TIPS AND TRICKS TO IMPROVE YOUR CREDIT SCORES
Now that you have a foundational understanding of how credit works, let’s talk about specific things that can be done to improve your credit, in relation to each of the five categories of information that comprise your FICO score.
Using any one of these tips and tricks is likely to give you a bump in your credit score if it’s relevant to your situation. But if you want more than a tiny fix, it’s going to take a bit more effort. Remember, there is no one-size-fits-all approach to improving your credit. If what you’re after is getting big results in a short period of time, you’ll need to make sure you use the right combination of tools, in the right way.
You’ll be using several of these strategies in your credit game plan, but don’t worry too much about that now. You have some time to decide which ones will be most beneficial to your unique credit situation, once you’ve got the full picture.
I recommend you take notes or use a highlighter as you read on. That will help you when you refer back to this section as you’re auditing your credit report, which I’ll walk you through in a later chapter.
Tactics to Improve Payment History (35%)
- Dispute negative items to try and get them removed from your credit report.
It’s often possible to get damaging items removed from your credit report if they are inaccurate, unverifiable, or outdated. The FCRA entitles you to challenge the credit bureaus on any of these grounds. Hands down, this is the fastest way to make the biggest positive impact on your credit scores. More on how to do this is below.**
- Make your payments on time — every time.
Look, I know nobody’s perfect (besides my wife). Sometimes your cash flow gets strained by unforeseen events and you need to pay a bill late. But now that you know which of your accounts report to the credit bureaus, those have to be your priority. Make sure you pay those accounts that show on your credit report first! Utility bills typically don’t report if you are just 30 days late, but car payments and credit cards will report right away. This counts as a recent derogatory item and will drop your scores tremendously. Trust me. Making this kind of avoidable mistake is the fastest way to undo all of the work you put into rebuilding your credit.
To ensure you’re never late on the bills that matter most, set up the account on auto debit through your bank, and create a reminder system to make sure the payment goes through every month.
- Be careful about paying off old collection debt.
Many people believe that paying off collection debt will remove it from their credit report or improve their credit scores. Neither of these statements is true. Paying a collection does not automatically remove it from your report or improve your score. In fact, counterintuitively, it may actually decrease your credit score. Remember the second factor in payment history, recency? Paying a collection account will update the date of the last activity, making it look like a brand new negative account rather than one that happened further in the past (where it had less of an impact on your score).
Please understand, I’m not advising you to not pay your bills. It is wise, however, to prioritize your goals and strategize accordingly. If your goal is to buy a house in short order, it’s possible that paying off old collections before securing that house can hurt your score and prevent you from getting it. So you might choose to wait to pay a collections bill until you’ve got the keys to your new home in hand.
4. Become an authorized user.
If you have some derogatory items on your credit reports that you can’t remove, it may be helpful to piggyback on the benefits of someone with a stronger payment history than your own. In some cases, it’s prudent to take the steps to become an authorized user on another’s positive account, like a credit card. Doing so will improve your credit scores.
If your aim is to buy a house, this has to be done a certain way for it to have the intended effect. Many people try to get added as an authorized user to a friend’s account, or distant relative’s. For one, you are taking a risk here; if your friend makes a mistake like a late payment, it affects your credit as well as theirs. Secondly, though it will give your scores a superficial bump, it ultimately will not work to help you qualify for a home loan if you become an authorized user on an account that belongs to someone other than your spouse. It will not fly through mortgage underwriting.
The way to use this tip effectively and ethically is to ask your credit-perfect husband or wife (because you married well!) to add you as an authorized user on their credit card. If you share a last name and address, it will not only help your credit scores but will pass underwriting and improve your chances of qualifying for a great mortgage.
Tactics to Improve Amounts Owed (30%)
- Get a secured credit card.
So you’ve made some mistakes with credit cards in the past. You may not want to have anything to do with credit cards. But to make a difference in your FICO score, you have to rebuild and avail yourself of new credit. (Note that I said new credit, not new debt.) If you show high credit utilization because you have too few revolving accounts on your report but can’t (or don’t want to) qualify for a traditional credit card, consider getting a secured credit card — stat.
There’s a big difference between a secured credit card and a traditional credit card. A traditional credit card is a revolving credit line that is unsecured, meaning there is no collateral backing up the charges you incur. A secured credit card comes with added security; when you apply, you put down a cash deposit as collateral, typically an amount in the range of $200-$500. It’s similar in that way to a prepaid debit card, but a prepaid card is not a revolving account so it won’t help your credit. A secured credit card has a revolving credit line that you can pay off and reuse every month. As long as you use it responsibly, it will absolutely benefit your credit scores.
