Your credit score is probably one of the most important factors when it comes to your financial health. Your credit score impacts so many important financial decisions in your life and most people really don't think about it until they need it. Having a good credit score determines what interest rate you will pay on loans, whether you get approved for an apartment, what you will pay for your car payments, or even if you get a potential job opportunity.
I must admit that my credit score was far from perfect back in 2011. I had maxed out credit cards and student loans and I also had two really bad marks due to a settlement that I went through back in 2008. I never really thought about my credit score until I started working in the finance industry back in 2011. In my profession, it's super important to practice what you preach. Who was I to talk to people about good credit when mine was an absolute mess?
I can't say that I raised my credit score overnight. It took time and work. After taking the necessary steps to improve my credit score in 2011-2013, I was actually able to really focus on paying off my debt. With my credit score actually in the “good” zone, I was able to apply for a balance transfer credit card which allowed me to eliminate $11,000 in credit card debt. Recently, I was able to buy a car with an interest rate of 2% which gave me the opportunity to make really affordable car payments.
I can't give you advice that will change your credit score overnight. I would be lying if I said that was possible. With that said, there are things that you can do that will improve your credit score more quickly than others. It's important that you look at improving your credit score as a process and not just making a one-time change. You have to show a history of good financial decisions and produce good financial habits. Focus on the major things that impact your credit score the most and give yourself the best chance of improving it.
Watch Your Utilization
Your credit card utilization is by far one of the most important factors when determining your credit score. Your utilization is simply how much credit you are using versus the limits you were given. You can find your utilization by dividing your total credit card balances by your total credit card limits.
For example: If you have a credit card limit of $2,000 and you have a $500 balance, your utilization would be 25% (500 / 2000).
The reason it's so important to keep your utilization low is because you want to show lenders that you are capable of paying off your debts. If you have balances that are super high or are to the top of your limits, you are demonstrating that it will be harder for you to pay the whole balance off.
You want to keep your utilization below 30%. I will even say it's best that you use your credit, but to make sure you keep your utilization around 15% – 20%. You want to show lenders that you can manage credit wisely which is something you can't do if you are not using credit at all. Improve your score by really focusing on paying down your balance on your credit card.
For example: If you have a balance of $1,000 and a limit of $2,000, that's a 50% utilization ratio. Do the math to figure out what you need to pay off to get the ratio down to 30% or less. So for the example above, you would need to get your balance down to $600. So just paying off $400 can really be a positive thing for your credit score.
- Related: How to Create a Plan to Pay off Debt
Become an Authorized User
Being an authorized user for someone who has an established great credit history can significantly improve your credit score. If you know someone who has excellent credit, makes their payments on time, pays off their balances every month, and demonstrates great financial history, you might have an opportunity to raise your credit score. When you become an authorized user, your name is simply added to their credit card and the history of that card gets added to your credit report. Even though you are not purchasing or using the card, you still get the benefits.
There a couple of things to consider before becoming an authorized user:
- FICO has changed its scoring model and is now seeking out “piggybacking.” This means that FICO is looking for signs of people trying to “cheat” the system. So it's important that if you find someone who is willing to add you as an authorized user that they have a credit card that is old and has a long history, has a low balance compared to their limit, and has always made payments on time.
- It's important to know that decisions of the credit card holder are now your decisions. If they fail to make a payment and max out their credit card it will also negatively impact you. Just remember, you might get their great credit history but you will also get their bad history as well. So make sure the credit card holder is someone you trust, have a positive and long-standing relationship with, and is someone you can talk to about money.
- Different credit card agencies report things differently. Some credit card companies report to all 3 credit reporting agencies and some report authorized user activities separately then that of the actual credit card holder. So before you make the decision to be added as an authorized user, make sure that it will actually improve your score by being reported positively. Check out this article to read about which credit card companies report authorized users.
The benefit of being added as an authorized user is that it's really easy to be removed as an authorized user. All it takes is a call to the credit card company and requesting to be removed. Since you have no liability to the card, it's easy to have the authorized user history removed from your credit report as well.
Check For Errors In Your Credit Report
Actually taking the time to read your credit report and identifying inaccurate information can really improve your score. I was 26 before I actually obtained and read my first credit report. I was able to identify and remove 3 inaccurate things and I was able to see a positive change pretty quickly. This is actually one of the first things I suggest you do. It's really easy to request your credit report for free and it allows you to get familiar with what is actually on your report.
By law, you have the right to request your credit report from all three credit reporting agencies once a year. You can do this over at AnnualCreditReport.com. Simply choose which report you want to see, provide some information, and you can be looking over your report in a matter of seconds online. The things to look for on your credit report are delinquencies, payment history, collection activity, accounts, and hard inquiries.
When I first looked at my credit report I noticed that there was a credit card in the “account” section of my report that I knew I didn't own. I called the credit card company and they said I was actually an authorized user on the card. It turns out that I was still on a card from a previous relationship from more than 5 years ago. I asked to be removed as the authorized user and it was done in literally 5 minutes. It was also removed from my credit report in about 2 months. For 5 years, the credit history from my previous boyfriend was actually impacting my score and I didn't even know it.
While there are a million different articles out there on how to improve your credit score, some of these articles don't always give the best advice. You have to make sure that you do what's best for your particular circumstance. Opening a new credit card to improve your score might the best thing for someone else, but maybe not for your situation. The ways to improve your credit score outlined above are things I feel everyone can benefit from.
Start with obtaining your free copy of your credit report, learn what's on them, and then dispute any errors you find. From there, make changes to the things that have the biggest impact on your credit score such as utilization & payment history. Once these things are completed look for other ways to improve your score such as becoming an authorized user.
It may seem like a ton of work for something that you might feel doesn't impact you right this second. There will be a time when a good credit score is extremely important, and you will be surprised how often you will depend on it.
Have you looked at your credit report lately?