What is a Credit Score?
To know how to raise your credit score, you’ve got to start by understanding how credit scores work. Your credit score is a measure of creditworthiness, or how likely you are to pay back your debt.
The FICO credit score is the gold standard for creditworthiness, and is judged on a scale of 300 (Very Bad) to 850 (Excellent). The higher your score, the more willing lenders are to let you borrow money, and at lower interest rates. Anything over 750 is considered “Excellent.”
Your FICO credit score consists of the following components:
- Payment history (35%) – Have you made all your monthly minimum debt payments on time? You don’t have to pay your cards off in full, but you at least have to make the minimum payments on time. If not, late payments stay on your record for seven years.
- Credit utilization (30%) – How much do you owe vs. how much could you owe? Ex. if your total credit card limit is $20,000 and you owe $4,000, your utilization is 20%. Creditors want a low utilization number, preferably under 30%. Under 10% is even better.
- Length of credit history (15%) – How long have you been making debt payments? This is an average age of all your accounts, so be careful with opening new ones or closing old ones! The longer your credit history, the better.
- Type of credit history (10%) – Do you have a good mix of debt types? This includes credit cards, personal loans, car notes, student debt, mortgages, etc. While you definitely want to make sure you have a credit card payment history build up, I don’t recommend taking on a ton of new debt just to diversify your credit types.
- Inquiries (10%) – How many times did someone who wasn’t you look at your credit score? This is why you need to be careful getting new debt or opening new cards. Those lenders pull your report, and that brings your score down. Hard inquiries stay on your credit report for two years, though most scoring models only count the ones that occurred in the past year.
Finding Your Credit Score
There are two main ways to get your credit score: through unofficial sources, and the official source.
Unofficial sources: Credit Karma and Credit Sesame are two free services that give you an estimated credit score report (note: not the official thing!) along with a breakdown of how to improve it. These are great services if you’re looking to grow your credit on an ongoing basis and don’t want to keep pulling your reports to get updates. In addition, WalletHub offers a service with full, free credit reports updated on a daily basis (cool, right?). So there are no shortage of unofficial ways to find out your score.
Official sources: In addition, everyone is also entitled to one free, official copy of their credit report from each of the three major credit bureaus each year (Equifax, TransUnion, and Experian). You can get your free copy at www.annualcreditreport.com. This website looks janky, but I assure you it’s the go-to for the real credit reports.
So now that we know the basics of what your score is made of, and how you can find it, let’s move on to the sweet, sweet credit-building tips!
Tip #1: Check your credit report for errors
According to the Federal Trade Commission, an estimated 1 in 4 people have errors on their credit reports. As you’re going through your credit information, be sure to look for new accounts, late payments on debt that don’t look familiar or that are more than seven years old, and basically anything else you don’t recognize.
If you find something that looks inaccurate, you can file a petition to have it removed from the three credit bureaus. This article from the Consumer Financial Protection Bureau does a great job of addressing that process, as well as listing all the contact info you need to get started. If something looks fraudulent, you should also contact that company’s fraud department immediately, as well as consider submitting a complaint to the Federal Trade Commission.
Making sure your credit reports are 100% accurate can save you lots of headaches, and even in some cases improve your credit score!
Tip #2: Make on time payments, every time
Your payment history is the biggest slice of the credit score pie (35%), so it’s critically important that you’re able to make on time payments, every time. In my experience, the best way to do this is through automation. The more you can set up an automatic transfer or calendar alert to pay off your statements once they hit, the better!
If you’ve got an old card you’re trying to keep active, or a new card that you’ve opened with the express purpose of building credit, this process becomes even easier! Here’s how it works:
- For each card, use the card to set up autopay for a small, recurring, predictable bill. Netflix and Spotify-type purchases are great candidates for this. You might be tempted to use the card on something like groceries instead, but you don’t get bonus points for spending $500 per month on the card instead of $15. It’s best to stick to something you know you can afford consistently.
