Your credit score plays a crucial role in your financial well-being, affecting everything from your ability to get approved for a loan to the interest rate you’ll pay. Whether you’re just starting to build your credit, preparing to apply for a mortgage, or trying to recover from a difficult financial situation, establishing good credit is an important step on any successful financial path.
No matter where you are on your credit journey, this guide is designed to help you understand the credit score process and take action to improve your credit score. By following our tips and recommendations to create your own credit score improvement plan, you’ll be on your way to a higher credit score and a brighter financial future.
Understanding Your Credit Score
A credit score is a numerical representation of your credit history, taking into account the data available on your credit report. This includes things like your payment history, the number of accounts you have open, the amount of credit you’ve used vs. the amount of credit you have available (credit utilization rate), and how long you’ve had a history of credit.
While there are several companies and agencies that can provide credit scores, lenders usually use credit scores generated by FICO (Fair Isaac Corporation), which calculates scores using data gathered by the three major credit reporting agencies, Equifax, Experian, and TransUnion. A wide variety of services use credit scores, including utility companies, lenders, landlords, car dealers, and credit card companies.
You can check your credit report for free every year, but generally, credit scores are not free. However, many credit card companies offer a consumer credit score along with your statements, which will be like the scores your lender sees. Additionally, when you apply for a loan, your lender is required to disclose your score. While you should never apply for credit just to see your score, knowing your score can help you gain a better understanding of your credit approval or denial.
Why are credit scores so central in financial approval decisions?
While it’s possible for creditors and other service providers to get a sense of your ability to repay future debts just by looking at your credit report, your credit score provides an easy-to-read, objective snapshot of your credit history. Lenders can also set specific parameters for credit scores for automatic credit approvals and interest rates, making decisions more straightforward and impartial.
What does your credit score mean and how is it calculated?
As we mentioned above, credit scores are based on several credit-related factors—but how exactly do those items translate into a numerical score? Here’s the breakdown of how FICO uses credit details to calculate your score:
- 35%: Payment History
- 30%: Amounts Owed
- 15%: Length of Credit History
- 10%: Credit Mix
- 10%: New Credit
Your FICO score will fall under categories ranging from ‘poor’ to ‘exceptional’:
- Below 580: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800 and above: Exceptional
Depending on what you are applying for, there may be different score requirements. For instance, mortgage lenders tend to require a score of 620 or higher for approval, with the best rates reserved for those with ‘very good’ or ‘exceptional’ credit. Credit card companies offer different products and credit limits based on scores. And car loans can have significantly higher interest rates for lower scores.
Credit Score Improvement Tips for Beginners
If you are new to the world of credit, one aspect of your score calculation—your credit history length—is going to hurt you, no matter what. However, it’s possible to build on the other parts of your credit history to maximize your score in the meantime, while setting yourself up for a great score by the time your credit history length catches up. Here’s how:
Start your credit history
- If you have regular income but don’t currently have any credit accounts, you’ll need to open an account to get started. (Start with one at a time—applying for too much credit is a surefire way to damage your score). Consider applying for a general credit card through your bank or a card specific to a retail establishment you frequent, like a gas station or your favorite store. Use your card regularly but keep balances low and pay them off in full each month. If you’re not quite ready to apply for your own card, becoming an authorized user on someone else’s credit card (like a parent) can help you establish credit.
Establish a solid payment history
- The only way to ensure you have a solid payment history is to pay all your bills on time, every time. But it’s good to know that credit companies don’t report late payments until they are more than 30 days past due. Even if you are more than a few days late, make that payment—don’t wait for the next billing cycle. Worried about forgetting to make a payment? FVSBank offers digital banking with Bill Pay to be sure you never miss a due date.
Minimize amounts owed
- Even if you are currently paying your minimum balances on time if you have a lot of debt, lenders will be wary of you taking on more, and this is reflected in the importance of this calculation. If you are using too much of your available credit, it could be indicative that you may reach a point where you are overextended. The best way to avoid this is to keep your balances low. Try not to use more than 30% of the available credit you have on your credit card accounts.
