Cleaning up your credit score just before you apply for a loan can be a bit like working out to get in shape for summer.
A few weeks of effort typically won’t be enough to completely undo months of mistakes. But consumers who show discipline and get in the habit of making savvier decisions can see improvements.
That kind of discipline is especially important for people who are looking to apply for a loan within the next three to six months. There are tried and true habits that can have a lasting effect on a person’s credit. There are also small changes consumers can make in the ways they use their credit cards to help lift their credit scores.
The timing and frequency of payments, as well as decisions about which cards are used, can lift scores by 20 points or more within a couple of months. How much a person’s score increases will depend on that consumer’s current score, his or her financial habits and other factors , credit experts say. Here are some moves that may help:
1. Pay your bills on time. This is the number one thing you can do to boost your credit score. Payment history accounts for 35 percent of the FICO score — which is used by the majority of lenders. That’s more than any other factor. So pay every card on time, every month.
2. Keep your balance low. The second-largest factor affecting a person’s FICO score, accounting for 30 percent of the equation, is the amount he or she owes. A good way to understand that is by looking at the the so-called “credit utilization ratio,” or the share of total credit that a person is using. (In other words, if you have $10,000 in credit available on your credit card and you carry a balance of $1,000, you are using 10 percent of your available credit.)
Ideally, consumers will pay their cards in full to help keep that ratio at or near zero, says Rod Griffin, director of public education for Experian. But people who can’t afford to do that should try to keep their balances below 10 percent of their available credit limit. The max should be 30 percent.
3. . . . And that applies to each card. Lenders want to see that consumers are responsible with every credit card, Griffin says. So for some people who are looking to apply for a loan in the near future, it may help to transfer balances from one card to the next to keep the balance on each card below that 30 percent threshold. But watch out for balance transfer fees, says Matt Schulz, senior industry analyst for CreditCards.com. Those can typically add up to 3 percent or more of the balance being transferred and may not be worth the quick boost to your credit score.
4. Pay often. Paying a credit card bill once a month may not be enough, credit experts say. That’s because the balance that shows up on your credit report is typically the last statement balance. And people who run up a high balance on a single card may be penalized — even if they pay that balance off in full each month, Schulz says.
Take a person who makes $3,000 in purchases one month on a card with a $6,000 credit limit. That person might still be recorded as using 50 percent of the credit on that card, even if they pay the card in full at the end of the month, Schulz says. This may not matter much for someone who isn’t applying for credit anytime soon, but consumers preparing for a credit check might want to make multiple payments a month to be sure their balance will be low near the end of the statement cycle. Those payments should still count as part of a person’s payment history, even if the balance on the statement is zero, Griffin says.
5. Use your cards. It’s never a good idea to run up a balance that you can’t afford to pay, but consumers do need to use their cards occasionally if they want the card to be counted as part of their payment history, says Florian Egg-Krings, general manager of the Chase Slate credit card portfolio. Cards don’t need to be used every month, but using them once in a while ensures that there is a record of purchases and timely payments, he says. Plus, card issuers may shut down accounts that have been inactive for several years, Egg-Krings says. That could cut down on a person’s total available credit, temporarily hurting his or her credit score.
6. Keep your oldest card open, for now. It can be tempting to get rid of an old credit card that is rarely used. But people applying for new loans may want to hold on to those cards until after their credit check, credit experts say. Closing an account can reduce a person’s total amount of available credit, says Ethan Dornhelm, senior director of scores analytics for FICO. If that person is carrying a balance on some credit cards, it could have the effect of increasing their credit utilization rate and ding their credit score.
However, any damage is likely to be temporary, Griffin says. Scores can rebound in the next month or two when credit agencies recognize a person hasn’t actually taken on more debt. “But it can be an important consideration, especially if you’re applying for credit in the next three to six months,” Griffin says.
The decision to keep or close an old card can also affect the length of a person’s credit history, which accounts for 15 percent of a person’s FICO score, Dornhelm says. But the impact is likely to be minor. If a consumer has been good about paying that card on time, it won’t drop off the person’s credit report the second the account is closed, he says. Positive records, such as cards with a history of timely payments, stay on a person’s credit report for 10 years and would continue to count as part of that person’s payment history, Dornhelm says.