What is “good credit”? Is it really as easy or difficult as people may think? A good credit score is portrayed to be this mystical concept to those who may not have a good understanding of it. Having good credit isn’t any more defining of your ability to manage your credit than having a degree measures your critical thinking skills. To increase your credit score doesn’t require a miracle. First, you just need to educate yourself on your current credit score and credit report. Second, it’s about understanding how your financial habits affect your credit. Finally, It’s about playing the game to keep your score as high as possible and maximizing your impact in all six categories. It’s about avoiding high-interest rates, security deposits, and paying unnecessary extra money. Utilizing these three key focus points will assist you in increasing your credit score. I’ve used these principles to help other people go from the low 500’s to 700+. Get your pen ready because we got a lot of information that will change your credit life!
1. You need to know your score and what’s on your credit report.
First, I recommend using Credit Karma to increase your credit score. Credit Karma is free. They send alerts when changes and updates occur on your credit report. It is your responsibility to know what is on your report. You need to protect your credit score. This number plays a huge part in your financial management. Consequently, you can’t fix your credit under the presumption of having “bad” credit. You need to know what is pulling your score down. Most things can only be reported on your report for seven years. Subsequently, if its eight years later then you most likely have no credit, not bad credit. You then need to understand how the FICO credit scoring works. I say FICO (originally Fair, Isaac, and Company) because there are many credit models that use the same information on your credit report to offer a score but most banks and lenders use FICO scores to determine creditworthiness.
Also, you want to make sure you check your report for accuracy. If you locate anything that is outside the seven-year timeframe or inaccurate information, you should submit a dispute through the credit bureau. You can also submit electronic disputes directly through Credit Karma. There are rules for the reporting of debts, which can be located in the Fair Credit Reporting Act (FCRA). The act states that most negative items must be removed from your credit report seven years from the original date of delinquency. There are some exceptions to the seven-year rule, which are listed below.
- Chapter 7 bankruptcy filings (10 years).
- Judgments (seven years or until the state statute of limitations expires, whichever is longer).
- Money owed to or guaranteed by the government (unpaid taxes or student loans stay on your report indefinitely or until seven years from the date paid).
Click here to check out the article from Experian regarding the seven-year rule.
2. Understanding what actually affects your credit score.
Second, its crucial that you understand what affects your credit score. For example, most people will not see their monthly rental payments on their credit profile unless it’s a mortgage. Considering this is most likely the first bill you pay, it can be surprising that it’s not reported on your credit report. The information from checking and savings accounts are not reported, either. I am not talking about unsecured or secured loans acquired at a bank. If you have ever received an overdraft fee, this will not be reported on your credit report.
Your timely utility payments are also not reported. This is important information to know. If you ever hit hard times in your life and need to do damage control this may come in handy. For example, if I had to choose between paying my credit card minimum and paying my electric bill. I would pay my credit card. Late credit card payments can be reported on your report for up to 7 years. Nothing like a seven-year reminder of a tough month to bring things in perspective. I would rather pay my credit card and plan for a late payment for my utilities. Your utilities do not report unless you completely stop paying and they sell your account to a collection agency. Understanding what affects your credit score is good information to have as you maneuver through all transitions of your life.
3. Maximizing the impact on all six categories that make up your credit score.
Lastly, this may be the most important tip. There are six categories that make up your total credit score. Your job is to understand what each one is and do your best to maximize your impact in each category.
- Credit Card Usage-(high impact)- The initial goal is keeping your credit card usage below 35% of your available total. For example, if your total available credit limits add up to $1000, then you should not exceed $350. For the best impact in this category, you should not exceed 10% ($100) of your available credit. You should also request a credit increase every 6 months. The higher your available credit the easier it is to keep your utilization averages low.
- Payment History (high impact)- The percentage of payments that have been made on time. The goal is to make sure everything listed on your credit report is paid on time. Remember, late payments can stay on your credit report for up to seven years. Late payments lower your percentage. For example, if you have a total of 100 payment activity reported and 20 payments were late. This would give you an 80% percentage of on-time payments. The goal is to get as close to 100% for this category. Set up auto pays to ensure timely payments. I have found that opening a separate account just for bills helps to limit any potential confusion.
- Derogatory Marks (high impact)– This is all collections, tax liens, bankruptcies, or civil judgments on your report. The goal here to have zero for this category. Derogatory marks can stay on your report for 7-10 years. If you have any items in collections, remember that these debts were sold to collection agencies for pennies on the dollar. I would negotiate to have them report the bill as paid in full. I would start with an offer for 20% of the debt and negotiate from there.
- Credit age (Medium impact). This is the average age of your open accounts. The keyword is open accounts. Therefore, it’s not the best idea to close your oldest credit card. You will lose those years of longevity on your credit report. There is no quick fix for credit age. One trick is to be added as an authorized user to someone’s credit card who’s in good and long-term standing. Keeping in mind, only time will age your credit and it is important to keep your accounts in good standing. Based on Credit Karma, 9+ year averages get the most impact for this category.
- Total Accounts (low impact)- This is the total number of open and closed accounts. Lenders typically like to see that you’ve used a variety of accounts responsibly. This means having installment accounts, credit cards, auto loans, real estate, and other loans (personal loans etc).
- Hard inquiries (low impact)- The number of times you have applied for credit. This isn’t a high impact category, but several inquiries can set you back quite a bit. They also stay on your credit report for two years. I worked in a bank for several years. One thing I learned was the benefit of soft inquiries. Soft inquiries are when a customer would come in to open a checking account and was pre-approved for a credit card. The member didn’t apply for a credit card, so this would be considered a soft hit. Soft hits usually are not reflected in this category. If you selected the offer, you would just see the new credit card listed on your credit report. It’s something to keep in mind when the opportunity presents itself. You get the credit card you may have wanted anyway, and you save yourself the points deduction in that category.
Bonus* Ask for credit increases every six months.
When you are building or repairing your credit, it’s important that you increase your credit line. I think it’s an essential part of the process. If you are repairing your credit, you need to start establishing good credit. That would mean getting a secured or unsecured credit card. For example, if you get approved for $300 credit card. You need to follow the credit utilization tip that I provided above. You don’t want to exceed 35% of your available credit but I would recommend staying under 10%. This would mean not having a balance of more than $30. You want to request a credit card increase every six months. This will help in increasing your available credit line. It does not affect your credit score by requesting credit line increases. You want to show that you can be responsible even as your credit line increases. I mark my Google calendar to request timely credit card increases for each card. This tip is critical in helping repair credit.
Understanding and implementing these three tips will help transform your credit and get you the score you deserve. These tips are essential to increase your credit score. Credit isn’t complicated but it’s important that you are informed. Credit drastically impacts all of your important life decisions, including housing, employment, auto loans, and interest rates. Why pay extra if you don’t have to. It’s the difference between paying $283(5%) per month or $409(21%) per month for a $15,000 auto loan. This is the same car but the latter price is the penalty you pay to have bad credit. What could you do with an extra $126 per month? That could go towards your cell phone or utility bill. Make the most of your income by increasing your credit score and getting better interest rates. Do you monitor your credit? How often do you check your credit? Do you have credit goals in place with action plans? Comment below and let me know. 🙂
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As always Fear Less, Love More, and Drink moderately.
