Credit score

How to upgrade your credit rating from fair to good

Fair credit report with pen and calculator;  the document and the report are simulated
There are steps you can take to improve your fair credit score to a good one.

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In order to qualify for many credit cards and loans, you will need to fall within what is considered the “good” credit score range of 670-739. Fortunately, most Americans are already in this category – with the average FICO score in the United States increasing to 716 in 2021.

On the other hand, a “fair” credit score is any score between 580 and 669. Although lenders can still approve you for credit in this range, interest rates will likely be much higher than for borrowers with good credit.

How is your credit score? If you are unsure, several online tools are available to help you get your credit score quickly.

If you improve your credit score from fair to good – or even better, “excellent” (800 and above) – you are in a better position to be approved for mortgages, car loans and other credit products with better interest rates, potentially saving you thousands of dollars over time.

How are credit scores calculated?

To understand how to build credit and get a good credit score, it helps to know how credit scores are calculated in the first place.

A financial tool may be able to provide additional information or advice regarding your credit history and position.

In the meantime, here’s a breakdown of the factors that make up your credit score:

  • Payment History: When lenders review your credit application, they want to know how well you handle credit. That’s why your payment history is the most important credit score factor, accounting for 35% of your FICO score.
  • Amounts Owed: Lenders consider your debt to be part of your credit utilization ratio – the amount of revolving credit you are using against your available limits. Your credit utilization percentage represents 30% of your FICO score.
  • Length of credit history: As a general rule, the more successfully you manage your credit, the better. The three largest credit reporting agencies – Equifax, Experian and TransUnion – take into account the age of your oldest and newest accounts and the average age of all your accounts. The length of your credit history makes up 15% of your FICO score.
  • Credit mix: People with high credit scores tend to have a diverse mix of credit accounts, which can include a mortgage, car loan, personal loan, credit cards, retail cards, and other types of accounts. The credit mix represents 10% of your FICO score.
  • New credit: Applying for multiple credit accounts in a short period of time can signal a higher level of risk and negatively affect your credit score. The new credit also represents 10% of your FICO score.

3 ways to boost your credit score fast

Whether you need to establish credit or repair good or bad credit, know that it takes about three to six months to make good credit decisions to see a noticeable difference in your credit score. Think of building credit as a long-term game where good habits pay substantial dividends over time. Fortunately, there are things you can do now to get quick wins.

1. Get a credit builder loan

As the name suggests, the purpose of a credit building loan is to help those with little or no credit history establish credit. With this loan, the money you borrow sits in the lender’s bank account. You will make monthly principal and interest payments, which the bank will then report to the credit bureaus.

Once you have repaid the entire loan over a specific term – usually between six and 24 months, by Experian – you will receive money from the account. You’ll establish a positive payment history by making your payments on time each month, which can help you build credit.

2. Get a co-signer for a loan

As we have seen, your payment history strongly influences your credit score. Opening a personal loan, auto loan, or other installment loan and granting credit in a timely manner can have a significant impact on your credit score.

If you can’t qualify for a loan on your own, consider using a co-signer with good credit. A co-signer can help you qualify for a loan with better interest rates and terms. Of course, you’ll want to make sure the co-signer understands that the bank will expect them to take financial responsibility for the loan if you don’t make your payments.

3. Become an authorized user

Another effective way to improve your credit is to become an authorized user on a friend or family member’s credit card account. You will be allowed to make purchases with the card, although you do not need to have a card yourself to benefit from it. As long as the monthly credit card bill is paid on time, your payment history – and your credit score – can be strengthened.

How to build credit with a credit card

Credit cards offer one of the best opportunities to take your credit from fair to good. Consider these options that can help you demonstrate your ability to manage credit and make regular payments on time.

Apply for a secure credit card

A secure credit card requires you to submit a cash deposit, which becomes your credit limit. The security deposit protects your bank by covering your purchases in case you miss payments.

By making your payment by the due date each month, you will strengthen your payment history. Therefore, your credit card issuer may upgrade your card to a traditional, unsecured card in the future.

Consolidate your debts with a 0% interest balance transfer card

Once your credit score is in good credit range or better, you might consider getting a balance transfer card to consolidate and pay off your debt. Typically, balance transfer cards offer low or 0% interest rates for an introductory period – six to 21 months. If you have high interest credit card or loan debt, it may be a good idea to transfer that debt to a balance transfer card. In most cases, you’ll save on interest charges and pay off your debt much sooner.

Be aware that balance transfer cards are usually chargeable. Before signing up for a balance transfer card, do the math to make sure the savings you’ll receive exceed the free balance transfer.

As a general rule, don’t apply for loans or credit cards you don’t need. It usually doesn’t make sense to pay interest when you don’t have to. Improving your credit score should be an added benefit of using credit, not the main reason.