(NewsNation) — With credit card interest rates at record highs, your credit score has never been more important, but there are several ways to improve if you’ve fallen behind.
Last year, the average credit score fell for the first time in a decade, according to FICO, a data analytics company that produces the most widely used consumer credit scores.
FICO said high interest rates and persistent inflation helped drive an uptick in missed payments and consumer debt, which led to a one-point drop in the average credit score.
As of October 2023, which is the latest data available, the average credit score in the U.S. was 717, per FICO. That’s considered “good” for most lenders according to the typical 300-850 point range, but consumers may benefit from a higher score.
“The reason it’s important is because it affects whether or not you get approved for loans and lines of credit and the interest rates you’ll pay,” said Ted Rossman, a senior industry analyst at Bankrate.
Your FICO credit score is based on five categories, but some are more important than others. Here’s how each category is weighted:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
With those variables in mind, here are four things you can do to improve your score as fast as possible.
1 – Prioritize paying your debt on time; speak up if you can’t
Payment history is the biggest factor in the FICO formula, so paying your credit card bill on time should be your top priority.
Ideally, borrowers would pay off their full balance each month, but even paying your credit card’s minimum is worthwhile to stay current in the eyes of the credit bureaus, Rossman said.
Keep in mind: lenders may charge a late fee if you’re only a few days behind, but credit bureaus typically report late payments when they’re at least 30 days past due. So even if your card issuer has slapped on a late fee, it’s still worth making a payment before that 30-day mark to protect your credit score.
For those who are unable to keep up with their payments, Rossman said it’s important to be transparent and let your card issuer know.
“It makes sense to ask for a break; lenders have these hardship programs … they’re just not as well advertised,” Rossman said.
Depending on your situation, a hardship program can help you avoid late fees, defer payment without penalty or get a break on interest.
2 – Lower your credit utilization ratio
The second biggest factor in your FICO score is the amount of debt you owe, but your credit utilization ratio matters more than your total debt.
Your credit utilization ratio is the percentage of available credit you’re currently using. Tapping a high percentage of your credit suggests you’re close to maxing out your credit cards, which can signal financial distress and hurt your credit score.
“It’s often recommended to keep your credit utilization ratio below 30%, but that’s not a hard and fast limit,” Rossman said.
According to a recent Experian report, people with exceptional credit scores of 800 to 850 had a credit utilization ratio of 7% on average.
Rossman said one of the best ways to keep your utilization low is to make multiple small payments over the month.
For example: let’s say you charge $4,000 on a card with a credit limit of $5,000. If you make a single full payment on time, you’re utilizing 80% of your available credit, assuming you only have one card. Instead, several smaller payments would keep your utilization lower — and help your credit score.
The other way to improve your utilization ratio is to expand your available credit, either by increasing your limit on an existing card or opening additional cards.
3 – Check for errors on your credit report
One in 5 people have an error on at least one credit report, according to an FTC study. Those errors can include mistakes with your name, closed accounts being misreported as open and fraudulent activity resulting from identity theft, all of which can bring down your credit score.
For that reason, it’s important to review your credit report to make sure there aren’t any mistakes. You can get a free copy of your credit report every 12 months from each of the three major credit reporting companies at AnnualCreditReport.com.
If you notice any issues, you can fix the mistake by contacting both the credit reporting company and the company that provided the information to the credit reporting company (the “information furnisher”), the Consumer Financial Protection Bureau (CFPB) says.
The CFPB provides detailed instructions explaining how to submit a dispute to a credit reporting company and also the information furnisher.
4 – Build credit history in unconventional ways
Tools like Experian Boost allow people to build credit for making on-time payments toward rent, utilities and even their monthly Netflix subscription. Boost users simply connect their bank account to confirm their transactions, and their payment history gets factored into their credit score.
“The point is: filling your report with good information,” Rossman said. “Some people don’t have a credit score because there’s not a lot of information on file.”
Credit history can be especially challenging for young adults who haven’t had as much time to establish credit.
Joining a parent’s credit card account as an authorized user is one of the ways around that problem. Authorized users can make purchases on the account but aren’t responsible for paying off the balance.
As long as the primary account holder makes on-time payments, the secondary user can effectively piggyback on their credit history, boosting their credit score over time.
“If you get on their account and they’re using their account responsibly, that good behavior can translate to you,” Rossman said.
