Forget maxing out your credit cards, here are some easy techniques anyone can use to optimize your credit score.
Most of these techniques can be used by those who have both good and bad credit.
I recommend that you try to do as many as possible on an ongoing basis.
Here are 5 simple techniques that you can use to optimize your credit score:
There are two types of credit inquiries that might show up on your credit report. One can negatively affect your credit score, and one doesn’t.
The main thing to keep in mind when it comes to credit inquiries is that a hard inquiry means you are applying for credit, while a soft inquiry is simply you (or someone else) looking at your credit report for reasons other than loaning you money.
So, how many inquiries is too many? As a general rule, you should keep hard inquiries under 2 during any given two year period. Hard inquiries fall off your credit report after two years.
This basically tells lenders that you aren’t actively looking for a bunch of credit. You may start to see your credit score negatively affected once you hit three or more hard inquiries.
Having more than two hard inquiries won’t kill your credit score, but it will likely take a few points off.
There are 4 types of credit accounts on your credit report and the type of account determines how much of an impact it has on your credit score.
I put together the graphic below to show you which types matter the most:
It’s best to keep a mixture of all these account types. It doesn’t mean that you should close your retail cards, it simply means that a real estate loan will more than likely have a bigger impact on your credit score than a retail card or credit card.
Maxing out your credit cards will kill your credit score really fast. Credit vs. Debt ratios are something people often overlook.
Most people think that their credit score isn’t impacted unless they are late on a payment.
This isn’t true! In fact, I would suggest keeping each credit card under 25% utilization. In other words, don’t charge up more than 25% of your available credit on any particular card.
If you have already charged more than 25%, paying it down to under 25% can significantly increase your score. I have written an entire article about credit utilization that you should check out if you want to understand it more in depth.
This one can sometimes be difficult for people who have bad credit, but it should be something you work towards in the long run.
Since major credit card companies usually require decent credit to approve you for one of their credit cards, having one (or a few) shows that they trust you.
This will positively affect your credit score. Again, if you have bad credit, simply keep this in mind and work towards getting to the point where you can get approved for a Visa or Mastercard.
I should also mention that if you don’t have any credit, sometimes major credit card companies will approve you. Consider this your trial period and don’t screw it up 🙂
A mistake that I see people do again and again (and one I did myself, actually) is close old accounts thinking that it will improve their credit score.
A person usually does this because the old account has a late payment or something. The truth is, this isn’t going to make the late payment “go away” –it will still be there.
What you will do by closing an old account is to stop building history for that account.
There are several factors used to calculate your credit score (see chart below), and your credit length makes up a significant portion: 15%.
By keeping old accounts open, the account continues to build credit history and this is a good thing! In the long run, your credit score will usually benefit.
Lastly, you should also always spend some time cleaning up your credit report by removing any collections or late payments. I recommend getting negative entries removed rather than wait 7 years for them to automatically fall off.
This way you don’t have to worry about them affecting your ability to get a loan.
I suggest you check out Lexington Law Credit Repair. They’ll remove the negative items. Give them a call at 1-844-764-9809 or Check out their website.
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Jeff ~
If a FICO score has gone down due to ratio of balance on credit cards, but payment history is good and I have always paid more than what is due, and I am in the process of paying cards off - do I just need to be patient for the score to increase? Also, is it best to close small retail cards and ask that they be reported closed by consumer?
I wouldn't close any cards if you're trying to improve your score.
Hi Drew,
My wife and I plan on purchasing a home next year. I have a rather high interest credit card and I asked a loan officer if it is a good idea to take out a low interest personal loan to pay it off now. I would probably double up my payments with the personal loan to get it paid off fsater. I do believe the the loan would give my credit, which is pretty good already, a boost as I would have 0% credit utilization and a new installment reported (I also have a student loan. Do you think it's a good idea to take out the personal laon?
No, I wouldn't get into anymore debt.
