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7 Easy Steps to Improve Your Credit

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In a Nutshell

Your credit score is a critical piece of information that helps determine your eligibility for credit such as a personal loan, auto loan, or new credit card. It is affected by several factors, but whether you have good or bad credit, you can usually improve your credit score by following these seven easy steps.

Written by Attorney Eric Hansen.  
Updated August 23, 2021


There are areas that we all can improve on. Some people take an online course on how to code, others work on an exercise and diet regimen, or read a book each month on a new subject. Another area that you can deliberately work on is rebuilding credit. Yes, you can improve your credit score with seven easy steps and a continual commitment to your financial well-being.

Your credit score is affected by several factors. It’s a critical piece of information that helps determine your eligibility for credit such as a personal loan, auto loan, or new credit card. Whether you have good or bad credit, you can usually improve your score. This article will show you how to build your credit with timely payments, a good credit utilization ratio, and other steps so that this important factor in your financial well-being improves each month.

What’s Considered in a Credit Score?

Your credit score is a snapshot of your credit history at a given point in time. It’s calculated using five factors. The five main factors that contribute to your FICO credit score are:

  1. Payment history: This is the biggest factor. It accounts for 35% of your credit score. It takes into consideration whether you have made on-time payments, if you’re past due or in collections on your accounts, if you’ve made late payments, and whether you’ve filed for bankruptcy.

  2. Amounts owed: This accounts for 30% of your credit score. It looks at how much of your total available credit you’re using. If your credit utilization rate is high, your credit cards will have high balances and you won’t have much available credit left to use. That will negatively affect your credit score. Lenders and credit card companies will look at your utilization rate to see if you’ve overextended yourself and taken on too much credit card debt. They are less likely to provide new credit to borrowers with credit utilization rates over 30%.

  3. Length of credit history: The next most important item in calculating your credit score is the length of your credit history, which accounts for 15% of your score. Your credit history helps lenders see how long you’ve maintained accounts and what your standing has been with your lenders over time. Your credit history will be a positive factor in your credit score if you’ve had accounts open for several years that you’ve consistently made on-time payments on. It is more beneficial to have long-standing lines of credit with timely payments than to have many new credit cards or loans. Having a shorter credit history that includes late payments or missed payments will negatively affect your credit score.

  4. New credit: This factor makes up 10% of your FICO credit score. It looks at how often you’re applying for new credit accounts. A sudden change in your credit score can usually be attributed to too many new credit inquiries. When you apply for a new line of credit, lenders do a hard inquiry or credit check. A hard inquiry will bring your credit score down, but the drop is usually temporary. Your credit score rebounds pretty quickly.

  5. Types of credit: Your mix of different types of credit accounts for 10% of your credit score. That is the variety of credit accounts that you have at any one time. Having diversity in your credit accounts is a good way to positively influence your credit score. So for example, rather than only having one kind of credit like credit cards, it is better to have a good mix of revolving and installment credit. This could be a mix of credit cards, a mortgage, a car loan, and a student loan that you are making timely payments on.

Though each of these factors matters, the most important thing to remember is to avoid missing payments or letting accounts go to collections. This is extremely important. One bad piece of information can hurt your credit a lot. It takes a lot of good information to outweigh it. 

Now that you know what factors are considered in your credit score, it is time to take a step-by-step approach to improve your credit score.

Step 1: Check Your Credit Report and Credit Scores and Assess Your Situation.

Your credit score changes. Checking it routinely will help you get a handle on where you’re at in your financial journey. You can get your credit report for free in a few different ways. There are three major credit bureaus. They are TransUnion, Equifax, and Experian. Each of these three credit bureaus is required by law to give you a copy of your credit report for free once every 12 months. But you have to request it. They won’t automatically send you your credit report. You can request your reports from these bureaus on AnnualCreditReport.com. This site is authorized by the federal government.

Note that your credit reports don’t state your credit score, rather just the factors and credit history that make up your credit score. Many banks, credit unions, and online credit monitoring services offer free credit scores. Just remember, when you use free or paid tools from credit monitoring services you’ll probably see a bunch of advertisements. These may look like financial advice, so be careful when using these services.

Reviewing your credit report and credit score is a great way to get a sense of your financial standing. It can also help you decide which steps to take next. For example, if you have several open loans and credit cards, adding another line of credit probably won’t improve your credit score. It is far more important to concentrate on paying off your existing loans and credit card balances than taking on new credit. But if you have very few credit accounts or none at all, opening up a new line of credit like a credit card or a personal loan is likely to improve your credit score. That is, as long as you make timely payments on those new credit accounts.

Step 2: Dispute Incorrect Information.

When you review your credit report, you might notice errors or inaccurate entries. Incorrect information on your credit report can lower your credit score. You can dispute incorrect information on your credit report and that should help increase your score.

Here are some common errors to look out for: 

  • Accounts that don’t belong to you;

  • Old debts marked as unpaid even though they’ve been paid off in full; and

  • A charge-off or bankruptcy being reported after the time has lapsed. For charge-offs, this is seven years and for a bankruptcy filing, this is 10 years. 

