Want to Raise Your Credit Score 40 Points? Try These 3 Surprisingly Easy Fixes

Albert Einstein once said, “Compound interest is the eighth wonder of the world. Those who understand it, earn it… those who don't, pay it.” While many only think of compound interest when it comes to how much money you can earn, compound interest also plays a big factor in how much you pay to borrow money; like when you want to buy a car, a house, or take on a personal loan. The biggest factor in how much someone pays in compound interest? Their credit score. Even a slight shift in your rate can impact how much you'll pay in interest for the long term on those big-ticket items, so learning the answer to the question, “how to raise my credit score 40 points?” is a valid endeavor.

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First, Check Your Score

You can’t know how much you need to improve your credit (or get to work on building business credit) if you don’t first know what your score is. There are many ways to check your credit score and all of them are absolutely free to every consumer:

• As a consumer, you are entitled to one free report each year from each of the three credit bureaus: Equifax, Transunion, and Experian. Here’s more information from the Federal Trade Commission on how you can obtain those documents.
• You can also check your score for free on one of many sites such as Credit Karma, Credit Sesame, myfico.com, or WalletHub.com
• Many credit card companies are offering “Free Fico Scores” to customers within their online banking applications. You may already have a FICO score available to you on one of these platforms without knowing it, so check there first. This isn’t a full and comprehensive credit report, but it will quickly tell you your current credit score.

So, the first step for cleaning up your credit is actually checking it. That makes sense, right?

Once you have your current score, it’s time to roll up your sleeves and do more research. I like – scratch that– I LOVE this calculator from myfico.com that tells you what type of interest rate you can expect with your current credit score and how much you can expect to pay in interest and what you can save by improving your score.

An example of the difference a 40-point shift can make

Using the calculator above, let's say I want to take out a $300k home mortgage loan. I have a 650 credit score, which means with no credit improvements, I'd nab ~7.5% interest rate or a $2,114 monthly payment. Learning how to raise my credit score 40 points, I improve my credit in a few months to a 690, which means I could now score a 6.9% interest rate, with a $1983 monthly payment. My monthly payment doesn't move a ton, but by improving my score just forty points, I save an extra fifty grand over the life of the loan. (Imagine the “mind blown” emoji here.)

How to raise my credit score 40 points the fastest way: pay off debt

Credit utilization (how much debt you have vs. your income) is worth 30% of your total FICO score. Since it is such a big component, one of the easiest ways to improve your credit score quickly (especially just before home shopping) is to pay off debt. If you have the money and are sitting on a good amount you do not need for an emergency, that money may be better served clearing away a chunk of your debt.

Perhaps you’ve been just paying the minimums and saving up as much as you can in your home down payment fund. While this is good if you’re worried your credit score might be on the cusp of making a difference in the interest rates, use some of this cash to pay down your debts.

Similar to the example above, if I applied for a $200,000 mortgage with a 680 credit score I’d get in the range of 4.5% interest on the loan. By improving my score to the 700-759 category, I’d save $7,000. It definitely pays to pay off as much debt as possible before you apply for another big debt like a mortgage! (Here's my guide on how I paid off $8,000 in just 90 days.)

Remove any Negative Information

After ordering your score, you may find negative information there that could be why your credit is low. Some of it may or may not be a surprise to you. Back when I was fresh out of school and working in my first job at a hedge fund, they did a background and credit check on me and I was surprised to learn of a negative report from an unpaid internet bill when I moved apartments in college.

If you owe a bill and can verify its accuracy, you can negotiate to have the negative report removed by offering to pay the bill in full. If you have inaccurate items on your report, you could work with a company like CreditRepair.com to create a credit repair strategy for you.

Pay on Time and Avoid Big Purchases

Don’t buy a car or finance a new washing machine, or open up a credit card just to get the bonus incentive or miles prior to shopping for a home loan. The number of inquiries impacts your credit score. While inquiries only move the needle a small amount (myfico.com reports a decrease of only 5-10 points) if you’re on the cusp, this can make a big difference.

Also, if you already have a short credit history, opening up a new account can have an even bigger impact. Plus, moves like this can signal to lenders you don’t keep money on hand and constantly need credit, which looks bad.

Conclusion

I feel like a broken record because I say/write this statement a lot on my blog but, seriously: IMPROVING YOUR CREDIT IS THE BEST WAY TO SAVE MONEY. Especially on a home. The lower the interest rate, the less you’ll pay in interest over the life of the loan. Periodt.