Lenders may work with you if you have a fair credit score—which the FICO® Score☉ defines as 580 to 669—but they'll generally view you as a riskier borrower and may charge you a higher interest rate. Increasing your score so that it falls in the range of a good credit score—a FICO® Score of 670 to 739—can mark you as a more trustworthy borrower and may help you qualify for lower interest rates on loans and credit cards.
The good news is that the factors that matter most to all credit scores are within your power to change. Here are five things you can do now to improve your scores from "fair" to "good"—and beyond.
1. Check Your Credit Reports for Inaccurate Information
Get copies of your credit reports from all three national bureaus (Experian, TransUnion and Equifax) for free at AnnualCreditReport.com and look them over carefully. If you spot any information you believe to be in error, you have the right to file a dispute with the appropriate bureau.
When examining your credit report, look out for the following types of entries, which can hurt your credit scores if a creditor has reported them in error.
- On-time payments reported as late or missed: Payment history is the most important factor in your credit scores. A late payment reported in error can have the same severe negative effects on your score as a legitimate late payment. When you file a dispute, the credit bureau will verify the payment with the lender that reported it. You may need to provide additional info before the late payment is removed.
- Misreported collections: A collection account may signify an unpaid bill in your name, which can hurt your credit score. Collections you don't recognize can also indicate fraudulent transactions made in your name or a mistake on the part of the collection agency. You should contact the company that reported the collection and dispute it if unfounded and, if you think it's fraudulent, file a report with the appropriate authorities.
- Negative entries that should have expired: Except for Chapter 7 bankruptcy, which remains on your credit report for 10 years, negative entries on your credit report are removed from your credit report after seven years. If you see an entry you believe should have been removed by now, you have the right to dispute it.
- Any suspicious activity: Unfamiliar accounts and inquiries related to credit applications you don't recognize can hurt your credit scores. They also can be signs of credit fraud. If you see one, you should confirm it's not your transaction, dispute it with the relevant credit bureau and report to the authorities as appropriate.
2. Pay All Your Bills on Time
Your track record of making debt payments, and whether they were made on schedule according to your credit agreement, is the single greatest factor that influences your credit scores. One of the best things you can do to promote steady credit score improvement is to never make a debt payment more than 30 days late. (If you miss your due date by even one day, you'll likely incur a late fee, but your credit scores won't be affected unless you're at least 30 days late on a payment.)
Calendar reminders, smartwatch alarms and other high-tech tools all can help you pay your debts on time, but account alerts set up through your lender or credit card issuer may be even better, since they prompt you to pay and enable you to click through to complete the transaction all in one go. Automatic payments can streamline the process even more, by doing all the work for you.
3. Focus on Paying Down Debts
A high amount of total debt can have a negative influence on credit scores, and also increases the debt-to-income ratio (DTI) many lenders consider when processing credit applications. If you're concerned about your total outstanding debt, consider some steps for accelerating repayment (which could have the added benefit of lowering your total interest costs).
Making one or more extra annual payments or increasing the amount you pay monthly on your mortgage or other installment loans can accelerate the rate at which you reduce your debts.
Strategies for affording extra payments include:
- Apply your tax return, annual bonus or other windfall funds to paying down debt.
- Use a fixed-rate personal loan or a 0% intro APR balance-transfer credit card to consolidate multiple high-interest credit card bills. By curbing the impact of continual interest charges that inflate your balances, this can enable you to pay down your debts more quickly.
- Take on a side hustle and devote your additional earnings to reducing your debts.
4. Don't Max Out Credit Cards
Another major factor that influences credit scores is credit utilization rate—the outstanding balance on your credit cards, expressed as a percentage of their borrowing limits. Utilization rates above 30% will have a more pronounced negative effect on your credit score, and paying down high balances can bring score improvement quickly.
A good way to avoid high balances is to use account alerts, available through many credit card issuers' web dashboards and smartphone apps, to warn you if your card balance exceeds a target percentage of its credit limit.
5. Maintain a Variety of Credit Accounts
Responsible for roughly 10% of your FICO® Score, a factor known as credit mix encapsulates your ability to manage multiple debts and debts of different kinds at the same time. Assuming you're able to keep up with payments and avoid excessive balances, your credit scores can benefit from having several accounts, including both installment credit (loans with fixed monthly payments) and revolving credit (in which you borrow against a set credit limit and repay in payments of any amount, as long as you cover a monthly minimum payment).
While managing a handful of credit accounts can help your scores, it's important not to rush to get them. A different credit scoring factor, one that's also responsible for about 10% of your FICO® Score, is new credit. This can cause your credit scores to decline if you take on too much new debt too fast.
Applying for new loans or credit cards places an event called a hard inquiry on your credit report, which typically leads to a small, temporary dip in your credit score. Scores usually recover within a few months as long as you keep up with your bills, but multiple applications in a short time (except when rate shopping for an auto loan or mortgage) can have a cumulative negative effect on your credit scores.
The Bottom Line
It truly pays to improve a credit score from fair to good. The difference can mean savings of hundreds, thousands or tens of thousands of dollars over the life of a car loan, student loan or mortgage. That's because credit scores are one factor lenders use to evaluate your creditworthiness and set interest rates. Higher credit scores indicate greater likelihood of loan repayment while lower scores mean greater risk of missed payments or default.
If your credit score falls in the fair range, taking steps today to increase it to the good range could bring significant savings in interest charges and fees on loans and credit cards you seek in the future. Checking your FICO® Score for free through Experian is an excellent way to track your progress in this effort. Good luck.
