What does winning at Monopoly, waiting in line for a ride at Disney World and improving your credit score have in common? You guessed it — sometimes all of these things can take a long time to hit the finish line. While it’s certainly possible to “cut” in line at Disney or cheat at Monopoly, there really are no shortcuts if you want to improve your credit score.
The good news is that if you want to boost your score, it can be done. A higher credit score can do several things for you: It can lower your interest rates on credit cards and loans, better your chances for credit card and loan approval, hand you more negotiating power, garner better car insurance rates and more.
Let MoneyLion step in and show you some ways to harness the power of your credit score and take your score to the next level — even if it does take a little time to get there.
First, Understand What Makes Up Your Credit Score
Your credit score is a three-digit statistical number that relays to a lender how likely you are to pay off debt if you take out a loan.
There are several credit scoring models, but the most well-known is the Fair Isaac Corporation (FICO) score, which calculates your credit score using information from three credit bureaus: Experian, TransUnion and Equifax. You have three FICO scores, one for each report generated from the three credit bureaus.
Your FICO credit scores range from 300 to 850, and a higher number means you’re considered less risky to a lender. Here are some guidelines you can follow:
If your score is Excellent, it will range from 750-850.
Your credit score is based on your credit history, and there are several factors built into the algorithm that calculates your credit score. These include:
- How often you’ve made on-time payments.
- How much you currently owe on your debts.
- The length of your credit history.
- How much credit you have.
- Any new credit you’ve taken on.
If your credit score falls on the lower end of the spectrum, you might struggle to get ahold of a loan. If you are given a loan, it’ll typically bear a higher interest rate or higher fees. Fortunately, even if you’ve had trouble paying off debt in full and on time in the past, bad credit can be reversed.
Know How Long it’ll Take to See Results
So, how long will it actually take to see some improvement? First, it’s important to avoid any quick-fix schemes. If you see an ad or junk mail that promises to instantly fix your credit score, be wary.
The length of time it takes to build up your credit also depends on your approach. For example, if you check your credit and notice errors, credit bureaus must respond to disputes within 30 business days. Your scores should improve shortly thereafter.
If you’re dealing with past-due bills and debt repayment, it’ll usually take longer to see a bump in your credit score. According to Experian, it can take several months to see your scores increase after you pay off a credit card. Your account is updated at the end of your billing cycle, but you still have to wait for the credit reporting agency to be notified. It’s a good idea to wait for at least one to two billing cycles (one to two months) after you pay off the debt to see an increase in your score.
How long do negative events stick around, anyway? (Think missed payments, accounts that have been sent for collection or a bankruptcy.) In general, this type of negative account activity stays on your credit report, which is a record of how well you’ve paid off your debts, for about seven years. More specifically:
- Hard inquiries (which occur when a lender or other service provider requests a copy of your credit report) can remain on your credit report for two years.
- Late payments remain on your credit report for seven years.
- Bankruptcy public record items stay on your credit report for seven to 10 years.
Start Improving Your Credit Score
Here are MoneyLion’s steps to propel you in the right direction. Note that some of the strides you take toward improving your credit score don’t have to be done in any specific order — except for the first one, which has to do with building credit if you have none.
Step 1: Start Building Your Credit.
Needless to say, it’s tougher to prove you can pay back a loan if you don’t have a track record that proves it. In fact, you must regularly use credit so creditors can report your credit use. If you have zero or poor credit but want to get a car loan or a house someday, there are a few ways to get started.
Apply for a Credit Builder Loan
Credit builder loans are perfect if you need to build your credit from scratch or improve your credit score. MoneyLion offers low-rate credit-builder loans that allow you to get cash up front, even if you have poor credit. A key part of a credit builder loan is that the lender reports your payments to the credit bureaus. MoneyLion reports borrowers’ payments to all three major credit bureaus.
Become an Authorized User
When you’re an authorized user, it means that your name is added to another individual’s credit card. It’s important to know whether that person makes on-time payments, however. If he/she makes sporadic payments or doesn’t pay his/her credit card bills at all, it could have the opposite intended effect on your credit: It could lower your credit score.
Obtain a Secured Credit Card
Unlike adding your name to another person’s card, a secured credit card is an actual credit card. The card is actually backed by a cash deposit you make. Your credit limit depends on how much you deposit. For example, if you deposit $400, your limit is $400. If you charge money to your secured card and don’t pay your bill, your credit card issuer can take the money from your deposit.
