How to Improve Your Fico Score

By Eric Tyson, Robert S. Griswold

The FICO score evaluates five main categories of information. Some, as you’d expect, are more important than others. It’s important to note the following about your fico score:

  • A score considers all these categories of information, not just one or two.
  • importance of any factor depends on the overall information in your credit report.
  • Your FICO score looks only at information in your credit report.
  • Your score considers both positive and negative information in your credit report.
  • Raising your score is a bit like getting in shape.

The percentages are based on the importance of the five categories for the general population. For particular groups — for example, people who haven’t been using credit for very long — the importance of these categories may be different.

Your loan repayment history

One of the most important factors in a credit score is your payment history; it affects roughly 35 percent of your score. In the area of payments, your score takes the following into account:

  • Payment information on many types of accounts: These types of accounts include credit cards such as Visa, MasterCard, American Express, PayPal Credit, and Discover, credit cards from stores or online merchants where you do business, installment loans (loans such as a mortgage on which you make regular payments), and finance company accounts.
  • Public record and collection items: These items include reports of events such as bankruptcies, foreclosures, suits, wage attachments, liens, and judgments.
  • Details on late or missed payments (delinquencies) and public record and collection items: The FICO score considers how late such payments were, how much you owed, how recently they occurred, and how many you have.
  • How many accounts show no late payments: A good track record on most of your credit accounts increases your credit score.

So how do you improve your FICO score? Consider the possibilities:

  • Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.
  • If you’ve missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
  • Paying off or closing an account doesn’t remove it from your credit report. The score still considers this information, because it reflects your past credit pattern. But closing accounts that you never use can help because the number of lines of credit and the total dollar amount of available credit are factors in the credit scoring algorithms.
  • If you’re having trouble making ends meet, get help. This step doesn’t improve your score immediately, but if you can begin to manage your credit and pay on time, your score gets better over time.

Amount you owe

About 30 percent of your score is based on your current debt. In the area of debts, your score takes into account the following information:

  • The amount owed on all accounts: Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
  • The amount owed on all accounts and on different types of accounts: In addition to the overall amount you owe, the score considers the amount you owe on specific types of accounts, such as credit cards and installment loans.
  • Whether you show a balance on certain types of accounts: In some cases, having a small balance without missing a payment shows that you’ve managed credit responsibly. But keep open only the credit accounts that you intend to use because having a bunch of open credit accounts with no activity can be a negative.
  • How many accounts have balances: A large number can indicate higher risk of overextension. Although many stores and online retailers want to lure you into having their specific branded or affinity credit card, it’s better to consolidate all your credit to just a few of the major credit cards that are widely accepted.
  • How much of the total credit line you’re using on credit cards and other revolving credit accounts. Someone closer to “maxing out” on many credit cards may have trouble making payments in the future.
  • How much of installment loan accounts is still owed, compared with the original loan amounts. For example, if you borrowed $10,000 to buy a car and you’ve paid back $2,000, you owe (with interest) more than 80 percent of the original loan. Paying down installment loans is a good sign that you’re able and willing to manage and repay debt.

How to improve your FICO score:

  • Keep balances low on credit cards and other revolving credit. High outstanding debt can adversely affect a score.
  • Pay off debt. The most effective way to improve your score in this area is by paying down your revolving credit.
  • Don’t close unused credit accounts that you still may use as a short-term strategy to raise your score. Generally, this tactic doesn’t work. In fact, it may lower your score. Late payments associated with old accounts won’t disappear from your credit report if you close the account. Long-established accounts show you have a longer history of managing credit, which is a good thing.
  • Don’t open new credit cards that you don’t need, just to increase your available credit. This approach can backfire and actually lower your score. Again, although it’s tempting when your local retailer makes that great offer of an extra 10, 20, or even 50 percent savings on today’s purchases if you just open a credit account with them, don’t do it — unless you’re buying an extremely expensive item (although most of these deals have limits or caps) and you’re able to immediately make full payment for all your monthly expenditures, plus you actually intend to use the card regularly.

