Which of the Following Actions Will Improve Your Credit Score?

Michael Collins
Apr 03, 2021

Your credit score is created from a series of complex factors like your payment history and credit utilization ratio to name a few. As such, it can be difficult to understand what exactly you can do to improve your credit rating. Let’s go over some of the common questions about credit scores so you can know exactly which of the following actions will improve your credit score. 

Credit Score

Before you can know what can and what can’t improve your credit score, it is important to know exactly what your credit score is beyond it being some 3-digit number. 

When the word “credit score” is used, it is almost always referring to the FICO credit score. Your FICO score is a 3-digit number that is meant to represent your “creditworthiness,” or how trusted you can be to pay back your loans, credit cards, and other types of debt. This score ranges from 300-850, with 850 representing the best credit score you can get and 300 being the worst. 

To make a long story short, your credit score is determined based on how good of a borrower you have been in the past. If you are someone who has never missed a loan or credit card payment in their entire life, chances are you will have a high credit score. If you are constantly missing payments and defaulting on your loans or have never even got a loan before, you will most likely have a poor credit score. All of this information about your creditworthiness is sent to credit bureaus by your lenders. The three main credit bureaus are Experian, TransUnion, and Equifax. These three credit bureaus and other credit bureaus compile this information into a credit score that you and lenders can access.

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When you apply for a loan or a credit card, your lender will want to see if they can trust you to pay them their money back. Lenders use the credit bureaus to have access to your credit profile like your credit score and your credit report. They then use this information to make a decision about lending to you. If you have a bad credit score, they are less likely to loan to you and if they do, they will generally charge higher interest rates. If you have a good credit score, you will have access to more loans and credit cards and they will be cheaper most of the time. 

Let’s now quickly look at what makes up your credit score. 

What Makes Up Your Credit Score? 

  • Payment History (35%):  Your monthly payment history has the biggest weight on your credit score. Your payment history is simply the record of your past payments from any loan account or line of credit from the past 7 to 10 years. Here, lenders can see exactly how well you pay back your debt.
  • Credit Utilization Rate (30%): Credit utilization is how much of your credit limit. Your credit utilization ratio is the percentage of this credit usage. If you are given $1,500 a month to use with your credit card and use $500, your credit utilization ratio is 33%. Lenders and credit bureaus want to see your credit utilization ratio be at 30% of your available credit per month or below. Using any more credit than this can actually hurt your score. 
  • Length of Credit History (15%): The longer you have had your credit or loan account the better. If you’ve successfully been making payments for 10 years, your length of credit history looks much better to a lender than someone who has only had 2 years of credit history. Any credit history that is 7 years or more is good for your score. Lenders like to see a long history of consistent, successful payments. 
  • Credit Mix (10%): Your credit mix is made up of the different types of debt that you have taken on. Lenders want to see this mix be as diverse as possible. For example, if your credit mix only consists of credit cards, an auto loan lender might see this as a red flag, since you have not had any experience with any type of loan, whether that be a mortgage, car loan, student loan, or other type of personal loan
  • New Credit (10%): Any recent loan or new credit account you’ve opened will impact your credit score. It’s better for your credit score if you don’t have many recent accounts opened. Remember that every time you seek new credit though, you get an inquiry on your credit score. A hard inquiry is a credit inquiry you get when seeking new loans or lines of your credit. These hard credit inquiries can lower your score anywhere from 5-10 points, so make sure you have less than 5 in any 6 month span. 

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Do These Actions Improve Your Credit Score?

Checking Your Credit Score

Checking your credit score alone will not improve your credit score. However, checking your credit score is one of the best steps you can take to begin improving your credit score.

Each of the three main credit bureaus allow you to check your credit score for free, once a year. This means that three times a year, you can know the current standing of your credit score. Beyond this, if you want to check your credit score more than these three times you will have to pay a small fee. 

Knowing your credit score is important because you can know exactly if you need to start improving your credit score or if your actions to improve your credit score are paying off. If your credit score is low you know there is something you are doing wrong and it is in your best interest to start improving your score. Instead of waiting to get your loan application denied because of a bad credit score, check your credit score as often as you can so you can get ahead of the problem. 

Paying Your Bills On-Time

Paying your bills in full and on time will improve your credit score. In fact, doing this is arguably one of the best things you can do for your credit score. 

Remember back to earlier in the article where we mentioned your payment history makes up 35% of your entire credit score. This makes up more of your credit score than any other factor, so it's easy to see how improving this is the most effective way to improve your credit score. The best way to improve it is to consistently make payments on all of your credit cards and loan accounts. 

