How To Increase Your Credit Score: A Comprehensive Guide
Your credit score is typically a three-digit number (may vary based on which country you live in) that reflects your creditworthiness and financial health. This number is crucial because it affects your ability to borrow money, secure good interest rates, and even impact your chances of renting an apartment, buying a house, or even getting a job. Whether you're a student just starting out or someone looking to improve their financial standing, focusing on maintaining a high credit score is essential for long-term financial success.
How is it Calculated?
A credit score is calculated based on several factors, including your payment history, the amount of debt you owe, the length of your credit history, the types of credit you use, and recent credit inquiries.
These elements come together to create a score, with higher scores indicating better credit health.
In Canada, your credit score will range between 300-900, while in the US your credit score will typically range between 300-850, and in the UK your credit score will range between 0-999.
Lenders, landlords, and even some employers use this score to assess your financial responsibility and reliability (to learn more about credit scores, check out this blog).
Why is a high credit score important? Simply put, it opens doors to financial opportunities and savings. With a high credit score, you can qualify for lower interest rates on loans and credit cards, which can save you thousands of dollars over time. It also gives you access to better financial products and services, like the very best credit cards with rewards and benefits (if you enjoy learning about maximizing credit card benefits we highly recommend signing up for the Daily Drop newsletter!).
Additionally, a high credit score can give you more negotiating power when applying for loans or leases.
Even students and young adults should pay attention to their credit scores. Starting early can set the foundation for a strong financial future. Good credit can help you secure your first apartment, finance a car, or even land your first job. On the other hand, poor credit can limit your options and make financial life more challenging.
In this comprehensive guide, we'll explore actionable steps you can take to increase your credit score. We'll cover everything from understanding the factors that influence your score to practical tips for improving it. Whether you're just starting out or looking to repair your credit, this guide will provide you with the knowledge and tools you need to take control of your financial future.
How to Increase Your Credit Score:
If you have a good credit score, congratulations- keep doing what you’re doing! If your credit score is fair or poor, rest assured there are several ways to improve it. Improving your credit score is a gradual process (often taking months or years), but there are several steps you can take to boost your score over time:
Pay Your Bills on Time: Your payment history is the most critical factor influencing your credit score. Make sure to pay all your bills, including credit card bills (ideally not just the minimum), loans, and utility bills, on time.
Reduce Credit Card Balances: Aim to keep your credit card balances low relative to your credit limits. High credit card balances (even ones you pay off each month) can negatively impact your credit utilization ratio, which is the amount of credit you're using compared to the total available credit. Keeping balances low (ideally under 30% of your available credit) can help improve your credit score. One creative way to do this is to transfer money to your credit card throughout the month instead of letting a balance build up high and then waiting to pay it off at the end of the month. For example, if you’re 10 days into your monthly billing cycle and you’ve already put $400 on your credit card, you can transfer some money (even the full $400) to your card to reduce your balance back down to zero to prevent it from ever getting very high.
Consider Increasing Your Credit Limit: If you get a notice about being able to increase the limit on your credit cards, you may want to accept it! This is especially useful if you find yourself using more than 30% of your available credit very often as increasing your limit will lower the percentage of credit that you’re using. For example, if you have a credit card with a $10,000 limit and you’re regularly using it for $4,000 (40%) each month, increasing it to $15,000 will lower your utilization ratio to 27%. This same reasoning applies when you’re considering closing down a credit card that you don’t use- keeping a free credit card open and never using it can help keep your credit limit high and your utilization low. Note: if you’re worried about being tempted to spend more with a higher limit, focus on other methods to increase your credit score and keep your credit limit where it currently is (or lower it if you need to)!
Pay Off Debt: Work on paying off any outstanding debts, especially high-interest debts like credit card balances and personal loans. Lowering your overall debt can help to increase your credit score.
Avoid Opening Too Many New Accounts: Each time you apply for new credit (like a credit card, line of credit, or car loan), it generates a hard inquiry on your credit report, which can temporarily lower your score. Limit the number of new credit accounts you open, especially within a short period. If you’re looking for a new credit card, make sure you’re a good candidate before applying so you don’t have to apply to a different one (and have a second hard check in a short timespan) if you’re turned down.
Monitor Your Credit Report Regularly: Sometimes credit reports are wrong! Imagine being puzzled why your score is so low only to find out years later it’s because the credit reference agency incorrectly wrote down that you took out a huge car loan and didn’t pay it! It’s a good idea to check your credit report from time to time to ensure its accuracy and identify any errors or discrepancies. You're entitled to a free credit report from each of the major credit bureaus (Equifax, Experian, and TransUnion) once a year. Or by using a 3rd party agency like Borrowell (Canada), CreditKarma (US, UK, and Canada) or ClearScore (UK, Canada, Australia, and South Africa). Reviewing your report allows you to address any issues promptly and maintain a healthy credit profile.
Maintain a Mix of Credit Types: Having a diverse mix of credit accounts, such as a credit card, a line of credit, and a mortgage, can positively impact your credit score. It demonstrates that you can manage different types of credit responsibly.
Be Patient and Persistent: Building good credit takes time and consistent effort. Focus on practicing good financial habits, such as budgeting, saving, and making timely payments, to steadily improve your credit score over time.
Building good credit takes time and patience, but it's a crucial step toward financial stability and achieving your long-term goals.
Helpful links to check and monitor your credit score:
Borrowell in Canada (what we use!)
CreditKarma in the US, UK, and Canada
ClearScore in the UK, Canada, Australia, and South Africa
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