You can take steps to correct errors. When you notice incorrect information on your credit report, first gather documentation and evidence. Then, contact all of the credit bureaus (Equifax, Experian, and TransUnion) that are inaccurately reporting this information. You can do that through their online portal or by using a dispute letter. 

The credit bureau will then have 30 days to either remove the incorrect information or send a written response explaining why they disagree with you about the information reported. In the latter case, the credit bureau may refuse to remove the information. If this happens but you still believe the information is incorrect, you can file a complaint with the Consumer Finance Protection Bureau (CFPB).

Step 3: Pay Off Debts (in Some Situations).

Frequently, paying off debt will improve your credit score. But that’s not always the case. If you can afford it given your budget and responsibilities, paying off debt is usually a good idea. Debt that carries over to the next billing cycle generates interest that you’ll have to pay eventually. By making payments on your debt more quickly, you end up saving more, especially if you have a high interest rate.

Paying off debt is a good idea if...

If you have a lot of credit card debt or you’re nearly maxed out on your credit limits, paying off your credit card debt will typically improve your credit score. That is because your credit utilization ratio decreases as you pay down your debt. Your credit utilization ratio is the percentage of your total available credit limit that you’ve used. The higher the percentage, the worse your credit score will be. A credit utilization ratio of under 30% is ideal.

Paying off a credit card doesn’t mean that you should close the account though. Your FICO credit score is partially determined by the age of your open credit accounts. Older accounts where you’ve had a good long-term credit history with your lender or issuer are better than newer accounts. Keep your older accounts open if you can. It’ll help improve your credit score.

Paying off debt in collections may help improve your credit score, but not always. It often depends on the credit score model used. For example, newer credit-scoring models like FICO 9, Vantage 3.0, and Vantage 4.0 outright ignore collections accounts that have a $0 balance. So paying off accounts in collections that have a balance higher than $0 will improve your FICO 9 score, as well as your Vantage 3.0 and Vantage 4.0 score. But many banks and lenders use older versions of FICO, which have different credit-scoring models and criteria. This is why paying off debt in collections doesn’t always improve your FICO score.

Paying off debt may not be good if...

Paying off your debt quickly and in full is not always a good idea. Remember that it is good to have a mix of types of credit accounts, like at least one credit card and one installment loan. If you have only one installment loan and you pay it off, you may find that your credit score actually drops. That being said, paying off debt saves you money on interest in the long run. Even if it doesn’t improve your credit score, it still might be the right choice for you and your financial situation.

Step 4: Avoid Missing Payments.

Try to avoid missing payments on your lines of credit. Missing or late payments negatively factor into your payment history and FICO credit score. Payment history is the most important factor in calculating your score, which is why missing payments can lower your credit score. If you decide to open up a new loan to try to improve your credit be confident in your ability to make all your payments on time. Otherwise, it’s best to focus on paying the debts you currently have.

Step 5: Try To Have a Good Mix and Number of Accounts.

In personal finance, balance and diversification are important. It is also important to have a good mix of credit accounts to maintain a good credit score or to improve your credit score. To prove to lenders and credit card issuers that you can make loan payments on time, you should have at least one open credit account. If you’re having trouble getting approved for a traditional credit card because your credit score is low, you can apply for a secured credit card. These cards are back or secured by a deposit you make. Lenders can use this money to pay your debt if you don’t make your monthly payments, which is why this type of card is easier to get.

Remember that credit mix is only a small factor in your credit score, accounting for 10%. It is ideal to have at least one installment loan such as a student loan, auto loan, or a personal loan and at least one revolving account like a credit card. To build credit, you need to have an open credit card. But you don’t necessarily need to accumulate interest. If you can pay off your credit card debt each month before interest accrues, that’s even better.

While it is good to have a nice mix of credit, don’t apply for several different credit accounts at once to achieve this. Too many credit inquiries, especially too many hard inquiries, at the same time can backfire and negatively affect your credit score.

Step 6: Be Added as An Authorized User.

If you have a trustworthy friend or family member with a high credit score, asking them to add you as an authorized user is a fast way to improve your credit score. Being an authorized user allows you to get the benefit of the account holder’s good payment history, which should help boost your FICO credit score. The downside of being an authorized user is that if the account holder fails to make payments on time on the account, you could actually see your credit score drop because of a negative mark on your credit report.

Step 7: Let Time Do Its Magic.

People say that time heals all wounds. That’s also true when it comes to rebuilding credit. Negative information like missed payments, foreclosures, repossessions, or other derogatory marks become less important over time. Eventually, they’ll drop off your credit report completely. If you are consistently making timely payments on your open accounts each month, your credit score is likely to improve as time goes on.

Let’s Summarize...

To improve your credit, develop a plan that’s right for you and stick with it. You’ll want to avoid missing payments and maxing out your credit cards. You should have at least one to three open accounts, but you don’t need to pay credit card interest to get a good score. Also, you don’t need to take on a lot of debt to improve your score. Here’s to you and your improved credit!



Written By:

Attorney Eric Hansen

Eric D. Hansen is an experienced Minnesota attorney within a number of varying and nuanced practice areas. He has operated his own solo practice as well as worked at small suburban boutique firms and large diversified downtown law firms. Eric has a wealth of experience in busines... read more about Attorney Eric Hansen

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