Cracking the Code on Credit: A Complete Guide to Boosting Consumer Credit Scores

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Cracking the Code on Credit: A Complete Guide to Boosting Consumer Credit Scores

May 7, 2024
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Certified Credit

Credit cards and loans can provide you with invaluable financial flexibility, whether you want to purchase a home or use a credit card to finance unexpected expenses. But before you can get approved for financing, lenders will assess how likely you are to pay them back on time. 

Your credit score is one of the most important metrics lenders consider during this evaluation. Since this three-digit number can have far-reaching implications for your financing eligibility, it’s important to understand how to optimize it. 

In this comprehensive guide, we’ll break down the basics of credit scores and why they matter. After that, we’ll provide some actionable steps you can take to boost your credit score over time. 

What is a Credit Score?

Your credit score is a three-digit number between 300 and 850 that helps lenders predict your likelihood of making your payments on time. It summarizes the quality of your credit history, which is the credit activity currently contained in your credit reports, according to your lender’s chosen credit scoring model.

To clarify how credit scores are calculated, let’s explore each of these important terms in greater detail:

  • Credit activity – Your credit activity is the information about your use of credit accounts. It includes details about your open and closed credit accounts, their balance sizes and credit limits, the length of time you’ve had each account, your on-time and late payments, and credit inquiries from lenders you’ve applied with recently.

  • Credit history – Your credit history is all of the credit activity contained in your credit reports. Typically, this credit activity only goes back seven to ten years, though it may be much shorter if you just recently started using credit cards and loans. You generally need at least three to six months of credit history to generate a credit score.

  • Credit reports – Lenders report your credit activity to the three major credit bureaus—Experian, Equifax, and TransUnion. The credit bureaus compile this data into credit reports. You have a different credit report from each credit bureau. While some lenders report credit activity to all three credit bureaus, some may only report to one or two. As a result, your credit activity can vary from one credit report to the next, as well as your associated credit score. For this reason, mortgage lenders often order tri-merge credit reports, which compile all three credit bureaus’ information into one.

  • Credit scoring models — Your credit score is calculated by credit scoring companies, such as the Fair Isaac Reporting Company (FICO) or VantageScore. These companies run your credit reports’ information through their proprietary algorithms. The credit scoring model used will depend on your chosen form of financing. For example, mortgage lenders look at credit scores generated using mortgage-specific credit scoring models. 

Why Does Your Credit Score Matter?

Your credit score has a direct impact on your financing opportunities. A high credit score suggests that you’re a responsible borrower who reliably makes your payments on time. As a result, it can make you much more attractive to lenders and help you:

  • Get approved for credit cards and loans.
  • Experience a faster approval process. 
  • Qualify for lower interest rates and more affordable terms. 
  • Enjoy higher credit limits and loan amounts. 
  • Obtain loans with lower down payment requirements. 

Your credit score can also influence your opportunities beyond borrowing money. For example, many landlords conduct credit checks during apartment applications. In certain states, auto insurers may also use your credit score to set your monthly premiums. Finally, some employers may check your credit score before hiring you if your job involves managing money. 

So, why do lenders rely on credit scores so heavily? Well, when someone applies for a loan or credit card, their lender has no guarantee that they’ll be paid back on time. Credit scores help lenders quickly determine which consumers display the strongest creditworthiness. Consumers with high credit scores are considered less risky and more responsible to lenders, landlords, insurers, and employers alike. 

What is a “Good” Credit Score?

Since having a good credit score can improve your financial options, you may be wondering what constitutes a “good” score. Every lender has their own credit thresholds, but the general benchmark for FICO credit score ratings is as follows:

  • 300 to 579 – Poor
  • 580 to 669 – Fair
  • 670 to 739 – Good
  • 740 to 799 – Very good
  • 800 to 850 – Excellent

What Factors Impact Your Credit Score? 

If you want to increase your credit score, you need to understand the primary factors that influence it. Here are the five factors considered in the FICO credit scoring model:

  • Payment history evaluates the consistency of your on-time payments. It assesses how many missed payments you have, the size of these delinquent payments, and how long it takes you to pay them back. It also looks at whether or not you have missed payments that have been sent to collection agencies. Payment history makes up 35% of your overall score.

  • Amounts owed, also known as credit utilization, calculates how much of your available credit limit you’re currently using. Using over 30% of your available credit can lower your score, since it indicates to lenders that you may rely heavily on borrowed money to keep your finances afloat. This factor is worth 30% of your FICO credit score.

  • Length of credit history is the average length of time that your current credit accounts have been open. Generally, your credit score will improve as your length of credit history increases over time. Length of credit history is worth 15% of your credit score.

  • Credit mix evaluates your experience using revolving credit accounts (credit cards, lines of credit, etc.) and installment credit accounts (loans, mortgages, etc). Having a healthy mix of both types of credit accounts gives lenders more confidence in your credit management abilities. Credit mix is worth 10% of your overall score.

  • New credit inquiries are recorded on your credit reports any time you fill out formal credit applications with lenders. Having several recent credit inquiries on your credit reports can lower your credit score temporarily. New credit inquiries make up 10% of your credit score. 

Optimizing these five factors is the key to obtaining a high credit score. But if you haven’t done so yet, don’t worry! Recent credit activity is weighted more heavily than old credit activity in most credit scoring models, so you can start improving your score as soon as you adopt better credit management habits.