Making one payment won’t improve your credit score that much. Neither will two or three payments. Instead, you need to be consistently making your payments over the course of your entire loan or entire credit card. Doing this will give you a long payment history of successful and on-time payments. This shows your lender that you can be trusted with debt and that you are a borrower that prioritizes paying off your debt. 

On the other side, if you are making late payments or are completely failing to make your payments at all, your credit score can really get hurt. If your payment is 29 days late, your credit score will drop a few points. Depending on how late your payment is, your credit score can drop as much as 100 points! This is a huge hole that can take years for you to fully dig yourself out of. 

Make sure you are paying your credit card and loan payments off on time and in full to avoid knocks to your credit score and to build your payment history over time!

Paying Down Your Debts

Having outstanding debts that need to be paid off are not good for your credit score. Instead, paying down your debts can improve your credit score.

Think about it, lenders don’t want to see you have other debts that need to be paid off if they are about to lend you money. If you are about to get a $1,000 loan from lender A but you currently have $2,000 in outstanding credit card payments from lender B, lender A is not going to be convinced you will be focused on paying off their debt. They will see that you have a ton of money you already need to pay off and they will be hesitant to loan their money to you if this is the case. 

To make sure you look good to your potential lenders, try to pay down all of your current debt. Not only will this improve your credit score but it will also be cheaper for you in the long run as you will not need to be paying interest on your credit card or loan anymore. 

If you have to prioritize, try to pay off your smaller loans and credit card debt instead of your bigger ones. Having fewer outstanding accounts can be a good look for you. However, once you pay off these debts do not close these accounts just yet. Closing your accounts right away actually hurts your credit score for a little. If you are just about to apply for a loan or credit card, wait until afterward to close your accounts.  

Paying Rent

On the surface level, paying your rent does not improve your credit score. However, you can take steps to make your rent payments build your payment history like paying a loan or credit card does. 

Did you know that lenders aren’t required to report your payments to credit bureaus? If they wanted to, they could not report your successful payments and your credit score would never go up! Thankfully, the vast majority of lenders do report your payments. This is to encourage borrowers to make payments on time so their scores go up as well as to deter borrowers from missing payments. 

Like typical loan and credit card lenders, landlords are not required to report payments to the credit bureaus. Unfortunately, landlords do not report rent payments as frequently as lenders do. For landlords, there isn’t exactly an incentive for them to report their tenant’s rent payments. If the tenants pay their rent they get to stay in the landlord’s building. If they don’t, they get evicted. 

However, many landlords will report tenants’ rent payments if they are asked to. If you are a tenant, kindly ask your landlord to report your rent payments to the credit bureaus. While they don’t need to accept, if they do, your successful payments will begin to build your payment history just like paying off a credit card does. Over time this will build your credit score up. However, know that missing rent payments will hurt your credit score just like missing a loan or credit card payment will too. If you always make your payments on time, consider asking your landlord to report your payments. 

Credit Card “Boosts”

Many third-party companies will claim to be able to boost your credit score. On the other hand, more reputable companies like Experian offer products like “Experian Boost” that claim to boost your credit score as well. But do these actually work? 

While there may be some diamonds in the rough, it's better to stay on the safe side when dealing with third parties as it relates to your credit. In general, you don’t want a company you don’t fully trust to have access to your credit information. You are better off improving your credit score the right way with tried and tested methods like the ones we mentioned earlier. 

On the other hand, reputable companies like Experian with their Experian Boost can be trusted. However, they may not boost your credit score like you exactly envisioned them too. While Experian’s boost can give you roughly a 10 point boost in your credit score, it only works for your Experian score and will not affect your other scores. Again, while boosts like this may work they won’t build your credit score as much as the traditional methods do. 

Another Way to Build Your Credit Score: Possible Finance

Here at Possible, we understand that many people are in a Catch-22 with their credit score. People need to have access to credit to build their credit score, but can’t get access to credit if they have no credit or a bad credit score. Some of the only loans people with bad credit scores have access to are payday loans, and those lenders rarely build their customers’ credit scores. 

To combat this, we created what we like to call a credit builder loan. When borrowers apply for this $500 or smaller loan we do not check their credit score, meaning you will not be denied a loan on the basis of your score. When paying back our loan, you pay back in installments over the course of four weeks. If you are struggling to make your payment, you can extend your payment right within our app up to 29 days later. As you successfully make payments, we report to the credit bureaus. Over time, this boosts your credit score.

Truly, we want to build our customers up by building their credit so they can one day graduate out of getting debt. Thinking of getting a loan with Possible? Download our app today and get started!

Michael Collins

Michael has a passion for writing and brought that passion to Possible. He enjoys reading everything there is to know about film, sports, and finance. His studies in college have allowed him to be on the forefront of business knowledge so he can better inform his readers.

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