- Cut up that credit card. Seriously, if you’re just using it to build credit, don’t risk getting yourself into bigger issues by overspending.
- Figure out when your statements hit. Is it the 14th of every month? The 20th? Make note, because in order to build your credit, you have to pay off your balance once those statements actually register.
- Set up an automatic transfer from your bank to pay off each credit card in full AFTER the statement hits. You need the statements to hit so that they count as an “on time payment in full”. That’s the other benefit of using something like Spotify of Netflix: those amounts will be identical every month, so it’s easy to put these completely on auto-pilot!
- BAM. CREDIT!
This strategy is great because you can leave your cards at home or cut them up (minimal temptation), it’s automated (minimal effort), and the payments are so small you won’t be panicked about running out of money by charging something big (minimal stress).
Tip #3: If you’re rebuilding credit or starting from scratch, try a secured card first
Building a history of on-time payments is all well and good in theory, but in practice, it can be much harder if you don’t have access to a credit card in the first place. If you’ve never had one and are just getting started building credit, or are trying to rebuild from some past mistakes, a secured card can be a great place to start.
The idea behind the secured card is that you put money down to open the card, usually between $300 and $500. That “money down” then becomes the credit limit on the card. In the event that you don’t pay your statements, the lender has recourse, so it’s safe for them–which is why they offer them to people who might not qualify for a traditional credit card.
Obviously, the goal is here to build that history of on-time payments, so be sure to pay your statements off each month. This isn’t a debit card, so it’s best to pretend that the “down payment” on the card doesn’t exist at all.
One great option for a secured card is the OpenSky Secured Visa. Not only do they base your credit limit on how much money down you can afford, they also don’t require a hard inquiry to get the account opened. This lets you can build credit without taking the initial hit in the Inquiries zone. (Many thanks to Cassidy Cain for her recommendation of this secured card!)
Credit Karma also has a nifty feature that lets you view and compare multiple credit cards that people with your credit score have a higher chance of getting approved for. You can filter by Secured Cards and see for yourself what your options are.
Tip #4: Get Crafty With Your Credit Card Utilization
Utilization is another major component (30%) of your credit score, which means that the more you’ve racked up your credit cards, the lower your credit score becomes. In fact, maxing out a credit card can reduce your credit score by as much as 15-40 points!
While the most reliable way to get utilization down is to pay down your debts, that’s not always easy in the short term. There are two crafty ways to decrease your utilization, however.
The first is to pay your statements twice per month instead of just once. Think of it this way: let’s imagine you have a $5000 limit on a credit card and you’re charging $2500/month of regular expenses. Even if you’re paying that off every month, depending on when your lender reports to the credit bureaus, they could be reporting a utilization of 50% purely based on silly timing issues! However, if you pay that card twice per month instead of once, the company will likely have a lower utilization to report since your balance will rarely be above $1250, or 30%.
Another alternative for decreasing your utilization is to ask for an increase in your credit limit. This may only be an option if you already have a good credit score and payment history, but is worth an ask to decrease utilization without a hard inquiry occurring!
Tip #5: Become an Authorized User
When you become an authorized user on someone’s credit card, you inherit all the credit history associated with that card, whether good or bad. For example, if you have minimal credit history, and you become an authorized user on a card with ten years of perfect payment history and low utilization, it can do wonders for your score! Moreover, the original cardholder doesn’t inherit any aspects of your credit history; you only inherit theirs.
However, there are some caveats. You may not know a person with great credit who is kind enough to let you have a credit card on their account. In addition, if you’re on their account and they end up maxing out the card and engaging in bad behavior, you’re on the hook for that bad behavior too. Finally, the odds are even greater for good financial behavior on your end. If you don’t have your spending under control, you can damage their credit as well as your own–and the relationship with the person who let you use their card.
That said, for someone who is looking to build or improve credit, this is a fantastic way to see your score jump up without incurring a hard inquiry on your account!
For better or for worse, building your credit score is a game. But if you are diligent about understanding the rules and playing by them consistently, your credit will build or repair itself over time!