One thing to keep in mind is that secured credit cards can have credit lines that are higher than the deposit amount. If you remain diligent about keeping your balances low, this should be no problem for you. And it’s good news for your credit utilization.
There’s more good news. Secured credit cards report the exact same way as unsecured credit cards. The bureaus won’t know the difference. So if you’re not able to get approved for a traditional credit card or are wary about using them, a secured credit card is an excellent option.
Don’t let your past dictate your future! Building a positive history moving forward is just as important as getting negative information from the past removed. Getting a secured credit card is a good, safe way to begin to rebuild your credit and see improvement in your scores in a very short period of time.
- Keep your credit utilization percentage as low as you possibly can.
When I suggest you keep your credit utilization on the low end, what I specifically mean is keep it below 30%. Period.
If you have a $1,000-limit card, you want to make sure that your balance, when it’s reported to the credit bureaus, is not over $300, or 30% of your credit line. Anything over that, and you will start to see your scores go down.
But 30% is not the goal; it’s actually the ceiling, the worst-case scenario of where you want your scores. The best place to keep your credit utilization is within 10%. Ideally, if you’re carrying a balance you want it closer to 1%-3%.
Why not 0%, you may be asking? Well, because credit companies want to see that you can manage your revolving accounts. There has to be some regular activity on them or they will grow outdated and lose their positive impact on your credit scores.
What’s your due date for your credit card? Obviously, that’s important information for you to know. But there’s another date that’s equally important, maybe even more so! It’s the day your monthly balance is reported to the credit bureaus, which is on or shortly after the date your monthly billing cycle is completed. Card due dates are generally set at a couple of weeks after your billing statement is issued. So if you’re paying the balance of your credit card on your due date, you’re missing the real opportunity.
If you want to use your credit card to boost your scores, you can still do so without carrying a balance or incurring interest. Use your credit card for whatever you want throughout the month, but make sure to pay it down to 10% or less right before your billing statement is issued — then pay it off completely before the due date. As far as the reporting agencies are concerned, your account is seeing action, but your utilization is right in the sweet spot. The next month, charge what you want again but pay it down completely before the billing cycle ends. Rinse and repeat.
- Request a credit limit increase on your credit cards.
It doesn’t occur to a lot of people to do this, but asking for a credit limit increase on your revolving accounts is a great way to boost your credit scores. If your credit card utilization is high but you don’t have the funds to pay down those credit cards, this will help lower your overall utilization percentage. Just make sure you don’t increase your debt. If you’re spending the same amount of money on your credit cards but the credit limit is higher, you’re now utilizing a smaller percentage of your available credit.
When was the last time you asked for a raise on your credit limits? Chances are, you’re due for one! Most credit cards will allow you to request a credit limit increase every six months, and the higher you get your limits, the lower your utilization percentage is (as long as you keep your spending constant). Call your credit card company and ask how often they will allow you to request a credit limit increase, then ask for a raise as often as you possibly can. The process is super simple. However often they grant your request, it will contribute to lowering your credit utilization percentage, which will nudge up your scores each time.
- Make sure credit card limits are being accurately reported.
Now that you’ve gone to the trouble of raising your credit limit, you’ll want to make sure those limits are getting reported properly. Credit card companies are notorious for withholding your credit limit on your credit report. When you audit your credit card accounts on your credit report, you might see your balance, but there’s no reporting on what your limit is. This could affect the perception of what your overall utilization percentage is.
For example, if your balance on a credit card account is $1,000 but your limit is $5,000, that’s a 20% utilization. Not bad. But if your credit limit is not being reported, there’s no way for credit companies to tell whether or not that’s a maxed-out card. Your credit line could be $1,000, for all they know!
Additionally, if your credit card company has issued you a limit increase, your FICO score can’t reap the benefits if that raise goes unreported. Unfortunately, this is pretty widespread among credit card companies. Monitoring your credit and making sure that your limits are reported (and reported accurately) is a simple but important step to take. In a lot of cases, you can substantially improve your scores by keeping your eye out for that one small thing. It’s quick and painless!
- Become an authorized user.
We covered this one in the payment history category, but it bears repeating because it’s relevant to your amounts owed as well. It’s not good for your credit health if you don’t have any open credit cards. It actually registers the same thing to credit companies as if you had a maxed-out credit card, because it’s high credit utilization. That’s right. As far as a lender is concerned, having no credit limit is as bad as having a balance of $5,000 on a credit card with a $5,000 credit limit — because 100% of $0 is $0.
You need to have at least one open credit card, but preferably multiple, or you can’t show low credit utilization. Remember, you want to keep your percentage of credit used at less than 30%.
