Raising your credit score 100 points is easier than many people might think, especially if you currently have bad credit.
Step 1 – Know Where You Are
Pull your credit score to determine where you are and how much damage control you need to do. There are dozens websites that will let you get your credit score in no time at all, but Credit Karma is one of my personal favorites.
Credit Karma is secure, easy-to-use, and the best part is, it’s free! Credit Karma not only shows you your credit score, but it also explains why you credit score is that number.
The site will show you factors like credit inquiries, credit card usage, age of credit history, payment history, and other aspects that impact your credit card score and how it holds up against the credit score scale.
Credit Karma will show you your credit score based on their own scale. Their number is going to be very close, but it’s not your EXACT credit score. The only way to get that is to go through MyFICO. This will give you your FICO score, which is the best representation of your credit score, but it isn’t free.
The website has a monthly fee of $29,95, that will give you a FICO score, which includes the three credit reporting agencies, and the fee also includes credit tracking. If you are good with only one of the three then it will cost $19.95.
Now that you know your credit score, we can start working to make it better. One of the best ways to have a great credit score is to always pay your bills on time. Missing one bill can lower your credit score by as much as 100 points.
To begin your credit card recovery journey, make sure you pay all of your late payments and don’t miss another bill payment. While paying those outstanding debts isn’t going to raise your credit score, it will keep it from getting any worse.
Step 3 – Run up the Score
Now that you’re paid up on all your bills, it’s time to give your credit score a serious boost. One of the best ways to improve your credit score 100 points is to have a credit card, but not use it. Sounds crazy right?
One of the biggest factors that impacts your credit score is your credit utilization, which basically means how much of your credit card limit you use.
So, if you have a $10,000 credit card limit, don’t get anywhere near it. In fact, we would suggest only using around 20%-30% of your total credit card limit. If you have any maxed out credit cards, even if you’re paying the bills on time, work to get your credit card utilization down using one of the many balance transfer cards. Way, way, way down.
If you only have a little available credit this may be difficult. If your score is not too bad you may be able to take out an additional credit card. If your credit is hurting then you may need to look at a secured credit card to get your utilization down. This next section is how one of my interns did just that and made a HUGE impact on his credit.
A previous intern of mine, Kevin, was oblivious to what his credit score was. His parents had always told him to not open a credit card in fear that he would get in massive credit card debt and ruin his future.
Unfortunately, his parents were wrong.
To help Kevin out, I asked him to find out what his credit score was through MyFico.com. Sadly, he was unpleasantly surprised. The story that follows is about how Kevin improved his credit score 100 points with a surprising tool – a secured credit card. Please welcome Kevin….
As a Junior and Senior in college, I was always told that applying for a credit card could be my first step in the wrong direction.
With a credit card in hand, my parents worried I would spend money I couldn’t pay off and build a lifestyle I couldn't really afford rather than learning to save money. They also worried I would lose track of the concept of having to work for items that I was receiving, as well as the curse of living above my means which many Americans fall victim to on a daily basis.
While these are legitimate concerns, I had to let them know I felt as if I had some control over my spending.
My response was always the same,
“How would I know until I was able to try for myself?”
My First Humbling Credit Experience
When I was finally prepared to get a credit card on my own, none of the banks I applied with would give me a chance. I had to walk into the banks and tell them what is probably the typical story for anyone who is in their final years of college, or have just graduated very recently from college. It went like this,
“I am unemployed, have no credit history, and have a couple thousand dollars in college debts that I will have to start paying on in the next year or two.”
Lets face it; this is not exactly the most appealing story when you are trying to convince someone to give you a line of credit!
Two banks denied me, but one of the bankers let me in on some info which has helped me raise my credit score over 100 points in the past five months. I think everyone should be aware of this information, which is why I’m sharing it today. The gist of his story was that I should stop trying to apply for credit cards and getting denied. His reasoning was that, when you apply, they do a hard credit check which, in turn, can lower your credit score even more.
Get A Secured Credit Card
He also told me that no major bank was going to accept my credit application anyway, but that there was actually a different, better option to consider. This other option was to sign up for what is called a “secured” credit card. The terms on these cards offer are horribly one-sided in favor of the lender, but can I assure you it is a small price to pay for the result you receive after only a few months.
Secured credit cards are like traditional credit cards except for the fact you have to give them a cash deposit up front, and that cash deposit is typically equal to your credit limit. This process truly confused me at first since I thought that the deposit was money I could actually spend.
What I learned, however, is that the deposit is there in case I default. I couldn’t spend the deposit itself, but I would get it back if I kept my account in good standing until I closed it. This wasn’t an ideal situation, but I knew it could help me build my credit score – and that was my real goal anyway.
There is also an annual fee to have most secured credit cards, but I felt it was a small price to pay for the opportunity to build a credit history. After you make your deposit, secured cards are also treated just like traditional credit cards. Your secured card will typically look and act just like a regular credit card, meaning that no one will know it is secured.
This is the route I had to take, and I suspect there are many people out there who are also in a similar situation to what I was in. Even though you have to put all the money up front, as well as pay an annual fee, it is still very much worth it when you consider the long-term benefits.
Top Secured Credit Card Offer for 2016:
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This card comes with NO ANNUAL FEE, which is almost unheard of in this industry, plus you will earn 2x points on dining and gas on your first $1,000 spent each quarter, and 1x points on all other purchases. Read here to learn more about the Discover it® Secured Credit Card.
More from GFC, Below
First Credit Score Check: Ouch!
