How to Raise Your Credit Score

Most folks are aware that there is a thing called a credit score and that a high one is better than a low one. Because of the score’s obscure nature (it was never intended for consumers) there is a confusion surrounding it that can cost us money — sometimes a lot of money. Increasing that score will lead to lower lending costs for you, which is another way of obtaining my favorite theme: “free money.”

The originator of the “FICO” score, a tight-lipped company called Fair Isaac (named after the founder), set it up about 45 years ago to range from 300 to 850. About 200 million Americans have credit scores and approximately a quarter have scores of 785 or above, the most desirable category. The average is about 660.

Most experts agree, paradoxically, that it takes debt to attain a high score. The high-score group (HSG) average 4 credit cards in use, with about $8,500 in non-mortgage accounts. Most pay them monthly, on time, indicating that they know how to manage debt. Although Fair Isaac says about 15% carry zero balances.

Credit really means unused, established borrowing (repaying) power. Like all power, credit’s best use is in its potential, not its actual use. Unused credit accounts for a (big) 30% of your score. The rule of thumb here is to try to keep your credit use to about a third of your available credit. Our HSGs use a skimpy 7% of available borrowing, on average.

If you use a higher percentage simply because you don’t have much overall credit, consider opening another account, or asking your credit card company to expand your limit. Sometimes they do this automatically as your positive history with them grows. New credit inquiries do ding your score a bit, but that effect is usually gone within 6 months.

The biggest factor in being in the HSG is simply paying all your bills on time, over time. That’s why most HSGs are older, having a 10- to 25-year history with the same accounts. HSGs average a 96% on-time payment record, only 1% have ever gone to a collection agency, and these facts typically stay on your record for 7 years.

Being a few days late on a loan payment usually leads to a late fee and an interest rate increase, which is lost, expensive money. But being 30 days late lowers your score and that’s really expensive. Just one payment late by more than 30 days will knock your score down 60 to 80 points. It’s a way of saying to Fair Isaac that you are having trouble paying your bills.

If you are just getting started in the credit world, you can’t quickly build a credit history. But you can piggyback on someone who has a long and strong history. For instance, your parents or relatives might be willing to open a joint account where you both have potential liability. Or get yourself added as an authorized user on an existing account.

All of this hinges on regularly monitoring your score through one of the 3 reporting agencies: Experion, Transunion and Equifax. You must make sure that they have your correct information and that what they report is accurate. There are a variety of “free” services online you might use to access your score.

If you are patient, and observant, even past credit misfires can be ironed over. The lower interest savings on future debt by being an HSG can be worth many thousands.

To paraphrase Mel Brooks in The History of the World: “It’s good to be an HSG [King].”