Increasing your credit score can make your life much simpler. It gives you a better chance to get more cards and loans and get you better rates. So if a car or house is in your future within the next 40 years, you should probably care what your credit score is.
Maybe you’re just starting out and you have no to very little credit. Maybe you’re finally starting to pay attention to it even though you’ve been kind of using it for a couple years now.
The important thing is that you want to improve your credit score and that’s why you’re here. Building credit isn’t really quick or easy but I have some tips that can help you.
Now I say that it isn’t quick but I got mine up pretty fast tips that I’m going to show you here.
I brought my score from 611 in August 2017 to 793 in just 10 months. Now granted this involved me paying off a lot of debt quickly but I’m going to teach you how to get that boost you need to your credit score today.
Let's Increase Your Credit Score
First thing you should know on improving your credit score is that we’re playing the long game here. Your score is going to jump twenty points than might go lower a couple points and then jump again over the next couple months but all we care about is the steady climb to the top.
To start out with I want to go over the six main factors of credit and how they affect you.
- Credit Utilization
- Payment History
- Derogatory Marks
- Credit Age
- Total Accounts
- Hard Inquiries
Now let’s go through these one at a time.
Your credit utilization has a high impact on your credit score meaning it’s very important to growing your score. The lower your utilization, the better it is for you. Lenders don’t like to see that you’re using all the credit that is available to you, ironically.
The general rule is to keep your utilization under 30% for good credit but my recommendation is to always try to be under 10% for excellent. That means if you have $5,000 in credit limit, you shouldn’t spend more than $500 on your cards at one time.
Payment History is the second high impact factor. This one makes perfect sense. If you miss payments in the past, you're more likely to miss payments in the future. A payment that is more than 30 days late goes onto your credit report as a late payment.
There are methods to get late payments taken off your report if you have one random one. If it’s a recurring problem and you’re not going to change, this guide isn’t for you. Try to keep this at 100% or 99% at the lowest. You don’t really want to go any lower than that.
Derogatory Marks is the last high impact factor. This is really bad things like repossessions, collections, and even bankruptcy. You should never ever get into one of these messes and they stay on your report up to seven years.
So if you get into one of these things, you’re going to be paying for it for almost a decade. Be responsible, pay what you need to when you need to. If this is difficult for you, learn to set up automatic payments that at least cover your minimum payment.
Age of Credit History is a medium impact factor but mostly out of your control if you’re in the beginning stages of this game. Lenders like to see that you’ve been using credit for a long time. This isn’t exactly fair in our 20s but it makes sense.
This is the reason why most of the time it’s not recommended to close credit cards. You improve your average age by keeping your accounts open and in good standing.
Your total accounts are also important to lenders. This is one of the things I have to explain to my coaching clients on credit cards. 3 out of 4 people think the fewer accounts you have is better but that’s actually a myth. The more accounts you have the better it is looked at on your report.
This might make sense. Would you rather have a doctor perform surgery on you and only has performed the surgery once or twice? Or would you pick the doctor that’s done the surgery 25+ times. I think I know your answer.
Hard Inquiries is when a company or lender looks up your report to see if you’re eligible when you apply for credit. This could even happen when you do things like getting a new apartment or car and even a cell phone.
Hard Inquiries is kind of a necessary evil when it comes to growing your score. It is kind of counter-intuitive but since this is a low impact factor, at certain times it’s better to take on inquiries to get things like more cards to help out other factors of your report.
Now that we know about the six factors that impact your credit report, let’s actually check yours out. We’re going to use the free app called Credit Karma.
Either download it on your phone or head over to creditkarma.com and create an account. They ask you some questions including your social but I assure you it’s safe. They’re a $3 Billion company and I’ve been using them for years and never had a problem.
If you have an account already, then you already know your score a little bit. But still open it up so we can figure out how to make it better.
Once we know our score, we can start tackling it.
Bring Down That Utilization
Your Debt-to-Credit Ratio is considered one of the most important factors when it comes to your credit score. This means that focusing on this is also the fastest way to see a rise in your score as well.
Let’s talk about what your utilization actually is. Let’s say you have two credit cards and both of them have a $1000 limit. You have $2000 in credit limit to use at your disposal.
Let’s say you put $50 on one card and $150 on another card throughout the month. That comes out to a $200 usage. $200 divided by the $2000 equals 10 percent. This means that your utilization is 10% and that’s considered good.
0-9% utilization is excellent. 10-29% is good. 30-49% is fair and everything else is poor. A rule of thumb is to not go over 30% but my rule is to try to always have under 10%. This could be hard to do if you only have or two credit cards with low limits.
Most likely your credit cards won’t come out to even numbers like this so I’ll give one more example just to help you out. Let’s say you have four credit cards. One has a limit of $1500 and another has a limit of $2000. Your third card is $3800 limit and your fourth card has a $1600 limit.
$1500 + $2000 + $3800 + $1600 = your total credit limit or in this case $8900 in limit. For simplicity sake, let’s say you have $1200 scattered on all these cards. $1200 divided by $8900 equals 13.5%. This puts us in the good category.
Now there are three ways to get us into the excellent category. That’s the main goal. We want to get down to 0-9% utilization.
