Question: Five years after college, I finally got a job with a decent salary. So now I’ve been able to handle my student loans and even pay down some of my credit card debt. I met a great woman, and we want to buy a house next year. Her credit score really stinks, though, so we need to use mine. (She has two collections on her credit report, one that’s paid off and the other she’s paying now.)
But I’m only at 692. I want to get it into the 700s or even 800s. I’m thinking of taking out some more loans and paying them back immediately, because I heard that can help. Or doing the same thing with credit cards. But what’s the fastest way to improve your credit score?
– Kenny in Michigan
Howard Dvorkin, Debt.com Founder and CPA, responds…
I admire your focus and drive, Kenny. Even with unprecedented access to credit scores – something you couldn’t easily do even a few years ago – Americans tend to be apathetic about looking up their scores, much less improving them.
That said, your credit score of 690 isn’t bad. Literally, it’s considered “good.” Credit scores range from 300 to 850, and they traditionally break down like this…
- 300-629: bad credit
- 630-689: average credit
- 690-719: good credit
- 720 and up: excellent credit
So improving your credit score in a year is definitely attainable. First, however, you need to learn how that score is decided – because some of the ideas you floated above will actually hurt your score.
The five factors that impact your credit score
Your credit score is split into five sections, and not all of them are equal. In fact, two dwarf the others.
The biggest chunk (at 35 percent of your credit score) is your “payment history.” That simply means how often you pay your bills on time – and how often you’re late. Simply put, paying your bills before the due date will hike you score more than anything else.
Along those lines, the second-biggest chunk (at 30 percent) is “credit utilization.” That’s just the fancy way of saying: How much do you owe on the credit limits you have? If you max out your credit cards, your score will be lower.
Next up, at only 15 percent, is “length of credit history.” Lenders love to see that you’ve had loans and credit cards for a while, and that you’ve been paying them regularly and early. So if you’ve had a credit card for years, keep it.
There’s “new credit” and “credit mix,” each at 10 percent. You want to avoid opening many new lines of credit, because that looks like you’re in financial trouble. Credit mix is a much more vague category but usually means you have a credit card, an auto loan, and maybe a personal loan – because many lenders figure this shows you can deftly handle whatever payments you need to make.
The best way to raise your credit score
As you can see, taking out some loans and paying them back immediately won’t really make a dent in our score. First, you’ll be dinged for taking out a lot of “new credit,” and while you’ll earn a few points for paying them back – your “payment history” – it’s important to look at everything else going on in your financial life.
My suggestion? Pay off your credit cards but keep them open. Use them only in amounts you know you can pay off each month. Those are the two biggest steps. Then read the Debt.com report, How to Improve Your Credit Score Step-by-Step. That will get you where you want to go.
One note about your girlfriend: if her credit score is suffering under collections, please tell her she’s not doomed. In fact, a fellow Debt.com expert has helped a reader with five collections. She should read How Do You Beef Up A Credit Score When You’re Still Paying Down Debt?