Better yet, most credit information falls off your credit reports within seven to ten years. Even if you incur a severe negative mark, such as bankruptcy or foreclosure, you can look forward to a fresh start one day in the future. 

What Information Isn’t Factored Into Credit Scores?

To prevent unfair discrimination, credit scoring models do not consider the following types of information:

  • Age
  • Location
  • Race
  • Gender
  • Nationality
  • Marital status
  • Occupation
  • Income
  • Assets
  • Public assistance programs
  • Soft credit inquiries (credit checks that aren’t involved in formal credit applications)

While these data points are excluded from credit scoring models, some do come into play during credit applications. For instance, lenders will verify your income, employment history, and assets before extending you financing.

How to Check Your Credit Reports and Consumer Credit Score?

The first step to improving your credit score is learning how to check it, along with your credit reports. You can obtain a free copy of your credit reports from each of the three credit bureaus once every 12 months on AnnualCreditReport.com. You are entitled to additional free disclosures under the following circumstances:

  • You’ve been denied credit based on your credit report information. 
  • You’ve fallen victim to identity theft.
  • You receive public assistance. 
  • You’re unemployed and plan to get a job in the next 60 days. 

When you receive copies of your credit reports, they won’t include your credit score. You can check your consumer credit score for free with your current lenders. Many credit card companies give you access to your credit score within your online account. You can also request your credit score from Credit Karma, Credit Sesame, or the credit reporting agencies. Just keep in mind that your consumer credit score may differ from the credit score your lender sees during your application. 

Learn more: Consumer Credit Score vs. Mortgage Credit Score: What’s the Difference?

How to Increase Your Credit Score

After reviewing your credit reports and credit score, you can start taking steps to improve them. Making a meaningful difference in your credit score can take time, so it’s a good idea to start the process a few months before you intend to apply for a new loan or credit card.

With that in mind, here are ten simple and effective ways to give your credit score a boost:

  1. Pay all of your bills on time – If you have trouble remembering when to pay your bills, set up calendar reminders or enroll in autopay.

  2. Make up missed payments as soon as possible – The longer a payment is delinquent, the more damage it can do to your credit score.

  3. Contact your creditors when you can’t afford your payments – If you don’t have the money to make a payment, contact your creditor and let them know. They may offer to put you on a more affordable payment plan until you can get back on your feet.

  4. Keep your revolving credit balances low – While you may have ample credit limits on your credit cards and lines of credit, you should avoid maxing them out. Strive to keep your balances under 30% of your credit limit at all times, and under 10% whenever possible.

  5. Request credit limit increases – In addition to maintaining low balances, you can improve your credit utilization by asking your lenders to increase your credit limits.

  6. Don’t close old credit card accounts – After paying off a credit card, it’s tempting to close the account, but doing so can ding your credit score. That’s because closing credit card accounts reduces your length of credit history and overall credit limit. Thus, it’s better to keep old credit accounts open, even if you don’t use them very often.

  7. Avoid unnecessary credit applications – Since new credit inquiries can lower your credit score, only apply for new loans and credit cards when you really need them. As you shop around, consider applying for prequalification with various lenders first. Prequalification applications won’t impact your credit score. You can also mitigate damage to your credit score by completing all of your formal credit applications within a 45-day period.

  8. Gain experience with different types of credit accounts – While you shouldn’t apply for new credit accounts frivolously, you can bolster your score over time by using a healthy mix of revolving and installment accounts.

  9. Take advantage of credit-building tools – Secured credit cards and credit-builder loans are made specifically for consumers looking to improve their credit scores. These financing tools don’t lend you any money. Instead, they require you to provide your lender with a down payment that’s equal to your loan amount or credit limit. By making on-time payments on your secured credit account, you can have its positive credit activity reported to the credit bureaus and bolster your credit score.

  10. Check your credit reports regularly – Keeping a close eye on your credit reports can help you ensure they’re accurate and up to date. If you notice any information that looks mistaken or suspicious, such as duplicate accounts or inaccurate balances, report it to the credit bureaus right away.

How to Dispute Errors on Your Credit Reports

To dispute an error on your credit report, you simply need to contact the associated credit bureau. Explain why you believe the information is false and provide documentation to support your claims. 

You can file your disputes online, over the phone, or by mail. Here is the contact information for each of the credit bureaus:

  • Equifax
  • Experian
  • TransUnion

The credit bureaus are required to investigate your dispute and respond within 30 days. If they corroborate your claims, they will remove or correct the inaccurate information.

How to Report Identity Theft

While most inaccurate credit report information is due to data entry errors, sometimes it signifies a more serious issue, such as identity theft. When someone steals your identity, they may open credit cards or loans under your name.

You can report identity theft and initiate the resolution process by:

  • Filing a report with the police.
  • Filing a complaint with the Federal Trade Commission (FTC).
  • Letting your lenders know.
  • Asking the credit bureaus to place a fraud alert on your credit reports.

Get Educated on Credit With Certified Credit

Hopefully, this guide clarified the basics about credit scores and proper credit management. By following the tips listed above, you can start optimizing your credit score and set yourself up for a stronger financial future. 

Want to learn more about credit? Check out the Certified Credit blog! There, we discuss everything from mortgage credit scores to alternative credit data. Here are some articles you can check out next:

If you’re a mortgage lender, make sure to share our educational resources with your borrowers! In addition to providing innovative mortgage lending solutions, we’re on a mission to help our clients bolster their borrower education. To learn more about our products and services, schedule a credit consultation with Certified Credit today.

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