Another factor that makes up your FICO score is known as your "credit mix," and this factor considers the different types of credit you have. For example, it's typically better to have a mix of credit cards alongside installment loans like a mortgage or an auto loan.
This step can take time since you may not be able to qualify for new credit when your score is low, and since you don't want to apply for new credit when you don't actually need it. That said, there are some simple steps you can take to add depth to your credit profile. For example, you could apply for a new credit card or ask to become an authorized user on someone else's credit card or loan.
Understanding Your Credit Score
While consumers have several different credit scores, these scores are essentially a numeric representation of a person's credit health. This means that, instead of listing whether someone is creditworthy or not on their credit reports, the credit bureaus assign scores that show where consumers fall on the spectrum from poor credit all the way up to exceptional credit.
The two most important types of credit scores, FICO scores and VantageScore, assign consumers with scores from 300 to 850. With both of these scoring models, you'll find that higher scores are always better, and that lower credit scores can be problematic in the long run.
How Your Credit Score Is Calculated
Since FICO scores are used by 90% of top lenders when making credit decisions, most articles about how to build credit talk about this type of score first and foremost. That said, it can help you to know how other types of credit scores (including the VantageScore 4.0 scoring model) calculate scores so you can figure out your next best steps.
With that in mind, you should know that FICO credit scores are determined using the following criteria:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
In the meantime, VantageScores (4.0 model) are calculated using the following criteria:
- Payment history: 40%
- Depth of credit: 21%
- Credit utilization: 20%
- Balances: 11%
- Recent credit: 5%
- Available credit: 3%
While these two scoring models use slightly different information to assign you with a credit score, they both consider the same basic information including your normal payment history, how much debt you have, how much available credit you have, and the full depth and history listed on your credit reports.
Checking Your Credit Score
There are a few different ways to check your credit score for free, and you can also check your credit reports with the three credit bureaus — Experian, Equifax, and TransUnion — with no charges required.
Here are the main ways to check your credit reports and credit score for free:
- Check your credit reports: Use the government-approved website AnnualCreditReport.com to look over your credit reports with all three credit bureaus at any time. This website lets you check these reports for free up to once per week.
- Use free apps to check your score. Free services like Mint and Credit Karma let you look at a version of your credit score for free, which can help you track your credit progress over time.
- Look over your credit card statement. Some credit cards offer a free look at your FICO score on your statement each month. Examples include the Discover it® Cash Back and the Bank of America® Customized Cash Rewards Credit Card.
What Is a Good Credit Score?
As you look for the best way to raise your credit score, you should have a general idea of where you're starting from. Here's a general overview of how credit score ranges work for both your FICO credit score and VantageScore:
FICO credit score rankings:
- 300 to 580: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very good
- 800 to 850: Exceptional
- 300 to 499: Very poor
- 500 to 600: Poor
- 601 to 660: Fair
- 661 to 780: Good
- 781 to 850: Excellent
How Often Does Your Credit Score Update?
According to Equifax, your credit scores are typically updated around once per month. However, how often the credit bureaus actually change your score can vary depending on your lenders and your unique financial situation.
How Lenders Use Your Credit Score
We keep saying that lenders use your credit score when making important credit decisions, but what does that really mean? Here's a rundown of the different ways lenders and creditors use your score to decide how much credit you can have, and with what terms.
- Lenders use your credit score to approve or deny credit. You may ultimately be approved for the line of credit you want based on your score, yet bad credit or even fair credit can lead to a denial. Note that there are loans for fair credit and personal loans for bad credit, but interest rates and fees can be on the high side.
- Your score can help you qualify for a bigger (or smaller) loan. A good credit score can help you qualify for a higher loan amount. This is especially true if your income is high and you have a strong history of employment.
- Lenders use your score to decide your interest rate and other loan terms. Like it or not, but lenders offer people with higher credit scores better interest rates and better loan terms in general.
Tips to Keep Building Your Credit
Once you boost your score 100 points, how do you keep that score and continue to improve it? For the most part, you'll want to keep doing the same things you did to improve your credit in the first place.
Keep Up the Good Habits
Keeping up positive credit habits can help you maintain a higher credit score once you reach your goal, but it can also help you keep improving from there. In order to keep your credit in the best possible shape over the long haul, you'll want to take the following steps:
- Always pay your bills on time. Since your payment history is the most important factor that makes up your credit scores, you'll want to avoid late payments at all costs.
- Keep debt levels in check. Keep your credit utilization ratio below 30% of your available credit limits for the best results.
- Apply for new credit only when you need to. It's okay to apply for new credit when you need it, but don't go overboard.
- Keep old accounts open. Older accounts on your credit reports add depth whether you're using them or not, so only close them if you have to.
Watch for Potential Pitfalls
Credit can be problematic for a lot of people, which is why so many people wind up with crushing amounts of credit card debt. To make the most of credit while avoiding the problems too many people face, consider the following:
- Set up bills for auto-pay. If you're worried about paying bills late, consider setting up bills for automatic payments that take place whether you remember or not.
- Use credit cards only for planned purchases. Don't use credit cards for splurge purchases and do your best to avoid racking up debts you can't easily pay off.
- Start using a monthly budget. Start writing down how much you plan to spend in different categories each month, then track your spending to see if it lines up.
- Keep an eye on your credit score and credit reports. Watch your credit reports to monitor for errors and signs of identity theft. Also check your scores regularly so you can celebrate your progress.
If you want to build credit fast, you should know that it almost always takes more than a single night to boost your score by more than 100 points. That said, you can make progress quickly if you use credit strategically, avoid late payments, keep debt levels at a reasonable level, and keep an eye on your credit reports over time.
While improving credit can take some discipline and planning, the effort will be worth it in the end.