Raising your credit score 100 points is easier than many people might think, especially if you currently have bad credit.
How To Improve Your Credit Score
Keep reading for a testimonial from one of my interns, Kevin, whose method for boosting his credit score over 100 points might surprise you.
How To Improve Your Credit Score
1. Check Your Credit Score
Most people don’t know their credit score until a time comes when they need it.
Don’t be one of these people!
Good credit scores are your passport to competitive interest rates for mortgages, cars, credit card offers, insurance premiums, and more. Maintaining a high credit score is worth it because it will save you from the money you’d pay in higher interest rates.
Luckily, it’s simple to learn your credit score. I recommend the following companies:
|MyFICO||Experian, Transunion, Equifax||$15.95|
|Credit Karma||Transunion & Equifax||FREE|
Learn more about each of these companies:
2. Fix Credit Problems
After you know your credit score, step two is: how can we improve it?
The best way to improve your credit score is to review your credit report. The score itself is not personal, every American falls within the same range. However, the credit report, is your unique financial history.
A credit report breaks down the following by weighted importance:
- Payment History (30%)
- Paying your credit card, student loan bills, etc. on time?
- Credit Utilization (30%)
- The ratio between credit available to you and how much of it you use
- Credit Age (15%)
- How long have credit lines been opened? Mortgage, credit cards, etc.
- Account Mix (10%)
- Variety of credit lines
- Credit Inquiries (10%)
- Too many hard inquiries don’t look good, i.e., applying for a bunch of credit cards at once
Where you get your credit report matters, which is why I strongly recommend Experian. You’re not only getting it directly from the source (Experian is one of the three credit reporting companies in America), but it’s free when you create an account!
3. Run Up the Score
Now it’s time to tackle the two factors in your credit report which impact your score the most.
Did you know that missing just ONE bill can lower your credit score by 100 points? Ouch. If you’re unable to pay your bills each month, I recommend setting up a budget. This is your path to a higher credit score.
A budget entails writing down all expenses in a given month, and all your sources of income. If the math doesn’t work, then you know what you need to do.
|Resource||How It Can Help|
|YNAB||Get’s you on track with a Budget||Try YNAB Free|
|Tally||Organize & Pay off Credit Cards||Sign-up For Tally|
Credit utilization refers to how much of your total credit card limit you use. If you have a $10,000 line of credit with one card, you should never spend more than $3,000. If your limit is low, or if you can’t help but spend the whole limit, I recommend getting another credit card.
It seems counterintuitive, but the goal is to increase your credit limit, without spending more, and this will improve your credit utilization score on your credit report.
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.
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?”
What I Learned from Being Denied for Credit Cards
When I was finally prepared to get a credit card on my own, none of the banks I applied to would give me a chance.
It went like this: “I am unemployed, have no credit history, and have a couple of thousand dollars in college debt that I will have to start paying on in the next year or two.”
Not exactly a winning pitch to convince someone to give you a line of credit! Two banks denied me, but one banker was kind and shared some info that has helped me raise my credit score over 100 points in the past five months.
First, I should stop trying to apply for credit cards that would get denied. His reasoning was simple: when you apply, they do a hard credit check which, in turn, can lower your credit score even more.
His second piece of advice was to get a secured credit card.
How a Secured Credit Card Works
He told me that no major bank was going to accept my credit application, but there was actually an alternative option available – one which was especially perfect for those in my exact situation: to sign up for what is called a secured credit card.
While the terms for these are horribly one-sided in favor of the lender, I assure you it is a small price to pay for the result you receive after only a few months.
With secured credit cards, you give the lender 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 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 the card.
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, so no one will know it is secured.
There is also an annual fee associated with most secured credit cards, but I felt it was a small price to pay for the opportunity to build some credit history.
How To Maximize the Benefits of Your Secured Credit Card
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. The credit limit should be a function of what cash 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 give your secured credit card a $500 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 $1,100 dollar limit fit my needs.
How I Raised My Credit Score Over 100 Points
Raising my credit score with a secured card took some disciplined, conscientious spending.
Here are the rules I followed to maximize the benefits of my secured credit card.
- Spend what you have: After I received my secured card and started spending, I made sure that I would only spend money I already had or would receive, before the next pay period.
- Pay often: 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.
- Know your limits: I would never let my credit limit exceed $800, and I would never pay it off if the card balance was under $300 unless the pay period was coming to an end.
- Make purchases: I would put every penny of my spending on the credit card – from the smallest expenses such as a drink from the gas station to major purchases such as airline tickets or hotel rooms.
- Be consistent: I repeated this process for 5 months to establish a credit history of regular use and always paying on time.
What My Improved Credit Score Allowed Me To Do
In August of 2011, I had to purchase a car so I could switch jobs.
When I filled out the credit application to see if I qualified for lower financing rates, my credit score came back as 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.
The difference in the loan between the two 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.
Why You Should Let Your Kids Get a Secured Credit Card
To all of the parents out there who worry 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.
It’s a safe way to earn credit if you do not trust your kid to spend responsibly.
The worst that can happen with a 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.
How to Make a Secured Credit Card Work For You
Here’s the truth: If you have a low credit score and cannot qualify for traditional credit, a secured credit card is the best way to build a credit profile that will last.
Below are the steps to moving your credit score in the right direction using a secured credit card:
Step 1. Learn Your Current Credit Score
Just as was emphasized above, knowing your credit score is key. Any one of these places listed below will get you either your exact credit score (if you pay) or close enough (the free versions).
|Credit Karma||FREE||Get Started|
|Credit Sesame||FREE||Get Started|
Step 2. Research secured credit cards
Getting a secured credit card is one of the best and fastest ways to improve your credit score. Petal Visa Credit Card is one of the only credit cards you can get without credit history or an up front deposit and the current APR is overall pretty good for a secured credit card ranging from 14.49% – 25.49%.
With responsible spending and on-time payments, you can grow your credit score. Petal reports to all three major bureaus–TransUnion, Experian and Equifax.
Step 3. Read the terms and conditions, then sign up for the right card
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.
When 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
One of the reasons I love the Petal Visa Credit Card (and no, I don’t work for them!) is because they don’t require a cash deposit.
Most secured credit cards do. If you find a card you love that requires a cash deposit, my advice is to put down only what you can afford. Don’t overextend yourself.
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.
In Summary: Tips To Improve Your Credit Score
- Signup for Credit Karma, an easy-to-use and transparent one-stop shop: get your credit score, credit report, credit monitoring.
- Download Tally, a credit card consolidation app that makes it easy to stay on top of your credit cards. Scan your cards and get a line of credit as well as manage payments.
- Signup for Experian Boost to include your cell phone and utility payments into the calculation of your credit score. This is huge because Experian won’t count missed bills, only positive history payments.
- Get a Petal Visa Credit Card. All the perks and rewards of a credit card, except no fees and catered towards improving your credit score.
The Bottom Line
While Kevin’s story is absolutely amazing, it isn’t all that unique. In the real world, secured credit cards are a valuable tool that can be used to build your credit when you otherwise couldn’t.
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 as 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 your options and sign up today.