Are you looking to raise your credit score? Maybe you want to buy a home and want the best possible interest rate, or want to qualify for the best credit card offers? Whatever the reason is, raising your credit score can make it easier to borrow money and save on interest.
While there’s no way to predict what moves will raise your credit score by exactly 100 points in 2024, here’s an overview of how the FICO credit scoring model works and ways to maximize your score.
The FICO formula
To be clear, the actual formula used to calculate your FICO credit score — which is the type of credit score most frequently used by lenders — is a well-guarded secret. As such, there’s no way to know what impact any specific action will have on your credit score.
Having said that, we do know quite a bit about how the FICO model works. Five categories of information are used to determine your FICO® Score, each with a specific weight. And by understanding how they work, you can use this information to do things that are likely to raise your score. In order from most important to least, here are those five categories.
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
Now, let’s look at these one at a time.
1. Payment history (35% of your FICO® Score)
It probably won’t come as a surprise, but the most important factor in your credit score is whether you pay all of your bills on time.
While there’s not really a way to quickly boost your credit score through this category (unless you have unpaid collection accounts or judgments), the best way to gradually build your score over time is by simply paying your bills on time, every single month.
2. Amounts owed (30%)
The second most important category of information is the amounts you owe. This doesn’t necessarily refer to the dollar amounts of your debt but considers things like the percentage of your available credit that you’re using (also known as your credit utilization ratio) and how much you owe on installment loans relative to the original balances.
The most obvious way to have a positive impact on this category is to pay down your credit card and other debts, but there are some outside-the-box strategies you can try as well. For example, you can ask your creditors for a higher limit so the balances on your credit cards will make up a lower percentage of your available credit.
3. Length of credit history (15%)
This category looks at a variety of time-related factors, such as the age of your oldest credit account, the average age of all of your accounts, and the ages of each account on your credit report.
The best way to boost this category is simply by letting time pass and not doing things like closing old credit accounts. For example, if you have an old “starter” credit card you barely use, it could seem like a smart idea to get rid of it. But if it’s one of your older accounts, closing it could hurt you in this category.
4. New credit (10%)
The new credit category mainly considers two things: the newly opened credit accounts on your report, and the number of times you’ve applied for credit within the past 12 months. The rationale is that people who are actively looking for more credit are more likely to get themselves into trouble.
The best way to maximize this category is to only apply for and open new credit accounts if you need them. And if you’re looking to boost your score in 2024, avoiding any new credit applications for an entire 12-month period could certainly help you do it.
5. Credit mix (10%)
This category is more important for consumers with shorter credit files, but the idea is that if you have several different types of accounts (credit card, mortgage, auto loan, etc.) it can be considered more favorable than if you have just one or two.
The bottom line
Again, there’s no way to predictably raise your credit score by exactly 100 points. And in some cases, it might not be practical. For example, the maximum FICO® Score is 850, so if you already have a 760, you literally cannot add 100 points to your score. And different credit moves will affect consumers in different ways.
The bottom line is that by knowing how the FICO scoring system works, you can use it to your advantage in your daily financial life and practice behaviors that are likely to build your score over time.
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