Create a mix of credit
- It’s best to have more than one type of credit to show creditors you can use credit successfully in different aspects of your life. From car loans and mortgages to a wide variety of credit cards, there are many different types of accounts. After you’ve established credit with one account, it may be time to add another. For instance, if you have a credit card for your bank, consider getting a different card for your favorite store. Once your credit has been established, future loans will add to this mix to increase your score potentially further.
Increase your financial literacy
- Read and learn about financial topics, like the ones we discuss on the FVSBlog, to have a better understanding of how your spending choices and financial habits can create lifelong impacts.
Credit Score Improvement Tips for Students
The methods we discussed above can benefit anyone new to credit, including students. But college students may have additional opportunities to build credit and greater risks for obtaining unmanageable debt through student loans.
A history of income is essential for most credit approvals.
- Unfortunately, as a college student, your income will likely be less stable than your peers who entered the workforce before you, whether it’s because you are only able to have a job during the summer months, your work-study employment is not considered regular income, or you’d rather focus on keeping your grades up then committing to too many hours of work each week. Here’s how you can still build good credit, even during your student years:
Get a student credit card
- With flexible approval terms for students, a student credit card can be a great way to start building credit. Just remember to use it responsibly and pay off your balance each month, or this strategy could backfire!
Become an authorized user on a parents’ card:
- A parent or guardian can allow you to become what’s called an ‘authorized user’ — adding your name to their credit card account. Have an agreement about the usage of the card and who is responsible for the charges. Responsible use can help build your credit, too.
Begin paying off your student loans early:
- you don’t have to wait to graduate to begin making payments on your student loans. Paying them off early can give you a head start, and student loans can also help you establish credit, just like other loans.
Recommendations for Managing Student Loan Debt
Even if your student loans can help you improve your credit score once you start paying them back, they can create a burden that gets in the way of other life goals, like purchasing a home, that require good credit as well as a lower debt-to-income ratio.
Understand the terms of your student loan
- make sure you understand the interest rate, repayment terms, and any penalties for late payments.
Minimize your use of student loans
- Just because cash is available to you, doesn’t mean you have to use it all. Reducing the expenses you use for student loans can lower your debt load making it easier to pay off. Consider: choosing more affordable rooming options, purchasing used books and lower-priced supplies, don’t use your loans to offset living expenses—instead, keep your costs low and only borrow the smallest amount possible.
Create a budget and stick to it
- Include your student loan payments in your budget, and make sure you can afford them.
Prioritize your student loan payments
- If you have multiple student loans, prioritize paying off the loans with the highest interest rates first.
Credit Score Improvement Before Getting a Mortgage
As we mentioned above, a good credit score is important to have if you’re hoping to get approved for a home loan, and scores above 620 are generally required. While some home loan programs aimed at first-time and low-income borrowers have some flexibility on this, it’s next to impossible to get a loan with bad credit. So what can you do to improve your credit score in preparation to apply for a mortgage? Here are some strategies you can use:
Pay off outstanding debts
- High outstanding debts can have a negative impact on credit score, and a high debt-to-income ratio can prevent you from getting approved for a home loan. Prioritize paying off the debts with the highest interest rates first.
Check for errors on your credit report
- Get a copy of your credit report regularly, make sure all the information is correct, and dispute any errors you find.
Keep credit card balances low
- While there’s no foolproof method for how to raise your credit score quickly, lowering your credit utilization can help. High credit card balances can have an outsized impact on credit scores. By keeping your credit card balances low, (ideally below 30% of your credit limit), you can give your score a boost.
Getting pre-approved or pre-qualified for a home loan is just the first step. Until your home loan reaches closing, it can still be denied. That’s why it’s crucial to maintain your credit during the entire loan application process. Be sure to:
Keep your credit score in good shape:
- Make sure you are paying your bills on time, avoid applying for new credit (inquiries can affect your credit score), and keep your credit card balances low.
Keep your debts in check:
- In addition to keeping your existing balances low, don’t take on any new debts or apply for new credit cards.
