Winning Back Your Finances: How to Increase Your Credit Score in 6 Months
A higher credit score can get you a lower interest rate on the debts you carry.
Credit scoring is a complex science that is something of a secret to the general public. While there are variations in the scores used by different creditors, the industry-standard score is issued by FICO. Although FICO won't divulge the exact method behind its calculations, it does publish the broad categories used for scoring, along with the percentage weight assigned to each component. You won't be able to predict on your own the exact number of points you can increase your score over a six-month period. However, you can move your score in the right direction by improving your credit behavior across the FICO scoring categories.
Pay on Time
The most critical part of your credit score is your payment history. Unfortunately, it's the hardest to increase over a short time period, such as six months. "The longer you can make payments on time, the higher your credit score will tend to go," according to L.A.-based CPA Jeff Gonzalez. He continues, "By the same token, the further you can put late payments in the past, the more your current payment record will stand out." Overall, your payment history counts for 35 percent of your FICO score, so this is an important area to attack if you want improvement. It's absolutely essential that if you want to improve your score over six months you don't make a single late payment.
Reduce Your Debt
The amount of debt you have is nearly as important as your payment history when it comes to your credit score, clocking in at 30 percent of your FICO score. The good news? This is likely to be the easiest way to improve your score over a short time period. "For maximum effect," notes Gonzalez, "just pay off your debt." When you pay down debt, your score improves not just because of your reduced debt level, but also because of lowered credit utilization, or the amount of available credit that you currently use. If you reduce your credit utilization from 80 percent to 10 percent or less, for example, you should see a major bump in your score. Gonzalez recommends asking for a credit line increase if you can't manage to pay down your debt right now. "Raising your credit line automatically decreases your credit utilization, so it's a nifty way to help your score without costing you a dime."
Avoid Credit Applications
Although new credit accounts for only 10 percent of your FICO score, credit inquiries knock an immediate 5 or 10 points off your credit score. If you're trying to improve your score, the last thing you want to do is apply for new credit. "You may get a small bump from the decreased credit utilization that results from a new credit line, but the fresh credit inquiry is likely to counteract that gain," says Gonzalez. Additionally, 15 percent of your FICO score is based on the length of your credit history. New credit doesn't help in this regard, especially if you close an older account when you open a new one.
Don't Expect Miracles
A good credit history is based on the responsible use of credit over time. While you can certainly take steps to improve your score in as little as six months, major moves upward generally take longer. This is particularly true if you already have a spotless credit history. Since you already score well in the major FICO categories, improvement of more than a few points can be difficult in a short time. On the other hand, having a negative credit history can continue to drag down your score for as long as a decade: for example, filing bankruptcy remains on your credit report for 10 years. If you have this type of negative information on your credit report, there's no way to simply remove it in the short term. However, credit scores are weighted to more recent behavior. You can help counteract your negative information, which diminishes in effect over time, by being a model borrower for as long as possible.