3. Reduce the amount of your debt.
Lenders want you to borrow – but not too much. Usually, lenders start to wonder when you use more than 30 percent of the available credit on all of your credit cards. This is measured by what is known as a credit utilization ratio – how much credit you use divided by the total amount available to you – and a low score means you are probably budgeting well. Credit utilization is 30 percent of your FICO score.
Lack of activity can also be a problem, Griffin said, because if you need a loan, the lender will want to make sure you have used the loan wisely in the past. Even if you don’t have a credit card, you can ask for utility bills or other recurring payments to be added to your credit report.
For fixed rate loansFor example, home loans or car loans, lenders look at your debt-to-income ratio, which reflects how much of your annual income goes towards paying off the debt. This is the sum of your monthly debt payments divided by your monthly income. The debt-to-income ratio does not affect your credit rating, but if it is too high, you may not get many credit card offers and it may be more difficult for you to get a car loan or mortgage.
If you have a card that is depleted or close to maximum then pay off aggressively… You may even consider using some of your savings to pay off your credit card. All things being equal, paying by credit card, which carries 18 percent interest, roughly equals 18 percent earning on an investment.
4. Don’t rush to close old accounts.
The age of your oldest account, the age of your new account, and the average age of all your accounts are 15 percent of your credit score. If you don’t pay an annual fee for an open account, it might be worth letting it collect dust. The longer you have a loan, the better your score will be.
5. Don’t ask for a loan too often.
Getting a new card from time to time should not damage your credit, nor should you take out a car loan or mortgage… People who don’t pay off loans tend to accumulate large debts before they default, so lenders keep track of how many times you ask. New requests account for 10 percent of your FICO score. (The last 10 percent is based on loan structure; lenders love to see different types of debt in good standing.)
Lenders will ask for your credit report when they are considering giving you a loan, and this type of request is called a “hard request”. Tough inquiries remain on your credit report for about two years. Lenders view the congestion of tough inquiries as a sign of financial problems.
“Soft inquiries” are when someone looks at your credit as a background check – for example, an employer might ask for your credit report if you are applying for a job. Sometimes lenders will pull out your report to see if you are a good candidate for a new credit card. Soft inquiries do not affect your credit score.