How to Fix Your Credit by Labor Day

As spring gives way to summer, you’re probably thinking more about long weekends with friends, backyard barbecues and just hanging out poolside than you are about how to improve your credit score.

But if you have less-than-stellar credit, there’s no time like the present to turn your financial situation around. The following steps can help you say hello to a better credit score just as you’re saying goodbye to summer.

Here’s how to improve your credit score, even if incrementally, by Labor Day.

1. Understand Your Credit Scores

The first step is knowing what you’re looking at. You have more than one credit score, but they’re all calculated based on five key factors – payment history, how much of your available credit you’re using, your account history, the mix of accounts and how often you apply for new credit.

What is considered “good” actually depends upon the score being used and the lender’s standards (you can read more about what makes a good credit score here). Each lender decides how to use these numbers, so one mortgage company might consider a 690 adequate, but others might require a higher score for you to qualify for a loan. That said, here are some basic guidelines, based on the common FICO score range of 301-850:

Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600

2. Set Up an Action Plan

Now that you know what your credit score means, it’s good to check yours and then establish a plan on how to improve it. (You can do both of those things by signing up for Credit.com’s free credit report summary. In addition to giving you two free credit scores, it also provides an action plan that can help you improve you score by assessing your standing within the five major items that impact your credit.)

If your credit scores are actually pretty good, there are still ways to make improvements. You can build good credit in the long term by making all loan payments on time, keeping debt levels low and adding a mix of accounts over time (more on these actions below).

3. Check Your Credit Report for Errors

Checking your credit report on a regular basis is one of the first steps to catching errors that can come from several sources, whether from an identity thief or even lender error. By pulling your reports from each of the three major credit reporting agencies — Equifax, Experian and TransUnion — you can review the records to see if they’re accurate. You can get your free credit reports annually at AnnualCreditReport.com.

If they’re not accurate — an FTC study found that 1 in 5 people have errors on their credit reports — you can dispute the errors.

4. Avoid Late Payments & Collection Actions

Your payment history accounts for roughly 35% of your score. This one is pretty self-explanatory: paying your bills on time will help keep your scores high, while late payments, charge-offs, and collections will hurt.

If you’re trying to improve your credit rating, avoid the latter at all costs. And while this category makes up the largest single chunk of your scores, it’s important to understand that 65% of your score is determined by other factors. Meaning that there’s more to it than simply making your payments on time.

5. Pay Down Your Balances

Another 30% of your score is based on the amount of debt you’re currently carrying, or more specifically, the amount of money you currently owe your creditors. While the total amount that you owe is considered (credit cards, home loans, car loans, etc.), pay particular attention to your credit card balances. Of course, a zero balance is optimal, but keeping them below 30% of your limit can help your credit score. Ten percent or lower is common among those with the highest credit scores. You can use this handy credit card payoff calculator to help you get started.

6. Don’t Close Your Oldest Accounts

The age of your accounts matters. The longer you’ve had credit, the more points you’ll earn in this section, which counts for 15% of your credit score. So even if you aren’t using that old retail card you’ve had for 15 years, you may want to keep it open so you don’t lose the good credit history, so long as there aren’t any fees making it difficult to maintain.

7. Review Your Credit Mix

The diversity of your credit accounts is important, and worth 10% of your total score. If you have a blend of credit cards, auto loans, mortgage loans, etc., you’re likely to improve your score here. If you have nothing but installment loans, like a personal loan or auto loan, for instance, you might consider applying for credit card. (Just be sure to pay any balances off, ideally in full.)

8. Limit Your Applications for New Credit

While getting a new credit line can improve your score in the long term, applications for credit will ding your score slightly.

Basically, when you apply for credit, an inquiry will post to your credit report showing that you’re seeking credit. Having too many inquiries in a short period of time can hurt you. As a general rule of thumb, try to avoid excessively shopping for credit – only open a new credit account when you really need it. (By law, inquiries remain in your credit reports for two years. However, only inquiries in the past 12 months are generally considered in your credit score calculation.)

Remember, if you have negative information on your credit reports, it will take some time for them to age off. For example, late payments will stay on your report for seven years. But by taking action now, you can begin building a solid credit history that will make your financial life significantly easier. Even by the time Autumn rolls around.