Know that your mortgage application will result in a credit inquiry:
- Once you start the mortgage process, a lender will check your credit. Understand that the inquiry can have a temporary negative impact on your credit score. Pre-qualifications for mortgages only require a ‘soft credit check’ — your score shouldn’t be affected. But pre-approvals will need a ‘hard check,’ and this will appear on your credit report. If you are applying at more than one lender, if all your applications occur within a window of 14 days, it will only appear as one inquiry, and the effect on your score will be minimal.
Credit Score Improvement Tips for Self-Employed
Being self-employed won’t affect your credit score. But, as with students, if your income is irregular, it could make it hard for lenders to determine if you have the ability to repay loans or credit cards each month. This means it may be harder for you to get approved for the credit you need to establish good credit. And even if you have an impeccable score, a lender still may be wary of approving you for a loan. Here are a few ways to demonstrate your creditworthiness:
Establish a credit history for your business:
- If you have a business—even a sole proprietorship—obtaining a business credit card or loan can help you establish credit for your business.
Keep business and personal finances separate
- While you want to do everything to make your business successful, it’s If your business is new and its stability hasn’t been established yet, it’s important to keep your business and personal finances separate to avoid any negative impact on your personal credit score.
Be consistent with income reporting
- Self-employed individuals may have fluctuating income, but it’s important to be consistent with your income reporting, filing quarterly taxes, and having a well-organized system of invoicing and payment records. When lenders can see a history of documented income, they will be more likely to approve you for a loan.
When you’re ready to apply for a loan or credit, here are some other strategies you can use to increase your chances of approval:
Look for lenders like FVSBank That specialize in self-employed borrowers:
- We can be more understanding of your unique financial situation, working with you to find credit solutions that consider your holistic financial picture.
Be prepared to provide additional documentation
- Self-employed individuals may be required to provide additional documentation such as tax returns or financial statements to prove their income.
Consider a co-signer:
- If you’re having trouble finding a loan or credit card on your own, consider finding a co-signer with a good credit score. Their good score can alleviate lender fears and increase your chance of approval.
Credit Score Improvement Tips for Divorcing Couples
Divorce can cost a lot of money—from lawyer fees and court fees to the added expenses of maintaining separate households. While your credit score won’t be directly affected by divorce, it can create a situation that leads to financial hardship, resulting in individuals taking on too much debt or missing payments. Additionally, your joint accounts will continue to be held jointly, even after legal separation. Closing them can result in the loss of available credit but keeping them open can create confusion about who is responsible for payment. So how do you avoid all these potential pitfalls?
Understand joint account responsibilities
- Determine who is responsible for paying off your joint accounts and make sure that paid off, all accounts with your name on them are paid on time.
Close joint accounts
- Even though closing accounts can have a negative impact on your score, this is an important step to take to separate finances and responsibilities. If you have good credit, consider opening an account in your name before closing joint accounts.
Rebuild credit separately
- Once the divorce is final, start rebuilding your credit and finances separately by obtaining credit cards or loans in your name only and opening a new checking account. This is especially important if you’ve never had credit in your name before.
Unfortunately, emotions can run high during a divorce, and disputes about finances can have negative consequences on your credit, making it harder to pick up the pieces. When sorting through your shared finances and re-establishing your independence, consider:
Seeking legal advice
- Consulting with an attorney who specializes in family law and credit issues can help you best understand your rights and options.
Negotiating a credit settlement
- Coming to a mutually agreeable credit settlement with your ex-spouse may allow you to avoid any negative impact on your credit score.
Monitoring your credit report
- Keeping an eye on your credit report during and after the divorce can help you spot joint accounts that need to be closed or missed payments—before they do too much damage to your credit score.
We Can Provide the Tools you Need to Build Your Credit
At FVSBank, we’re committed to helping our community members in the Fox Valley Region succeed financially. And a strong credit score is an essential component of that—from helping you get approved for the financing you need to achieve major life goals, like buying your own home, to getting the best interest rates to save you money. By following the tips and recommendations outlined in this guide, you can take control of your credit and improve your financial future.
We understand that credit score improvement can be challenging and that’s why we’re here to help, answering your lending questions, offering credit score boosting strategies, and helping you make smart financing decisions. Contact us at FVSBank today or visit one of our branches in Oshkosh, Waupun, and Fond Du Lac, Wisconsin to see how we can help you achieve your financial goals.