The first option is kind of obvious. It’s to pay off some debt. You keep paying your minimum payments on the card but you do an extra payment on one (usually the one that’s gaining the most interest.)
If we paid off $400 of that $1200 it goes down to $800. $800 into $8900 equals 8.98% utilization. That brings us into the excellent category. So the first option for building your credit score is paying down your balance to help your utilization.
The second option is actually easier than you think sometime and that’s getting credit limit increases. This is actually a pick your poison option because for some banks asking for a credit limit increase is going to result with hard inquiry. We’ll get into this a little bit later so stay tuned.
But basically with one of our credit cards that we were using above. If we ask for a credit limit increase on the card that has a $3800 limit and they move it to $7500, it makes a big difference.
We had $8900 in credit limit before and now we have $12,600. $1200 divided by $12,600 equals 9.5% which is below our 10% limit I push people towards.
The good side of this is that it’s pretty simple and can move you into that next bracket overnight. The bad news is that you don’t change your spending habits and sometimes people use this new limit to get even more in debt. If you can’t be financially responsible, then asking for a increase is not for you.
The last option is to get another card. This is ultimately doing the same thing as asking for a credit limit increase in terms of your utilization. Instead of getting a $3700 raise in a credit limit, you get a new credit card that has a $4000 limit.
It still moves your total limit to $12,900 which will bring your rate down to 9.3%. We’re going to get into whether this is a good option for you in the next couple paragraphs.
Getting Your Average Age of Accounts Up
Now I mentioned above that this is mostly out of your control and that if you’re in the beginner stages it basically will just get better over time. While that is true, there are also some tips to make sure that you’re not going to entirely hurt it while building up your score.
I’m going to go through a couple scenarios to help you understand average age of accounts.
Let’s say you have three cards. The first card you opened 3 years ago and the second card you opened 2 years ago. Your third card you opened last year. You add up all of those years so 3+2+1 which equals 6. Now you divide that by the total amount of cards which gives you an average age of 2.
That’s all that this is and you can probably see why time plays a big factor in this. Excellent rating for this is 9+ years which means it’s impossible to get for at least 9 years from getting your first credit card and probably a lot longer for most people because they get more than one card.
Let’s just show you how important time is. Let’s fast forward 5 years. So the first card is now 8 years old, second card is 7 years old and the third card is 6 years old. 8+7+6 now equals 21 which means your average age is now 7 years old which is considered very good.
Now let’s say once your average age is 7 years old you get another card. So your years now are 8+7+6+0 which still equals 21 but now you’re dividing by 4 which means your new average age is 5.25.
This is why your score takes a little dip sometimes when you get a new card. But this isn’t terrible because it then rises because of your new utilization rate.
The way I think about this is that it is a necessary evil not only to get a better utilization rate but all of the cards that I get now are forming a base for my average age for years to come.
Think about the foundation to a building. All of the cards I get in my first five years of credit building will be 10+ years by the time I’m in my 30s. This will give me a great advantage in my credit score even if I get some new ones in my 20s.
Limiting those Hard Inquiries
The last tip I have for you is to watch your hard inquiries like a hawk. Inquiries only lower your score by a couple points and actually fall off your score much faster than anything else but are still important to watch.
Every time you look for a car loan, not just received one, you get an inquiry. If you apply for an apartment, you’ll most likely get an inquiry. If you try to sign up for a cell phone payment plan, they probably will check your credit report resulting in an inquiry.
And of course, if you sign up for a new credit card, you’ll get an inquiry.
These can rack up fast. In 2015, I didn’t know about this so I thought it was in my best interest to go to three different banks and see what’s the best rate I could get a car loan for. They all basically gave me the same rate so I took on three inquiries plus one more for actually receiving the loan and come to find out I basically hurt my score for no reason.
Some credit card companies actually decline you automatically if you have a certain amount of inquiries within a given time period.
Most importantly, interest rates for big things like mortgages actually go up with the more hard inquiries you have on your report.
So whenever something online, or a form in person asks for your social security number, it’s usually because they will be performing what is called a hard pull. This means finding your credit report to perform a hard inquiry.
Anytime this happens I either ask the person if this will result in a hard pull, or I look in the terms to see. Sometimes it is going to have to happen. If you need that new car then you’re going to have to have one.
But I was opening up a checkings account and they asked about my social so I asked if there would be a hard pull and they said it usually is but if I request it they will do what is called a soft pull which is the same action that things like Credit Karma does.
Soft pulls don’t negatively affect your score. So if you can, try to find a way to get companies to do soft pulls on you instead. It doesn’t hurt to ask these cell phone companies and sometimes even landlords.
So where should you go from here. The first thing I would do is sign up with Credit Karma. Checking your credit score consistently will put you on the right track to being responsible and starting to build your credit score.
After that, I would recommend to start paying attention to that utilization score. If you're someone who has a utilization within the 50+% range then I would focus on getting that down to 30% or lower. If you have around a 30%, use the tips in this post to get below a 10%.
I wouldn't focus on really worrying about your average age or your hard inquiries until you can get your utilization under control.
If you want to know more about the best credit cards I recommend to everyone, you can click the picture below.
Do you have a credit card story to talk about? Comment below and tell me your story and how you're going to use these tips to your advantage.