can request a credit limit increase, and will respond to your request in minutes if not seconds. You can make these requests every six months. Here's a full guide on how to request a credit limit increase.
3. Avoid applying for new lines of credit
It may be tempting to open new lines of credit when you're trying to build credit. However, every time you apply for a new loan or a new credit card, the credit reporting agencies receive what is called a hard inquiry, which is then recorded on your credit report. One hard inquiry may drop your credit score by a few points, but these compound exponentially with each additional hard inquiry. This is because creditors will wonder why you're taking out so much credit in such a short period of time, and, more importantly, if you're good for it.
A new line of credit will also drop the average account age, another factor that credit scoring models consider. "Every time you apply for a new line of credit, your credit score will initially drop," Amaral says. "This is because your 'average account age' will decrease from adding new credit cards."
4. Keep old credit accounts open
Maybe you don't really use that first credit card you qualified for. Instead of canceling it, just stow it away. Canceling it will reduce the average age of accounts on your credit report, which will hurt your credit score. Additionally, Amaral says "closing an old card that has most of your good payment history will hurt your score."
Another reason closing a credit card can hurt your credit is because its credit limit will no longer be included in your utilization ratio.
5. Resolve any accounts that are past due
Bringing past-due accounts current is a key step in improving your credit scores. Remember that payment history is 35% of your credit scores, so the sooner you have a positive payment history, the better. Amaral suggests reviewing all your payment plans and interest rates and developing a strategy to pay off the loans or accounts to minimize the interest they will pay. Once the accounts are current, you can revise your payment plan to pay the accounts each month to pay off the entire balance.
If your credit payment is already in delinquency, meaning it's at least 30 days late, the damage to your credit can be severe. However, you can attempt to get your creditor to forgive the delinquency and have it removed from your credit reports through a goodwill letter. This is more likely to work if you have a history of keeping your balances in check.
6. Monitor your credit reports
Your credit report isn't infallible. In fact, errors on your credit reports are quite common, and errors are steadily rising. In 2013, the Federal Trade Commission reported that 20% of consumers had some kind of error on at least one of their credit reports. In 2021, 34% of consumers found an error on their credit reports.
These errors can be as innocuous as a misspelled name, but they can also be damaging to your credit score, such as a misreported delinquency or a hard inquiry that you didn't approve. While you should be disputing all errors on your credit report regardless of their severity, these bigger issues warrant additional investigation. If, for example, you find an entire line of credit that you didn't open on your credit report, you're likely the victim of identity theft.
Unfortunately, your credit reports aren't freely available for you to view. You get a grand total of three free credit reports each year, one from each bureau, courtesy of the Fair Credit Reporting Act. You can request these from AnnualCreditReport.com.
It's generally recommended that you ration these reports, requesting one every four months. That said, you can also employ a credit monitoring service that often gives you access to your credit reports and lets you know when there has been a change on your credit report.
While this practice may not actively increase your credit score, at the very least you can be confident that your credit score is an accurate representation of your credit file.
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Aura – All-In-One ID Theft Protection
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IDShield 3 Bureau Individual Plan
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IdentityForce UltraSecure+Credit
When working on your credit, it's important to note that improvements to your credit score will slow as it rises. It's easier to get from 600 to 650 than it is to get from 650 to 700.
While it's frustrating to hear, it's also worth mentioning that building credit takes time. You can be doing everything right with your utilization and your payments, but if your accounts are pretty new, you will need to be patient.
Improving credit score frequently asked questions (FAQ)
Most negative information, such as a delinquency, falls off your credit report after seven years. Bankruptcies will fall off after 10 years.
No, checking your credit report results in a soft inquiry on your credit as opposed to a hard inquiry. These do not affect your credit score and are not visible to anyone but you.
The average FICO credit score is 716 as of October 2022 and has remained there since April 2021. The average VantageScore credit score dropped from 697 to 696 in December 2022, its first dip since March of 2022.
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