How to Improve Your Credit Score

My 26-year-old daughter recently checked her credit score through Equifax and was surprised that it was just 708. She thought it would be higher -- she has one credit card that she always pays by the deadline, and she generally charges around $700 or less of the $2,500 limit. The only other debt she has is student loans. What can she do to improve her score?

One reason her score was different than expected is because she received a proprietary score from Equifax, rather than the more-common FICO score. Both scores take information from your credit report and distill it into a single number that measures your credit risk. But they use different calculations and have different score ranges -- the Equifax Credit Score ranges from 280 to 850, and the FICO score ranges from 300 to 850. For more information about different kinds of credit scores, see How to Get Your Credit Score for Free and Conflicting Credit Scores.

Using the same credit report, we helped your daughter get her FICO score, which was 731 -- putting her in the “very good” category. “A 731 is a normal FICO score for someone with only a couple of years of credit experience on record,” says Craig Watts, of FICO. “As long as she continues paying her student loans and credit card account on time, and remains conservative about opening new credit accounts, her score should continue to rise slowly,” Watts says. The length of your credit history accounts for about 15% of your FICO score, but the positive impact of having a longer credit history is gradual.

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She might be able to boost her score even faster by asking her bank to increase her credit limit, says John Ulzheimer, president of consumer education at SmartCredit.com. Almost one-third of your FICO score is based on the amount owed, including your “credit utilization ratio,” which is the amount of your available credit limit that you’ve used. Charging $700 on a card with a $2,500 limit gives her a utilization ratio of 28%. It’s usually a good idea to try to keep that ratio to 25% or less -- and the lower the better. “The average utilization ratio for consumers with scores of 760 and above is 7%,” says Ulzheimer. If her bank raised her credit limit to $10,000, for example, she could still charge $700 per month and have the low 7% utilization ratio.

One common misconception is that paying your balance in full each month can help your utilization ratio. That’s not the case. The number used in the calculation is the balance on your monthly statement, whether or not you pay the bill in full by the deadline. “If it shows up on your statement, it shows up on your credit report,” says Ulzheimer.

But he also puts this information in perspective. “Don’t get so hung up on the number unless you’re in the process of buying a home and need every point on the interest rate,” he says. “In that case, you might want to pay off all balances and leave the card on the shelf for a month.”

For more information about improving your credit score, see our Do You Know the Score on Your Credit? quiz.