In this article:
A list of the things to change on your credit report, in order of importance. These aren’t “hacks” to fix your credit report in 30 days. These are the goals you need to undertake to get your credit score over 800 AND keep it! By the end of this process, you will have everything for excellent credit.
The 9 steps of credit improvement
- Bring all open credit accounts current
- Establish at least 3 quality credit accounts
- Bring revolving utilization below 80%
- Resolve outstanding collections
- Bring revolving utilization below 50%
- Bring average age of credit above 12 months
- Bring revolving utilization below 30%
- Have no more than one credit account opened within the last 12 months
- Bring revolving utilization below 10%
Important things not on the list
There are a lot of things skipped from this list that “could” improve your credit. But most of the time, you can’t actually do anything about them. More importantly, just because you have negative items on your credit report doesn’t mean you can’t have a credit score. Here are a few of them.
If you were unfortunate enough to have to deal with a bankruptcy it doesn’t mean you can’t get credit and you don’t have to wait 7 years for a good credit score. You may have to use secured credit cards at first to start the process. However, after just one year, a bankruptcy really only costs you about 40 to 50 points on your credit score. So a credit history without a bankruptcy that gives a 750 credit score would yield a credit score of about 700 to 710 with a bankruptcy.
Previous late payments
The impact of late payments drops quickly over time. In fact, after keeping all of your credit accounts current for just 6 months, the impact of prior late payments is usually 25 points or less. After one year, that drops to about 10 points. After 2 years, prior late payments are negligible and can be ignored. Don’t spend time worrying about past missteps. Focus on the future.
Foreclosure / Repossession / Charged off accounts
Just like with bankruptcy and prior past due statements, there really isn’t anything you can do with these. Time is your friend here. However, if you still have an outstanding balance on the account, it could continue to hurt your score longer. Often, these accounts are sold to third party collections agencies but sometimes the lender will try to collect on their own. Either way, dealing with these falls under step 4.
Step 1: Bring all open credit accounts current
Past due payments are the first step to defaulting on a credit account. Since credit scores measure the chance of default, having a past due payment will drastically hurt your credit score. The good news is that bringing your accounts current and keeping them current for just 1 month will make major improvements to your score. Keep them current and you will continue to see improvements!
Step 2: Establish at least 3 quality credit accounts
This is the most overlooked step in credit improvement. You have to have quality, long term credit accounts that you can use and pay over time. Mortgages and credit cards are the best for this. If you have a mortgage, that will help you a ton. For credit cards get three, you can do two if you have a mortgage. If you have cards already, work on bringing the balances to 0. If you don’t have any, get some. Take your $0 balance credit card and use the double autopay method.
Step 3: Bring revolving utilization below 80%
Tackling revolving utilization should be done in steps. I rank very high utilization (above 80%) near the top of the list of things to deal with. Quick reminder: revolving utilization is the outstanding balance divided by the credit limit multiplied by 100 (to get the percentage). You need to bring the utilization rate of each card below 80%, which by default will bring your overall utilization rate below 80%.
Step 4: Resolve outstanding collections
Collections are a difficult topic and they include third party collections and first party collections such as foreclosures, repossessions, and charged-off accounts that have an outstanding balance. How to deal with these collections requires multiple other articles. Here I will only make a couple of notes.
- From a credit score perspective, it’s more important to keep your open accounts current than to pay off collections.
- There are multiple legal issues and rules you need to make yourself aware of if you have outstanding collections.
- You can often negotiate collections and resolve the balance for far less than the total. However, this will usually require payment in full and not a payment plan.
- The impact of paid collections ($0 balance) depends on the actual credit score version, which FICO or VantageScore model you’re looking at. It doesn’t depend on the credit bureau.
Step 5: Bring revolving utilization below 50%
This is the second level of revolving utilization reduction. In general, each 10% reduction in overall credit utilization rate improves your credit score by 10 to 15 points. At this stage of your credit improvement journey, you have addressed other important debt and credit issues and are ready to take the next step in your utilization reduction process. Bring each card below 50% in utilization rate.
Step 6: Bring average age of credit above 12 month
Now that you have brought your utilization rate below 50% it’s time to focus on another factor in your credit score, age of credit. There are actually a few parts to this factor. Age of oldest account (we aren’t going to worry about this), age of newest account (step 8), and average age of credit. When calculating the average age of credit, what’s important are active accounts. If your average age of open accounts is less than 12 months, focus on paying off an closing the newest accounts. However, you need to keep open any accounts established in step 2.
There are also interest rate considerations. The credit score improvement probably isn’t worth allocating dollars to low interest debts simply because they are new when you have higher interest ones. In that case, it may be best to tackle this step simply by waiting and not opening any new accounts, which will also help you with step 8!
Step 7: Bring revolving utilization below 30%
Part 3 of reducing credit utilization. At this stage of the journey you have put yourself in a good credit position. You have the right accounts, you’re letting your credit age, and you’ve dealt with all troublesome debts that you can. Now it’s time to worry about the details of a great score. Keep bringing down the utilization rates for each card you have until you reach 30%.. While you’ve probably heard that you should keep utilization below 30% before, note that it isn’t the final step, but it is a great milestone.
Step 8: Have no more than one credit account opened within the last 12 months
This goes back to credit age but also touches yet another credit score factor, “new credit.” New credit includes the new accounts and the number of hard inquiries over the last 12 months. When looking at new accounts, what’s important is basically the number of new accounts opened in the last 1, 3, 6 and 12 months. By limiting this to one account, you should also be limiting your hard inquiries to the same. Note that rate shopping, or applying with multiple lenders for the same credit, is typically viewed as one inquiry, even if multiple appear on your credit report in a very short window, usually 14 to 30 days.
Step 9: Bring revolving utilization below 10%
This is the final step of reducing your credit utilization. At this stage there are actually two goals you should be targeting. The first is that you are paying your credit card statement balances in full each month. This is a target everyone should strive for. Even though you are paying your balances in full each month, your utilization rate is not 0%. The utilization rate will be calculated based on your reported balance, which is typically your credit card statement balance.
For example, say you have a credit card with a $1,000 credit limit and you charge $300 on it each month before paying it in full on the due date. Even though you pay the balance in full each month, your utilization rate is 30%.
There are two effective ways to deal with this. First, you can apply for a credit line increase that will reduce your utilization rate for the same amount of spend. Secondly, you can pay all or some of your monthly charges the day before your statement closes. This way you will have a lower balance reported to the credit bureaus, lowering your utilization rate for credit scoring purposes. Note, this will usually require you making 2 payments per month instead of one.
Notable exceptions to this process
There are a couple of notable exceptions to this process, if used as a part of an overall strategy to improve your personal finances. First, dealing with collections. After reviewing the legal risk involved with your collections (TheYukonProject does not offer legal advice), you may choose not to resolve them. While this is not a path that I recommend, there are times when it may be the prudent financial choice.
Second, debt consolidation loans are sometimes are very good choice for reducing credit card debt. This allows you to take all of the revolving utilization steps at once, often giving a boost to your credit score while lowering your interest expense and making your debt payoff cheaper. It also means that step 6 and step 8 will be delayed due to the new account.
One last thought
In general, I prioritize paying off debts over credit score needs. This is because debt reduction improves credit score and long term financial stability. A great credit score can help you in a variety of ways, including reducing the cost of future important borrowing such as a new mortgage. That does not mean you should continue to pay interest just to keep a good credit score, see step 3 and our double autopay method article for details!