A good credit score can mean saving a lot of money over the lifetime of a loan. That's because lenders use credit scores (among other factors) to determine if you're a risky borrower. Risky borrowers typically receive higher interest rates, and higher interest rates mean borrowing money is more expensive.
A lower credit score means you could get rejected for a loan altogether, or receive credit at a high interest rate. A higher score that falls into the good or exceptional category can get you access to the lowest interest rates available. So if you have fair credit, it will benefit your financial life to improve it so it moves into the "good" category.
There are actually hundreds of different types of credit scores out there. Each credit scoring formula may have a slightly different numerical range, and what's considered "fair" or "good" may vary from one model to another. However, one of the most common scores around is the FICO® Score, which ranges between 300 and 850. On that scale, a fair credit score falls between 580 and 669.
If you can move that needle into the good credit score category of 670 to 739, you will set yourself up to be in a much better financial position. (For more information on the different credit score ranges, see our explainer here.)
The good news is that regardless of what scoring model is being used, the steps you can take to improve your credit scores apply across the board. Here are five things you can do now to improve your scores from "fair" to "good"—and beyond.
1. Check Your Credit Reports to Eliminate Any Incorrect Information
The first thing you should do to improve your scores is to see what they are currently based on—review all three of the credit reports maintained at each credit bureau: TransUnion, Equifax, and Experian (the publisher of this piece).
Get your free credit report from Experian, where you can also get your FICO® Score. You are also entitled to one free credit report every 12 months from Experian, Equifax, and TransUnion at AnnualCreditReport.com. Review each credit report to make sure the information is completely accurate. If you do find mistakes or inaccurate information, initiate a dispute with the appropriate credit bureau.
Examining your credit report will also help you figure out what you need to do to improve your scores. Maybe you have a history of missing payments, or maybe you are using too much of your available credit each month. Your credit reports will help provide a roadmap for what to do next. So will pulling one or more of your current credit scores.
When you get your credit score you may also receive a breakdown explaining why your score is what it is. Pay close attention to those details because they'll you better understand where you stand. For more information on how see our primer at How Do You Check Your Credit Score?
2. Make Sure All Your Payments Are on Time
There are several factors that influence your credit scores, and one of the most important is payment history. A history of paying your bills on time helps your credit scores. Late or missed payments, on the other hand, will drag your scores down.
If you've had any late or missed payments, make an effort to never miss any again. Consider setting up automatic payments on your credit cards and activating text and email alerts so you never forget that a bill is coming up.
3. Focus on Paying down Your Debts
If you have an outstanding credit card or installment loan debt, set up a plan to pay it down. That might mean examining your budget and determining where you can cut back so that you divert more of your income to paying down debt.
The amount of credit you use regularly compared with the amount of credit you have available to you is called your "credit utilization ratio." The higher your credit utilization ratio, the lower your scores will be. (You should strive to keep the ratio below 30% and below 10% for the best scores.) If you are carrying a lot of credit card debt, your credit utilization ratio will be high. Paying down that debt will help bring your utilization ratio down.
4. Don't Use Too Much Credit at Once
Even if you don't carry credit card debt from month-to-month, you could still be hurting your credit utilization ratio. That's because your ratio is calculated with the monthly balances at the end of your billing statements. Even if you pay them off in full each month, those monthly statement balances will still affect the ratio.
For example, say you have three credit cards, one with a $2,000 limit, one with a $3,000 limit and one with a $5,000 limit. That means you have $10,000 worth of credit available to you. If you charge $4,000 across all these credit cards each month, you are using 40% of your available credit—even if you pay it off in full each month.
To understand how much credit you should use, tally the credit limits of all your credit cards. Then, try to keep your credit card spending to 30% or less of that each month. You can do that by spending less each month, or by getting more credit so that your overall credit limit is higher. (Just remember that when you apply for new credit, your scores typically take a small, temporary hit.)
5. Maintain the Right Balance of Credit Accounts
If your credit scores are in the fair range, one factor could be the number of accounts you have. If you have too few credit accounts, consider applying for one or two more over a period of time. Conversely, you don't want to apply for too many accounts at once or go overboard with the number of accounts you have in order to maintain a good credit utilization ratio.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit score fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on September 10, 2018, and has been updated.