Length of credit history

About 15 percent of your score is based on this area. In this area, your score takes into account

  • How long your credit accounts have been established, in general: The score considers both the age of your oldest account and an average age of all your accounts.
  • How long specific credit accounts have been established: Extended responsible use of credit accounts with major credit cards and/or major retailers can have a positive effect on your credit score. This is much better than having a lot of accounts that are open for only a short period of time.
  • How long it’s been since you used certain accounts: Not using all your available credit shows self-control and responsible use of credit.

If you’ve been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts lower your average account age, which will have a larger (negative) effect on your score if you don’t have a lot of other credit information.

New credit

Taking on a lot of new debt affects your score, too. About 10 percent of your score is based on new credit and credit applications. In the area of new credit, your score takes into account

  • How many new accounts you have: The score looks at how many new accounts you have by type of account. It also may look at how many of your accounts are new accounts.
  • How long it’s been since you opened a new account: Again, the score looks at this info by type of account.
  • How many recent requests for credit you’ve made: This is indicated by inquiries to the credit reporting agencies. Inquiries remain on your credit report for two years, although FICO scores consider inquiries only from the last 12 months. The scores have been carefully designed to count only those hard inquiries that truly impact credit risk. Inquiries for insurance or employment are soft inquiries and don’t negatively affect your credit score.
  • Length of time since lenders made credit report inquiries: The older the lender inquiries, the better. Inquiries more than a year old are ignored. In this case, being ignored is good.
  • Whether you have a good recent credit history, following past payment problems: Reestablishing credit and making payments on time after a period of late payment behavior helps to raise a score over time, so can disputing any incorrect entries or even providing a letter of explanation.

Here are some ways to improve your FICO score:

  • Do your rate shopping for a specific loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  • Reestablish your credit history if you’ve had problems. Opening a select number of new credit accounts responsibly and paying them off on time will raise your score in the long term.
  • Request and check your own credit report and FICO score. It’s okay to do this and it doesn’t affect your score because it’s a “soft inquiry” — as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of credit in use

About 10 percent of your score is based on this category. In this area, your score takes into account the following factors:

  • What kinds of credit accounts you have: Your score considers your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. Don’t feel obligated to have one of each.
  • How many of each type of credit account you have: The score looks at the total number of accounts you have. Think quality, not quantity. Apply only for credit accounts that you know you’ll really need, and always use all types of credit judiciously and responsibly.

How to improve your FICO score:

  • Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix or fall for the trap of thinking that more accounts is better. Years ago, common advice was that to build up your credit history, you must go out and buy something you really don’t need just to establish that you can show a good payment history— our advice is to buy only what you have to buy on credit and pay it off as promised.
  • Have credit cards — but manage them responsibly. In general, having two to three major widely accepted credit cards and installment loans (and making timely payments) raises your score.
  • Note that closing an account doesn’t make it go away. A closed account still shows up on your credit report and may be included in the score.

Adding up inquiries

A search for new credit can mean greater credit risk. This is why the FICO score counts inquiries — those requests a lender makes for your credit report or score when you apply for credit.

FICO scores consider inquiries very carefully because not all inquiries are related to credit risk. You should note three things about credit inquiries:

  • Inquiries don’t affect scores very much. For most people, one additional hard credit inquiry takes less than 5 points off their FICO score. However, inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.
  • Many kinds of inquiries aren’t counted at all. Ordering your own credit report or credit score from a credit reporting agency has no impact on your score because it’s a soft inquiry. Also, the score doesn’t count requests a lender makes for your credit report or score to make you a preapproved credit offer, or to review your account with them, even though you may see these inquiries on your credit report.
  • The score looks for rate shopping. Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re looking for only one loan. To compensate for this reality, the score counts multiple inquiries in any 14-day period as just one inquiry.