Credit scores are calculated using the FICO algorithm, which uses information from your credit report to determine how creditworthy you are as a borrower. The FICO scoring model uses your payment history, balances you owe, the length of your credit, the amount of recent applications for credit and the mix of credit you have. These are all plugged into a formula to determine your credit score.
Keep the Accounts You Have
When you are trying to improve your credit score, you should keep the accounts you have and not try to open new accounts unless absolutely necessary. Each time you apply for a new account, the lender will request your credit score to determine whether or not to approve your application. This results in an inquiry on your account. The more inquiries you have on your account the more desperate you appear to lenders, and your credit score will suffer. In addition to not opening new accounts, you will want to leave any accounts you currently have open even if you don't plan to use them ever again. Even if the account has no balance, the account will still go on your credit report each month as being current with your payments. If you close it, you will lose a source of positive records for your credit report.
Reduce Your Debts
Thirty percent of your credit score is based on your existing balances. The more money you owe the greater risk you are to lend money to because lenders fear you will not be able to pay it all back. While it is unlikely you will be able to pay off all of your debts, you can improve your score by reducing your revolving debts like credit card balances because these debts are counted more heavily than installment debts like home or car loans. When you pay down your credit card debt, you also decrease the percentage of available credit that you are using, which helps your score.
Make Payments Responsibly
Payment history is the single largest factor in determining your credit score and it accounts for 35 percent of your total score. If you are consistently making late payments or have delinquent or defaulted accounts, it is nearly impossible to have a good credit score. However, you can start to improve your score immediately by getting your accounts current and making on-time payments because your recent history is weighted more heavily than missed payments farther in the past.
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