Get a Co-Signer on a Loan or Credit Card
A co-signer is a person who guarantees that he or she will pay off a debt if the primary account holder cannot pay it back. You can get a co-signer for loans and a handful of credit cards.
Sign Up for a Rent-Reporting Service
Rent-reporting services like Rental Kharma verify your successful rental payments and report it to the credit bureaus.
Step 2: Check Your Credit Reports for Errors.
Your credit score is derived from your credit reports. While it’s easy to assume that your credit report and your credit score are the same, they’re actually different.
Imagine that your credit score is just like a standardized test. When you take a test like the ACT (a test you might take to get into college) you get a composite score. That composite score (the overall number) is like your credit score.
Subscores are the smaller scores that make up the composite score. Think of your credit reports as similar to these subscores. For example, you get a report from each of the three major credit reporting agencies: Equifax, Experian and TransUnion. These three reports are like the smaller subscores for math, English, reading and science on your ACT and, together, “report” your final score, or your credit score.
As you work to boost your credit score, the first thing can do is to check your credit reports for any errors. In fact, it’s a good idea to check your credit report for free once a year at annualcreditreport.com.
There may be incorrect information listed on your credit reports that may damage your credit score without your knowledge. It’s possible to see accounts that don’t belong to you, fraudulent accounts, accounts from an ex-spouse, outdated information, missing accounts and other false information. When you find an error, follow up with the credit bureau’s dispute service.
Step 3: Pay Your Bills on Time.
All bills — whether they’re credit card bills or your mortgage payment — affect your credit score. No one bill has more “merit” than another. For example, if you neglect to pay your credit card bill for 30 days, that doesn’t count as a “lesser offense” on your credit reports than your mortgage. This is why it’s important to pay each and every bill on time, and yes, even utility, rent and cable bills — even though these aren’t regularly reported to credit bureaus.
Step 4: Pay Off Debt.
One way to increase your credit score is to pay off debt, and whether you realize it or not, the type of debt you pay off first matters. If you have credit card debt, car loans or student loans, do you know which to pay off first? Here are a few guidelines:
- Consider the types of debt you have. Your first priority should be to pay off your credit card debt because credit bureaus don’t consider credit card debt “good debt.” After you’ve taken care of your credit card debt, then you can attack other types of debt.
- Make multiple payments per month. Consider making two payments per month instead of just one.
- Be sure that any extra payments you make go toward your principal. The lower your principal, the lower your interest accrual.
Step 5: Keep Balances Low.
Check out your credit utilization ratio. This refers to how much of your credit you use, divided by the total amount of revolving credit you have available. (Revolving credit does not have a fixed number of payments and is the direct opposite of installment credit.) To calculate your credit utilization ratio, divide how much you currently owe by your credit limit.
The formula is: Credit utilization ratio = (Total debt balance / Total credit limit) x 100
For example, let’s say you have a $2,000 credit card balance and a credit limit of $10,000. Your credit utilization ratio would then be 20%.
A good guideline is to keep your credit utilization ratio below 30%, particularly if you want to increase your credit score. An even better ratio is to keep it at less than 10%.
Step 6: Apply For and Open New Credit Sparingly.
As you work to increase your credit score, avoid applying for new credit cards or loans since they put a hard inquiry on your credit file. (Note that not all MoneyLion loans put a hard inquiry on your credit file.) But if you apply for a lot of credit during a short period of time, you could be seen as a credit risk. Plus, any new credit can tempt you to spend more, up your credit utilization and increase your debt, and all of these can put a further dent in your credit score.
Step 7: Monitor Your Credit Over Time.
If you’re doing all the extra work to improve your credit score, watch to be sure your hard work pays off. MoneyLion offers free credit reporting (with weekly score updates if you’re using our Credit Builder Loan) and free credit improvement advice.
Move Toward Your Money Goals
Once you’ve bumped up your credit score, it’s time to get serious about your money goals. Did you plan to buy a house? Get a car loan? Borrow money for something else? No matter what your goals are, it’s important to shop around for the right loan for you and come up with a plan to utilize it wisely.
Once you’ve obtained the loan you want, don’t forget to keep all the elements you used to increase your credit score in the first place in good standing — your credit utilization, balances on credit cards or other credit accounts need to be managed competently over time. Keep paying your bills on time and monitor your credit.
Just remember that increasing your credit score (just like finally getting to ride Splash Mountain) is worth the wait, no matter how long it takes to get there.