How to improve your credit score

Let’s say that you’re in the market for a brand new car (it’s usually better to buy used cars, but that’s a story for another day). You have this gorgeous car picked out, and all you have to do is pay for it. Since this is such a large purchase, you probably don’t want to — or can’t — pay for it all at once. Instead, you’ll apply for an auto loan and pay that off over time.

When you apply for a loan, a bank or financing company will decide whether to approve it. In order for banks to decide how risky it is to loan you money, they use something known as a credit score. The higher your credit score, the less risky it is to lend you money.

An example credit score from Credit Karma.

Your credit score, also known as a FICO score, is very important! A higher credit score could mean access to lower interest rates on loans, better credit cards, and even cheaper cell phone plans. All of this adds up to tens of thousands of dollars over the course of your life.

Exactly how your credit score is determined is a bit of a mystery, but there are a few basic tips that can help you improve it.

Understanding your credit report

The first step to improving your financial health is to understand where your money is currently going. (Hint: that’s why Penny is so helpful 😉)

The same goes for your credit score. The first step to improving this three-digit number is to understand how you’re currently doing. And the best way to do that is to get your credit report at Credit Karma—it’s free!

On your credit report, you’ll see a breakdown of the various factors that go into your credit score:

Factors that affect your credit score.

For now, let’s focus on what to do about the four factors that have the largest impact on your score: payment history, credit card utilization, derogatory marks, and age of credit history.

Payment history: Pay your bills on time

Pay your bills and pay them on time. This is the single most important contributor to a good credit score. You may want to consider setting up automatic bill pay so that you don’t accidentally miss a payment. That’s an easy way to prevent late payment fees and avoid taking a hit to your credit score.

If automatic bill payments won’t work for you, set yourself reminders to pay your bill every two or three weeks. That way, even if you don’t get to it right away, you’ll still have time to pay your card before it’s considered late.

If you’re already behind on payments, then try to catch up as soon as possible. Your payment history will stay on your record for seven years, but your credit score weights your recent activity more heavily. If you get up to date with your bills — and you keep them that way — your credit score will begin to rise.

Credit card utilization: Keep credit card balances low

Your utilization shows how much credit you’re using. For example, if you have a $1,000 credit limit on your credit card, and a balance of $500, then you have a utilization rate of 50% ($500 / $1,000 = 50%). This percentage has a high impact on your credit score, but it is also fairly straightforward to improve. A good rule of thumb is to stay below 30%. If you can get that number below 20%, then you’re in really good shape.

There are a number of things that you can do to improve your credit card utilization, but the simplest one is to start paying down your credit card balances as quickly as possible. This may require some discipline to spend less, but it’s definitely worth it!

Derogatory marks: Verify and wait

A derogatory mark is a negative record that stays on your credit report for at least seven years. Some examples include bankruptcy, foreclosure, or bills being sent to a debt collector.

First, you should check that the mark is accurate, especially if it’s a bill that is in collections. If the mark doesn’t belong on your credit report, you should file a dispute with each credit agency: Experian, TransUnion, Equifax.

If the mark is accurate, there’s not much you can do. Any derogatory marks will eventually be removed from your history. In the meantime, the best plan of action is to keep the rest of your credit history squeaky clean.

Age of Credit History: Keep your accounts open and current

The age of your credit history is determined by averaging the length of time you’ve had each open account. The more time you’ve been consistently paying off your loans, the better your credit score.

The only way to improve the age of your credit history is time. Keep your accounts open and current with payments. You should avoid closing credit lines unless they cost you money, such as a credit card with an annual fee. Over time, your average credit age will increase and your credit score will rise.


When it comes to getting a loan, there is nothing more important than your credit history. It’s like a report card that follows you throughout life. A better grade, or credit score, shows that you have a history of paying off your debts. If you build a long and consistent history, it will make lenders more comfortable, and more willing to give you a loan with a favorable interest rate. If you take some of the steps outlined above, hopefully you can make your credit score work for you rather than against you.


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