Ryan,
If I have a very high score (820) and low utilization on all cards. I want to use a card to make one large purchase for the purpose of accruing airline miles that purchase (engagment ring) will take it to 90% utilization but will be paid off in full the first moment the charges post to the account, will my score be impacted? If so, for how long assuming I go back to under 20% utilization within days? Any other advice related to this scenario are more than welcome.
It shouldn't impact it if you pay it back down quickly. Even if your score drops in the beginning, it will bounce back once it's paid down.
Ryan,
This is great article. I do have a few questions for you. (1) How long does it take for your credit score to rebound from hard pulls; does it occur as soon as the inquiry falls off of your credit report? I have heard that inquiries remain on your reports for two years but only has an impact on your FICO score for one year. I'm not sure if this is accurate. (2) If a person never has a mortgage loan can they ever obtain a high/really high credit score? I have a few installment loans in the form of student loans, two open credit cards, and two open retail/store cards. At the present, I do not care to buy a home. Maybe in a few years... (3) How long does it take for your credit score to rebound from a high credit utilization? I'm rebuilding my credit and I have been keeping the utilization well below 10%, at all times. However, I am planning a vacation in a couple of months and will nearly max out one of my credit cards as the limit is only $1,000. I plan to eventually pay the balance down to zero within 2-3 months. Will my score immediately rebound from the high utilization once paid off or does it take more time to recover? If it will not recover immediately then I may need to reconsider that option. Again, thank you for the wealth of information!
hi ryan!! im new here in USA and i have 3 bank accounts after 3 months i applied for secured credit card from bank of america and us band and they give me card. because im new my credit limit is 500 everytime i buy using the card the next day i pay for the item then i realize that i spen almost 900$ on card but paid already before the bank cutoff so i dont have any remaining balance my question is will still affect my credit score. Coz the banker at usbank told me that i can used the card like debit card buy they pay the next day so my credit limit will still be 500. hope to hear from you soon thanks
This is a great, clear post on optimizing your credit score. I'd been considering closing my oldest credit card since I was recently issued a rewards one that's also from CapitalOne, but I'll just hang onto it if it's going to be a detriment to my credit score. Thanks for the info!
Hi Ryan,
In order to "open at least one major Cridit card" do you think is ok to apply for Secured Credit card if I have bad credit score? to avoid apply for regular Credit card
Thank you
Yes, that's actually what I would suggest doing.
If you have bad credit, you can be paying literally thousands a year extra due to high interest rates. Thats why the best thing to do is to hire professional help. Personally, I went through Lexington Law and they really helped me out a lot. My score is now much better and my interest rates are now much lower. It was certainly worth the time.
Yeah, Lexington Law is a good one.
Ryan,
I have a question about Point 2: Keep a mixture of credit account types.
I went through a short sale in 2010 and have been working to rebuild my score.
I paid down a significant portion of installment loan (student loans) over last 2 yrs
and if I wanted to I could pay off the remaining balance which is low. However, I thought
about keeping the installment loan active until I replaced it with another installment loan (auto loan) in approximately 2 yrs. Do you think my score would be better if I maintained an installment loan consistently rather than paying of my student loan debt entirely and having no installment loans for 2 yrs?
Hey Jeff -- My experience with installment loans has been that it's OK to pay them off.. it shouldn't affect your score.. The fact that it's on your credit report is what is important.
Thank you for all the information. I started working on repairing my credit in 2011. I have come a LONG way in the past 2 years. I have managed to get 10 of 14 negative marks removed from my credit but my score seems to stay the same (636, 650, 670). I just wrote a letter to the company that administered my car loan to see if I could get the one late payment (the one and only late payment) removed from my credit. I have also tackled each and every creditor by writing them each two letters over the past two years. I just wrote Experian and Equifax directly to see if I could get some of these items removed. The remainder of the negative marks fall off my report in 2013. I'm wondering if I should just wait them out. I have 2 credit cards that are in good standing but I feel like I'm stuck in the credit score department.
Sara -- you have really done well... Seriously, great job! Getting that many negative marks removed is truly impressive.. It's really up to you.. do you have a specific reason for getting the remanding negative marks removed right now (other than it just feeling good :)?