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Heard on the Street Blog

5 Steps to Raise Your Credit Score

Two years ago, when I was driving down the highway, my car’s engine exploded. It was no big deal at the time because it was a 2001 Ford Taurus with 160k miles, but I found myself without a car. I was in college at the time so I was already broke, but luckily I could walk everywhere on campus, so I held off on getting a car until December of 2017. I wanted to get financed for a car and nobody would give me a car loan, even though I was good for the money. Because I had never had a credit card or loan, I didn’t “exist” in the credit world. I did “technically” exist in the credit world, but I just had a very low credit score. Luckily, I happened to have USAA (best company in the world) and they were able to offer me a car loan....BUT at a 15% interest rate. Yes, that’s right, I was paying for an auto loan at a credit-card-type interest rate. However, I paid it down aggressively, sometimes 3 or 4 times my monthly payment amount each month. Fast forward to today, less than 18 months later and I only owe $401 on my 2015 Ford Focus until I can finally list it as an asset (a depreciating asset nonetheless). But it was from this experience where I became obsessed with my credit score, and I check it daily. I am pretty competitive so it has become sort of a game with myself to see how high I can increase my credit score, now I am going to give you some of the tips I learned to increase your own credit score.

1. Start building your credit history – do this by getting a credit card young, preferable a low-interest one, or a student credit card if you are in school. Make small purchases and pay them off right away. Do not carry a balance from month to month and set up automatic bill pay so that you never forget to pay your bill (which would result in a big hit in your credit score). Discover is by far my favorite credit card company because they offer a student card, they have AWESOME customer service, all their cards have $0 annual fees, they are upfront and transparent (other credit card companies are not at all) and their interest rates are lower than the industry average. I used to work for a credit card company, so I can tell you that many of the credit card companies are quite sleazy, but Discover is my favorite and I always recommend them (I am not sponsored by them or anything either). Anyways, another trick you can use to game the system is to ask your parents (or better yet, your grandparents) to add you as an “authorized user” onto their credit card. Basically, this means that you are added to their account, so if they’ve had a credit card for 10 years, your credit history now goes back 10 years because it is attached to their card, this is also a great way to increase your spending limit (on paper at least).

2. Don’t miss a payment – missing or being late on a payment can have very serious consequences on your credit score. You will most likely see a very large drop in your credit score, but also if you have less credit history, it will affect your score even more because the more on-time payments you have, the more payments you have to “dilute” that missed payment. It’s imperative that you don’t miss a payment because a missed payment goes onto your credit score as a “derogatory mark” which stays on your credit score for SEVEN years. You can get DUI’s & drug offenses expunged faster than you can  derogatory marks on your credit score. Because payment history makes up the largest component of your credit score at 35% of your score, paying on-time is the best way to ensure your credit score stays high. An easy way to avoid this is to spend within your means, don’t spend money you don’t have and always set up automatic bill payments.

3. Keep your credit utilization low – Just because your credit card gives you a $10,000 limit doesn’t mean you should spend $10,000. Credit utilization is most commonly associated with Credit cards, and basically it means  things, 1.) how much money you currently owe, and 2.) what percentage of your credit limit are you currently spending. The rule of thumb in the industry is to have your credit utilization be 30% or less meaning that if your spending limit is 10,000, you shouldn’t ever have a balance of over 3,000, especially for long periods of time. Your credit utilization can change daily, so a very easy (and quick) way to boost your credit score it to decrease your credit utilization by paying off more of your outstanding credit card balances. It’s important to keep your total credit utilization under 30%, but also keep the credit utilization of each account below 30% as well. That’s because your credit score not only factors in your total credit utilization, but also the credit utilization of each individual account. So, if your total credit utilization is below 30% but one of your credit cards is nearly maxed-out, you’ll want to pay that one off firstYour credit utilization percentage makes up the 2nd largest portion of your credit score at 30%, which is why it’s important not to carry a large balance from month to month and to only spend within your means. 

4. Don’t apply for too much credit – This was actually amistake I made early on, I applied to get multiple credit cards in a small span of time. The reason this is bad is that every time you apply for credit, you get a “hard hit” on your credit which basically means that your score automatically goes down a few points. The more “hard hits” you receive, the more likely you are to get rejected from getting a loan or credit card, in fact, too many “hard hits” are a red flag to creditors who may flag it as fraudulent activity. Stay away from these as much as you can because they stay on your credit report for 2 years and they affect your credit score as well as your ability to get approved for some credit cards and loans. Typically, credit card companies will increase your credit limit over time as you pay your bills on time – think of it this way, you might let your brother, or your best friend borrow money from you but you probably wouldn’t let a total stranger borrow a bunch of money from you. The same is true of credit card companies, as you pay your bills on time each month, you are building your relationship with them, and as a result they begin to trust you more and they allow you to spend more on your credit card by increasing your credit limit.

5. Check Your Credit Score Regularly – checking your credit score regularly can be done for free on sites like CreditKarma. I personally check my credit score everyday, despite it usually only updating once a week. I do this so that I can keep track of my outstanding balances, my credit utilization, as well as all the other factors that comprise my credit score. You should never walk into a bank, a car dealership, or an appliance store, looking to get financing, and not know what your credit score is. There really is no excuse for you not to know what your credit score is at any given time, in fact, Credit Karma will also give you your approval odds for certain credit cards and loans based on your credit score before you apply so that you don’t get a hard inquiry aka a “hard hit” applying for something you won’t get approved for.

Building up your credit can make a huge difference in how much you end up paying for things like auto loans and mortgages. Let’s say you have 2 people who get approved for mortgages, person A has a good credit score and buys a $250,000 house at an interest rate of 3.3% over a 30-year mortgage, Person B buys a house of the same value, but person B has mediocre credit, so he/she pays 5% interest over the 30-year mortgage. Over the course of 30 years person A pays $394,000 for the house, while person B pays $483,000. That extra 1.7% interest rate ends up costing the home buyer an extra $89,000 over the life of the mortgage, and that credit score could be affected by too many hard inquiries, too much credit utilization or a missed payment. Keep in mind that your credit score is only a snapshot in time, you may have a high credit utilization because you just made a big purchase and you plan to pay it off at the end of the month, if they take a snapshot of your credit score after you have made the purchase but before you have had time to pay it off, then at that moment in time, if a creditor were to look at that snapshot, it may appear that you have bad credit, so timing is everything when applying for credit. Applying for credit when you have an ideal credit score can result in more favorable interest rates, higher credit limits, and higher approval odds. You don’t need to make a lot of money to have a good credit score, in fact, the way credit scores are determined, they are calculated independent from salary. So as long as you have discipline and can manage your money wisely, you too can get an amazing credit score.