If you can’t qualify for a new credit card, ask your spouse to be added as an authorized user on an account in good standing. This is an effective way to gain some data on your report to show a more favorable credit utilization percentage, which will quickly improve your scores.
- Make your payment before your credit card company reports to the bureaus.
Even if you are a highly responsible credit card user, this small mistake can do major damage to your score without you even realizing it. I’ve gotten calls from millionaires who put thousands and thousands of dollars on their credit cards each month, and they say, “Hey, my scores are fluctuating 60-80 points, but it doesn’t make any sense. I always pay my cards off at the end of the month. What’s going on?” And it’s almost always this problem.
We touched on this earlier, but to illustrate how this works and why it’s so important, let’s say you have a credit card with great rewards and a $5,000 limit. You decide to put every single one of your bills on that credit card so you can get the most out of your airline miles and cash back. then you pay it down by the due date. Like our millionaire above, you are fastidious about paying off your credit cards to avoid carrying a balance and paying interest, but your credit scores are still suffering. Why? You guessed it. Your credit card balance is being reported to the credit bureaus before you are making your payment; that is, before your due date. On your report, it looks like that credit card is maxed out every month, which is killing your credit utilization score. This is entirely avoidable!
If you’re paying off your card balances on the due dates, you’re missing a vital window. You must make a payment to lower your credit card balance each month before that balance gets reported to the credit bureaus. This date will vary according to the unique billing cycle of each creditor — and it is NOT the same as your payment due date.
Your credit card company issues a monthly statement on the same day each month. The balance they report for your account is whatever the number is ON THAT DAY. So if you have been using your card for a couple of weeks since your last due date, the balance is likely to be higher than you want it to be for the purposes of reporting.
Once you figure it out, it’s all gravy. Credit card companies report data to the bureaus on the same day as your statement date, or within a couple of days of it. Not a lot of us receive paper statements anymore, so you may have to dig a little. Check into each of your accounts online, access your billing statements, and find out the exact dates of your billing cycle. What’s the last date of your billing cycle? Whatever day that is, set your new payment due date for the day before it.
If you want to take it a step further, don’t pay off the full balance each month. The best thing to do (though it takes a bit more coordination) is every other month to pay down your balance to 2% or so the day before your billing cycle ends, then pay it off to $0 the next month, and so on. This will demonstrate regular activity while keeping your credit utilization consistently low, right where it needs to be to enhance the health of your credit and keep your scores nice and high.
- Make a plan to pay off your debt, then stick to it.
If you have debt, it behooves your credit to take steps to make sure you are paying it off as efficiently as possible. Here are some of the debt repayment strategies available.
The snowball method is where you list all of your accounts on a sheet of paper in order of smallest to largest and you start paying them off in that order. The idea is to pay the minimums on all of the other accounts and throw every extra dollar you have toward paying off your smallest debt first. Then once that debt is paid off, you cross it off the list and start prioritizing the next one, working down the list gradually until one day you’re debt-free. This strategy is said to be helpful because each time you retire debt, it’s a small win that will motivate you to keep going. That may be so, but mathematically the snowball method is not the smarter way to pay back your debt. In fact, it will likely take longer and cause you to pay more overall in the end.
The debt avalanche method saves you more money over the long haul. This method is where you list all of your accounts on a sheet of paper in order of highest interest rate to lowest interest rate and you start paying them off in that order. Pay minimums on all of the other accounts while you throw everything you have at knocking out the highest interest account first. Then continue in that order. Naturally, the benefit here is that the quicker you get rid of the higher-interest accounts, the more money you will save.
Debt consolidation is the method of using a loan or zero- or low-interest credit card to pay off all of your debt. The best way I have found of paying off credit card debt is with a personal loan. Almost always, the loan will have much lower interest and the monthly payments will be lower, so the debt will get paid off quicker and save a lot of money in interest. Also, revolving debt hurts your credit scores much more than installment debt, so if you use this method you’re likely to see a score increase.
If you’re interested in exploring which of these methods can work best for you, check out some of the great tools available in the Resources section at the end of this book. I suggest you take the time to carefully consider each of these three strategies before you even think about settlement or bankruptcy. Debt settlement and bankruptcy should be used only as a last resort in the most desperate situations. They definitely do not work like “get out of jail free” cards, as they often create new problems in place of the old ones.
Debt settlement requires you to start missing payments and let your accounts forcibly close. Then you can use your history of default as leverage for negotiating the debt to a smaller number. Your creditors will generally work with you on a settlement because at this point you’ve proven yourself to be high risk and they want to collect whatever they can before they write you off. Debt settlement companies will work with you after several months of delinquency with your creditors. These companies charge you a monthly fee that they put into an escrow account as they try to reach a settlement agreement with your creditors (this can take quite a while). Whether you’re negotiating on your own behalf or hiring a company to do it for you, the debt settlement method is not a good plan for your credit and takes a very long time to recover from.