When I first checked my credit score with MyFico in March of 2011, it was sitting at 621. I set up my new secured credit card with a credit limit of $1,100. This credit limit should be a function of what you have, and also what you plan on using the credit card for. According to many bankers and friends I talked to, you should try to run a 75% utilization rate on your credit card to maximize your potential to raise your credit score.
So if you only spend around $300 a month, you should only give your secured credit card a $500 dollar down payment so that you are utilizing your credit rather than having a $1,000 dollar limit and only spending $300. My expenditures were approximately $700 dollars a month so the $1,000 dollar limit fit my needs.
After I received my secured card and started spending, I would make sure that I would only spend money I already had, or would receive before the next pay period. I ended up paying off my credit card roughly four times a month to ensure I never carried a balance from one month to the next. I would never let my credit limit exceed $800, and I would never pay it off if the card balance were under $300 unless the pay period was coming to an end.
I would spend every penny on my credit card from the smallest expenses such as a drink from the gas station, to major purchases such as airline tickets or hotel rooms. I repeated this process for five months to establish a credit history always paying on time, and always making purchases on my credit card.
Second Credit Score Check: Yes!
In August of 2011, I had to purchase a car so that I could switch jobs. When I filled out the credit application to see if I qualified for the lower financing rates, my credit score came back as a 731.
In other words, I raised my credit score from 621 to 731 in just five months!
This is a very big deal because, at 621, I would have been denied a loan for the car, or would have had an interest rate that exceeded 9% on the auto loan. Since I chose to get a secured credit card, I was able to take the car loan on my own, and qualify for the low rate of 3.99% financing for the car.
The difference in the loan between the two different interest rates would be $750 over the life of the loan, far surpassing the card's annual fee, and the opportunity cost of my secured credit card holding my $1,100 for five months.
A Message to Parents
To all of the parents out there who may be on the fence about letting their college kid apply for a credit card, I can tell you it worked for me in five months and will change my financial future for many years to come.
Secured credit cards offer a foolproof way to raise your credit score when it is not possible through a regular bank credit card, and is a safe way to earn credit if you do not trust your kid or self with a credit card that isn’t secured with your own funds. The worst that can happen with your secured card is that you cannot pay your bill; your company closes out the account, and they pay off your credit with the money you already have on deposit.
My secured card worked perfectly for me and I have now been accepted for a credit card with a major bank. I closed my secured card because of the annual fee associated with it, but I would recommend it to anyone who would like to raise his or her credit score.
How to Make a Secured Credit Card Work for You
Now that you’ve heard Kevin’s story, you’re probably wondering if a secured credit card might also work in your situation.
Here’s the truth: If you have a low credit score and cannot qualify for traditional credit that could help you build credit over time, a secured credit card is the best way to build a credit profile that will last.
Here are some steps you can take to get your credit moving in the right direction with a secured credit card.
Step #1: Learn your current credit score.
If you’re worried about your credit, the best thing you can do is figure out where you’re at. By signing up for a free credit score with Credit Karma, you can get an estimate of your FICO score from two of the three credit reporting agencies. Although you’ll only receive an approximate score, it will be close enough to give you an idea of your current standing. Best of all, signing up for Credit Karma is free so you have nothing to lose.
Step #2: Research secured credit cards.
The next step you’ll want to take is to research the top secured credit cards available. If you want to build your credit the right way, the top secured card in the market can help you get started.
Discover it® Secured Credit Card – The Discover it® Secured Credit Card is the only secured credit card on the market that doesn't charge an annual fee. Better yet, you can earn rewards! With this card, you'll earn 2x points on your first $1,000 in dining and gas purchases every quarter, plus 1x points on all other purchases. This can lead to cashback, free hotel room, or even works as a credit card for airline miles. Read here to learn more about the Discover it® Secured Credit Card.
Step #3: Read the terms and conditions, then sign up for the card that suits your needs best.
Once you find a card that meets your needs, you need to read through all the fine print to make sure you understand all fees involved with your new secured card. Once you feel comfortable with the details, simply click on the “apply now” sign and fill out all of the required information.
Step #4: Put down a cash deposit you can afford.
Most secured credit cards will ask you to put down a deposit that is equal to your new credit limit. If you want a $500 credit limit, for example, you’ll need to put $500 in cash down as a deposit. You might need to save a few weeks or months to build this up, but the wait will be worth it.
Step #5: Use your secured credit card sparingly at first.
As you get used to using credit, you’ll want to use your card sparingly at first. Don’t rush in and begin charging items until you get a grasp on what you can truly pay back. You don’t want to end up with a revolving balance you can’t afford to pay off every month, and you definitely don't want to pay interest on your purchases!
Step #6: Monitor your bill closely, and pay your secured card off frequently.
To make sure you’re utilizing your new secured credit card, you’ll want to keep close tabs on your growing bill. If your card offers online account management, this task should be fairly easy. If it doesn’t, you may need to keep track of your purchases and charges manually. Either way, this step is crucial since staying debt-free is the best way to keep your credit in tip top shape.
The Bottom Line
While Kevin's story is absolutely amazing, it isn't all that unique. The truth is, this is exactly what secured credit cards are supposed to do. They do receive a bad rap because of the initial deposit and the fact that some charge annual fees, but that's not really fair. In the real world, secured credit cards are a valuable tool that can be used to build your credit when you can't qualify for a line of credit otherwise.
Whether you like it or not, your credit score is important. If you ever hope to take out a mortgage, borrow money for a car like Kevin did, or borrow funds to start a new business, you'll need a good or decent credit score to qualify for the best rates.
While imperfect, secured credit cards offer the opportunity to improve your credit and your life. If you are ready to improve your credit and think a secured card could help, don't delay. Research secured card options and sign up today.
Have you ever used a secured credit card? What is holding you back?