Majority of us will need good credit for a multitude of reasons, to get competitive rates on a car loan, private student loans, to get a rental property and to eventually buy a home. By any means, if you have enough cash on hand why get in debt; just pay up front in cash. To the rest of us, we need to be savvy enough to make good decisions to keep and to better our credit.
Facts: Just so you know, there are many items that will remain in your credit report for 7 years according to Experian, items such as late payments, bankruptcy (chapter 13) and civil judgments.
Bankruptcy (Chapter 7) will stay in your history for 10 years. Tax liens, depending if paid or not, will stay either 7 or 10 years from date of filing.
Even if we have made bad decisions in the past we can still move forward and work on the present and future. We first have to have an idea what determines our credit score.
There are 5 factors determining our credit score and they are:
- Payment History (35%)
- Total Debt compared to Limits or Amount Owed (30%)
- Length of Credit History (15%)
- New Credit Open (10%)
- Types of Credit Lines Used (10%)
I have almost a perfect score and I don’t say this to brag but simply to tell you it’s possible with discipline and you can have it as well. I have followed many tips and I have helped others with the same advice. Here are 10 tips for you to start improving your Credit Score:
- Don’t Close Credit Card Accounts: These accounts will show the length of your credit history. Even if you are not using them and don’t want to be tempted, just put them away in a safe place.
- Don’t Max Out Your Cards and Do Not Go Above 30% Of Your Limit: For example if you have a $1,000 limit, do not charge or carry a balance over $300 dollars. Your utilization is a big factor in your score. If you have 2 cards, 1 with a $1000 limit and the other with a $2000 limit, now your overall limit is $3000. 30% of $3000 is $900(.3*3000=$900), so you should not have over $900 charged in those two cards combined.
- Pay On Time, Pay On Time, Pay On Time: This is the most important factor here. If you were late before, get caught up. If you can get a separate checking account for bills only and set automatic payments, do that so you won’t forget again and you won’t ever make a late payment. To date, the only bills that are not in auto-pay are my gas, electric and mortgage. Either because they fluctuate based on the season and because my mortgage is the largest payment and we get a 15 day grace period to pay depending on our pay date.
- Pay Off Delinquent Accounts: Remember that utility bill you stopped paying for at an old apartment? That urgent care bill or copay you forgot and went to collection?–yes–all of them, pay them off. Even if they stay on your report, showing it has been paid off is a plus for you and the clock will start, so it can be erased down the line.
- Reduce Your Overall Debt: First, know your debt to income ratio. The lower it is the better because it shows a good balance between your debt and your income. Whenever you are applying for any loan or even to rent, your debt to income ratio will be a factor. Add up all your monthly debts (mortgage, car loan, student loans, credit cards). Then add your monthly gross (before taxes) income. For example, let’s say your mortgage is $1,000, car loan is $300, student loans are $300 and credit cards are $200 with a total of $1,800. For this example, let’s say your total monthly gross income is $5,000, therefore you would divide your total monthly debt payments by your total monthly gross income.
⇒Total Monthly Debt Payments/ Total Monthly Gross Income= Debt to Income Ratio.
⇒$1800 /$5000=36% debt to income ratio.
- Check Credit History Report and Remove Errors If Any: Do an overall review of your report and make sure there aren’t any open accounts that you have not opened, if an account has been paid and the report does not reflect it, make sure to dispute them with each credit bureau. I found this article that discusses this tip in more detail, How to Dispute Credit Report Errors in 3 Steps. Don’t forget to access your free report Here.
Get a Lower Interest Personal Loan: If you have a large balance on high interest credit cards but your credit is still good, you may qualify for a lower interest rate on an unsecured personal loan that you can use to pay off your cards. These loans will have a fixed term, meaning an established number of years for you to pay off the loan, so your payments will most likely be higher than the minimum payments you were paying on your cards. You will save money in the long run with this because the rate will be lower and you will pay it off sooner. When getting a loan ask for the rate (make sure it’s fixed), term, if there are any prepayment penalties and see if by enrolling in auto-pay you can get your interest rate lowered.
0% Interest Credit Cards: Again, if you have a large balance on high interest credit cards but your credit is still good, you may qualify for 0% interest credit cards. Keep in mind these 0% cards only have a short promotional period ranging from 6 months to 18 months give or take. Also, almost every time you transfer a balance to these cards, you usually pay a transfer fee which could be 3% or more of the total amount transferred.
So let’s say you want to transfer $3,000 from a high interest credit card to a 0% card, if you transfer this amount now, your new balance, with a 3% transfer fee, will be $3,090 ($3,000*1.03%). Now, let’s go a step farther, and let’s assume this card has a 12 month promotional period for 0% interest, this means after 12 months the card’s interest will sky rocket to God knows what-(well you will know, they have to tell you). I only recommend a transfer if you can pay off the full balance during the promotional period. In this case, you will have to pay $257.50 monthly ($3,090/12) assuming you will not charge one additional penny on this card just because you think “well it’s interest free.” Remember, this is a way to pay off debt faster not accumulate debt faster.
Disclaimer: I only recommend the 0% interest and personal loans to people who have a plan and know they will stick with it. You have to be intentional with your financial goals and this is not a matter of just moving debt around. You have to be disciplined or you are just going to be in a non-ending debt cycle.
- Don’t Open Cards Just To Open Them: Remember 10% of your credit score is attributed to new credit lines opened. Going around opening every department store credit card just to save 10% on your new pair of shoes is not smart, in reality it’s costing you 10% of your credit score; do the math.
Get A Secured Credit Card: I have no experience with this one but I have been told that you could go to some banks or online and get a secured credit card to start helping you build credit. With these cards, you have to put money down to be able to use it, kind of like a debit card but debit cards don’t help you with your credit. I think this is good for young adults trying to establish and build credit responsibly and for adults who may not qualify for major credit cards. I came across this post about some secured cards, but again I cannot personally recommend one so do your research and ask around or please drop a comment below if you have experience with a good one.
Additional Tip: Become An Authorized User: This tip didn’t make it to my list above due to its riskiness but it could help you if done right. If you have someone who is financially sound and you trust completely and they are willing to add you as an authorized user, do it. Pretty much the credit card company will issue a card with your name on it on your friend’s limit and already existing credit card. Now, the person responsible for this account is someone you trust, so I am not saying go ahead and go on a shopping spree on their name. I’m actually encouraging you to not even touch the card, but let this person just continue to use it so it helps you with building credit. This can backfire on you though if your friend stops making payments or is late on any payments. Think this tip thoroughly because it can also lower your credit.
“THE BEST WAY TO PREDICT THE FUTURE IS TO CREATE IT.”