In some cases, filing bankruptcy might actually allow you to bounce back quicker. If this is where you’re at, you need to speak with a professional and weigh your options.
Tactics to Improve Length of Credit History (15%)
- Become an authorized user.
(Is there an echo in here?) This tool is helpful in this category as well. If your husband or wife has 10 years of positive payment history on a credit card and you get added as an authorized user, your credit will benefit from the same history. It’ll improve your score quite a bit.
Maybe you have a longer credit history than your spouse does. If that’s the case, they can get added to your account and it will help improve their credit because your history looks like it’s theirs now too. It’s no sweat off your back, and you’ll be more likely to qualify if you’re buying a home together. Plus, it’s just the right thing to do.
- Keep your old accounts open.
This one also showed up earlier as well, and it’s useful again here for obvious reasons. The one exception to this is if you have an older account that shows egregious delinquency, default or collections. That will ultimately hurt you, even if the account is a longstanding one. It’s going to be closed anyway, but you aren’t going to want it on your report at all if possible because the negative would outweigh the positive. If, however, the account had one or two late payments in otherwise strong payment history, I’d say it’s worth keeping open and on there. The overall good payment history outweighs the bad spots. Plus, after a period of time, late pays don’t hurt your score anymore. Hold onto old accounts in order to keep your credit history long and your credit score healthy.
How to Improve Types of Credit (10%)
There’s just one tactic in this category: Maintain a healthy mix of credit. As I mentioned earlier, the rule of thumb is that for every installment loan you have (like an auto loan or personal loan), it’s ideal to have three revolving accounts (credit cards). This is what FICO recommends, so it’s your best bet. But it’s not required. Try to get as close to that ratio as you can. Two credit cards per installment loan is acceptable, even one credit card and a car payment would be fine, as long as you are not excluding either type of account in your credit portfolio — and everything is getting paid on time. Never get in over your head. But one account is not enough, zero is definitely not enough. Having multiple different types of open accounts that you’re managing well shows that you’re less of a risk because you’re proving that you can handle it.
How to Improve New Credit (10%)
Manage inquiries reasonably. As you have learned, hard credit inquiries make up a relatively small percentage of your score, but you do want to be careful. New inquiries will have a negative impact on your score for one year (12 months), and they fall off after 2 years. So be careful about applying too often. Never apply for any type of credit unless you’re 100% sure you’ll get approved. And the way you do this is surprisingly simple.
When you are ready to apply for a new credit account, go online and get an idea of where your credit score is. Then call the lending institution and find out what their requirements are. What is the minimum credit score that will get you approved? If your scores aren’t there or better, do not apply.
I don’t recommend you to ever just cross your fingers and blindly apply for credit. This is like throwing spaghetti at a wall to see what sticks. In truth, if you’re making uninformed decisions with your credit and finances, the worst that can happen is not that your credit score will drop because you applied for things you did not get approved for. It’s that you will get approved, your credit score will drop, and then you won’t be able to keep up with your new payments.
What to Do if You Don’t Have Credit
Hopefully, you’ve taken the time to read carefully up to this point, even though your credit journey is just beginning. If that’s the case, you’re ahead of the curve. Still, a credit report full of white space translates as high risk to creditors, so as soon as you can you need to make it a priority to start building credit, one brick at a time.
Having no credit at all is actually a very common thing. We all have to start somewhere. When my wife and I got married, she’d never had anything in her name before because her parents took care of her car and she was using their credit card, so she had a credit score of 0. The good news is that as soon as you open your first credit card you can begin building a good score fairly quickly. It takes six months to register a FICO score, so you’ll want to spend that time making purchases on the card and paying it down every month. After six months, you will register a score above 700 if there is nothing else on the report.
However, it’s not just about your scores. If you have a decent score but your file is thin, you’re likely to still be seen as a credit risk to lenders when you apply for a car loan. For that reason, I recommend opening two credit cards in the beginning and building from there. Once you get to six months and your score registers, it’s reasonable to go do some research to see if you can get approved for an installment loan then. Depending on the requirements of the lender, you may or may not be approved (it’s best to check on what those specific requirements are before you apply). If not, continue to build and it won’t take too much longer until your credit health is where it needs to be.
Even if you don’t want to buy a car or house for many years into the future, it’s best to start with a card or two early so that you build some age to your credit history. Just be sure to use them responsibly, or you’ll be shooting yourself in the foot! Refer to the Resources section at the end of the book to find the best options for builder credit cards.