Work and Money
How I Raised My Credit Score by 150 Points
While your credit score isn’t the most important aspect of your financial profile, it shouldn't be ignored.
As a teenager, I never really understood the concept of credit or how to build up my score properly. Before I even turned 18, I unknowingly had a bad remark on my credit report after the balance from one of my bank accounts was sent to collections. I made an honest mistake but had to pay the price.
At 20, I moved out of my parents' house and tried to get an apartment and furniture, and my bad credit came to haunt me. It sucked. As a low-income college student, I didn’t have a lot of money to pay for everything in cash, and I desperately wanted to improve my score.
"Some people in the personal finance niche will argue that credit is irrelevant since it promotes the act of borrowing money and getting into debt."
While this is understandable (and I don’t encourage people to borrow money to inflate their lifestyle or take out loans they can’t pay back), credit is a part of our society.
If you have dreams of buying a house or need a new car because yours breaks down and you need to get to work, the first step should be to rely on your savings funds, but as a backup, you may have to utilize credit.
What Are the Perks of Having a Great Credit Score?
- Better chances of getting approved for a quality credit card
- Lower interest rates for personal loans and mortgages
- Easier approval for rental houses and apartments
- Easier to get a cell phone contract
- Better car insurance rates
These benefits are at your disposal when your credit score is above average. Should you take out loans every month and open 20 credit card accounts? No, but the option to borrow is there should you ever need it.
Over time, I’ve been able to rebuild my horrible credit score by about 150 points. That’s huge, seeing as how my credit score was pretty pathetic a few years ago, and now I could demand the lowest interest rates on a mortgage if I wanted to. It took me some time to get to this point, though.
If you’ve made mistakes that have negatively affected your credit, anyone promising to help you improve your credit overnight is probably not being 100% truthful. It takes time. If you’re looking for a real solution to building up your credit score, consider taking the following steps.
Check Your Credit Score and Report
Before you start building or rebuilding your credit, you need to know where you stand, so you must check your credit score. You can do this online for free using sites like Credit Sesame. This is the site I used to get my credit score back on track. Credit Sesame shares your credit score and credit report with you. They provide helpful information such as a credit analysis, your total debt amount, and your debt to income ratio. They also offer tools like identity-theft protection and goal-setting assistance so you can take steps to improve your score. You can check out your entire credit report for free once a year by visiting annualcreditreport.com.
Figure Out Which Area of Your Credit Profile You Need to Improve
Your credit score is determined by a variety of factors, such as:
Payment History – 35% of score
Credit Utilization – 30% of score
Length of Credit History – 15% of score
New Credit – 10%
Mix of Credit Accounts (how diversified your accounts are, i.e., student loans, mortgage, credit cards, auto loan) – 10%
Ideally, you should work on improving all factors that contribute to your credit score, but some are more important than others. For instance, you can’t really do anything about the length of your credit history aside from waiting for time to go by. You can, however, make sure you pay all your bills and account payments on time and keep a low utilization on your credit cards.
Pay Down Your Debt
Paying down your debt can boost your credit score big time. When I took out a car loan, I didn’t want to do it, but I prioritized paying it down, and that boosted my credit score. If you have been carrying any balances, be sure to pay them down, which may also allow you to save money in interest, too.
When it comes to credit, there is a catch 22: the system likes you to continue making payments on various accounts each month because it builds up your payment history. But what happens when you pay down your debt and close your account? The credit system doesn’t like that as much, and your score may go down a few points. Nevertheless, you should feel good that the debt is gone. Paying off debts like student and car loans is a great way to boost your credit score and improve your finances. However, it is not the best way to build your credit history because, once you close those accounts, your payment history might disappear after a while. I paid off quite a bit of debt over the past two years, and I’ve seen my score improve overall even though it might have dipped a few points.
Start with a Secured Credit Card and Keep Your Utilization Low
If you’re trying to rebuild your credit, you can apply for a secured credit card and keep the utilization low. Secured credit cards are backed by a cash deposit you make upfront. The deposit amount is usually the same as your credit limit. For example, you might have to pay $300 upfront to have a $300 credit limit with a secured credit card. With a traditional credit card, the issuing bank offers a limit, and you may spend up to that limit. No matter your limit, you should never utilize more than 30% of it. For instance, if you have a credit card with a limit of $1,000, you shouldn't spend more than $300 per month on that credit card.
To be safe, I usually never utilize more than 20%. Credit cards should not be used as free money. Use them as a tool to improve your score. Lenders like it when you don’t utilize all of your credit limit because it demonstrates that you’re not dependent on the use of your credit card. If you are worried about your spending and the possibility of getting into debt, you may not want to get a credit card, and that’s understandable.
For me, I just play the game. I keep my utilization super low, somewhere between 5-10%. I use my credit cards for regular expenses such as gas, groceries, and Hulu — and build up a positive payment history by paying off the card each month.
To use a credit card as a tool to improve your credit score: keep it simple, maintain a low utilization, and pay your balance in full each month.
Make Sure Inquiries Are Removed After Two Years
Another factor that could negatively affect your credit score is inquiries. Soft inquiries (like a current creditor pulling your score to offer you a promotion) don’t affect your credit. Hard inquiries (applying for an auto loan adds a hard inquiry to your credit) can leave a lasting impact.
Keep the number of inquiries to a minimum, and make sure everything falls off your credit report within two years or less. If inquiries don’t fall off within two years, you’ll need to pull up your full credit report and contact the creditor personally to request they remove the inquiry ASAP. Here is some detailed information about requesting to have credit inquiries removed for your score.
Finally, Be Patient
I've listed everything I did to increase my credit score by 150 points, but the process took time. If you decide to take these steps, be patient. Awesome credit isn’t built overnight, but if you stay persistent, you’ll see an improved credit score.