How to Improve Your Credit Score

Improving your credit score can lead to lower interest rates on loans and credit cards which can save you thousands of dollars in interest over time

Unfortunately, many people don’t have a high credit score because they have poor payment history and high credit utilization. These two factors alone account for 65% of your credit score

To improve your credit score you first need to understand the factors that impact your score

5 factors impact your score and the % impact they have

Payment History- 35%

How Much You Owe- 30%

Credit History- 15%

Number of New Credit Accounts and Applications -10%

Types of Credit You Use -10%

As you can see, the biggest impact on your score is paying on time and using less than your credit limit. By doing this month after month, your credit score will gradually increase over time

Here are 6 Strategies to Improve Your Credit Score

1. Use less than 30% of your credit limit on any card. The lower the better

   Credit utilization is the 2nd largest factor in your credit score. If you have a credit limit of $1000, spend up to $300 instead of using the entire $1000 limit. Don’t use more than 30% of your credit limit

2. Pay on Time

   Debt is a contract. Lenders want to be paid on time which is why it is the largest factor in your credit score. Pay early and as much as you can

3. Increase Your Credit Limit

   When you increase your credit limit, but keep your credit balances the same, your credit utilization decreases. If your score increased or you just got a pay raise, ask for an increase in your credit limit

4. Don’t Close Your Oldest Account

   The length of your credit history makes up 15% of your score. If you don’t use your oldest account anymore, don’t cancel the account. Instead, use it from time to time on small purchases. If you close older accounts, your credit history will decrease which will result in a credit score decrease

5. Pay Down Revolving Account Balances

   Revolving credit is your credit card. Prioritize paying off high credit card balances and other high-interest debt. This will not only increase your score because your account balances are decreasing, but it will put you on the path to becoming debt free

6. Don’t Open New Credit and Multiple Credit Applications in a Short Period of Time

   Lenders run a hard inquiry on your credit every time you apply for credit. This hard inquiry lowers your score. Don’t open up multiple credit cards in the same month. Instead, space them out to something like every 6 months

Using the mental model of inversion, if I wanted a low credit score this is what I would do. I would open a lot of cards, use up to the credit limit, and don’t pay them off. If you can avoid doing this, your credit score will improve

Summary

Your credit score has a big impact on your personal finances. Improving your credit score can lead to lower interest rates on loans and credit cards which can save you thousands of dollars in interest over time. By prioritizing paying debt on time and using less debt, your credit score will be on its way to 850!

Thanks for reading! If you’ve found this helpful when it comes to improving your credit score, please subscribe to the newsletter

Best, Matt