The 4-Step Credit Score Hack


Credit score improvement doesn’t need to be complicated or confusing. The basic breakdown of a FICO score is this:

  • 35% payment history (whether you pay on time, every month, over time)
  • 30% amounts owed (the amount of debt you have in relation to the amount of credit available to you)
  • 15% file age (the average age of all of your credit accounts)
  • 10% new credit or inquiries (the number of times creditors have looked at your credit in response to an application for credit)
  • 10% credit mix (whether your file shows a mix of different types of credit products)

VantageScore uses a similar scoring method but doesn’t reveal the exact percentage that each category contributes.

Within each category, factors are weighed differently. For example, recent late payments hurt more than old late payments, and very late payments hurt more than just a day or two late. And VantageScore gives greater weight to late mortgage payments than other types of late payments.

What you really need to know

You don’t need to understand (but feel free to dig in if you want to) the complex manner in which every piece of data affects your score. That’s just as well since the precise algorithm is a big secret that is closely guarded by credit scoring agencies. You really only need to know two things: what you can control and what makes the biggest impact on your score.

To answer the first item: You have complete control over every aspect of your credit score. Now that we’ve gotten that out of the way, let’s get to the actions that will have the biggest impact.

The two best things you can do for your credit score

1.    Make all – and we mean ALL – payments on time

Payment history is the single biggest contributor to your score. So it stands to reason that focusing on this will have a big impact on your score.

How many late payments are okay? Zero. And they linger in your credit file for seven years. Nonetheless, you can overcome the damage before those seven long years pass. The effect of late payments on your credit score diminishes over time. To get results, aim for 100% on-time for 24 months.

2.    Lower your balances

The second biggest thing to affect your score is debt utilization. This is the amount you owe compared with your credit limits, expressed as a percentage. If you owe $500 on a credit card with a $1,000 limit, your utilization is 50%. Credit scoring agencies look at your utilization on each card as well as your overall utilization. This is a fast fix; bringing your balances down will have an immediate effect on your score. How much of an effect? The numbers are relative. Fifty percent utilization is better than 80%, and 30% is better than 50%. People with credit scores over 800 tend to use no more than about 7% of their available credit. Get it as low as you can.

Here’s a tip: if you can’t get your balances down right away, try asking the creditors to raise your credit limits. That will make your utilization ratio go down (as long as your balances don’t go up).

Here’s another tip: credit card balances are reported once per month, usually on the statement closing date. Even if you pay off the balance by the payment due date, your utilization is probably NOT zero! To ensure zero balance reporting, find out what date the balance is reported and make your payment before that date.

No-effort credit score boosts

Although the other factors in your credit score don’t pack as much punch as on-time payments and low balances, they do add up. Here are two easy strategies to help your score stay as high as it can be. The best thing about them is that all you have to do is… nothing!

  • Leave accounts open
    • Consumers with top credit scores tend to have an average account age of 20 years or more. So don’t close accounts unless it makes better financial sense to do so (for example, if a credit card has an annual fee that you no longer want to pay). Leave accounts open, but watch out for penalties related to inactivity. Some creditors automatically close accounts that are dormant and some business credit card issuers even charge an inactivity fee. Use the card for a small purchase every couple of months to steer clear of penalties.
  • Don’t apply for credit
    • Most hard inquiries cause a ding to your credit score, so don’t apply for credit unless you absolutely need to. If you do have to apply for credit, do plenty of homework first. For a credit card, research the options and only apply for the card you’re likely to be approved for. For mortgages, auto loans and student loans, watch the calendar. You can rate-shop within a certain time frame (14 to 45 days, depending on the loan type and the scoring model) and all inquiries from the same class of creditor will be counted as a single inquiry.

Keep it simple!

Don’t get bogged down in the minutia of credit scoring or try to game the system. (For example, don’t apply for a personal loan just to improve your credit mix unless you truly have a handle on household debt!) Just focus on paying down your debt and paying bills on time.

Tackle the obvious, too. If you have unpaid collection accounts, pay them off. The newest version of FICO ignores paid collections, but outstanding collections really hurt. Also, if something looks wrong on your credit file, have the creditor verify the information. If it’s incorrect, the credit reporting agencies are obligated to remove it.

The bottom line

We can’t give you a silver bullet that will quickly and effortlessly propel your credit score upward. But the good news is that credit score hacks are available to us all. If you follow these guidelines, you could see significant improvement in as little as six months, and certainly within 12-24 months. Your score may need more time to recover if you have a significant derogatory event in your file, like a bankruptcy. Time is on your side. To a large extent, credit improvement is a waiting game. All negative items diminish in importance over time, and eventually age off your report completely.

Posted in Credit Score
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