6 Steps to Improve Your Credit Score!
I meet with clients each week and I typically find that credit scores are usually an obstacle in the way of them achieving their financial goals. In order to take advantage (responsibly) of the leverage that credits allows, you must first understand the rules to maintain good standing and the fastest way to increase your credit score.
Step #1: Take a personal inventory. The first step of any journey should not be taken before a person has chosen a destination and has accessed what supplies are needed. The road to recovering one’s credit involves setting the desired goal (what you want your score to be) and understanding first why your score sucks in the first place (understanding what tools you need for the journey). Credit scores (FICO Scores) are a lenders resource to determine your likelihood of paying a debt. If you currently do not know what your credit score is, then your credit probably sucks. Ignoring a problem will not make it go away! If you are not able to take steps to fix the issues in your credit report, you should at least have a plan to tackle that debt and know when you will stop negative impacting factors.
Step #2: Make all payments on time. If you have been late, don’t worry about that! This is day 1 of your credit recovery and you must make payments consistently from this point forward. You cannot miss 1 on time payment! This is of high importance because 35% of your score comes from on-time payments to reporting creditors. Your rent and car insurance are not creditors. Creditors are those institutions who have recurring monthly payments setup for your loan. It does stand to note that anyone can damage your credit by reporting failure to pay. If your utility bill goes to collections, now a non-reporting expense has become a reporting creditor. There is no excuse not to pay your bills, be responsible and don’t make commitments you are not prepared to keep. An easy way to make sure that you never miss a payment, or are late on a time payment is to set up automatic payments for 5 days before the payment due date.
Step 3: Don’t close your oldest account. Your credit history is the average of your all accounts, so keep the oldest account open will increase your credit history. This accounts for 10% of your credit score.
Step 4: Reduce your credit utilization. By reducing your total balance to less than 30% of what your available credit. You can calculate this by dividing total credit balance by total credit used. How much credit you use of what is available for use can have huge impacts on your credit score. Credit Utilization % represents 30% of your credit score and shows financial institutions that you manage your credit line responsibly. Once again, here is how your utilization is calculated:
Credit Utilization = (balance/credit limit)*100
Step 5. Use technology! There are just no excuses not to be informed about your financial situation with all the techy tools we have at our fingertips. Just because you refuse to acknowledge your problem doesn’t mean Get Credit Karma and Clarity Money Now! Both apps are vital if you want to maintain good credit. They not only give the information within your credit report for free but they tell you why your score dropped or increased. They even give you suggestions and warnings to keep you on track.
Step 6: Use your cards responsibly. I actually only use 1 of the 4 cards I have open. That card I use for everyday purchases and pay the balance off each month. For my other cards, I capitalize on reward point and/or maintain activity by charging following.
Card #1: charge all variable expenses (cell phone, cable, car insurance, gas/electric, etc.) this runs about $850 each month. I use my online banking to auto pay the card $850 each month. (This awards me 1.5% cash back just for paying my bills.)
Card #2: Netflix $11.99 per month and auto payment from my bank for $10.00. (Maintains activity on the account.)
Card #3 Audible subscription $34.99 and an auto payment from my bank for $30.00. (Maintains activity on the account.)
Now those are just examples of subscriptions I use. You can use whatever subscription services you want to keep your accounts active but make sure to be responsible with your accounts.
So what can you do if you have no credit?
- Get a secured credit card at your bank (About a $300-$500 deposit of your cash and your cash is the available credit limits
- Set up a subscription service like Netflix or something that will charge your card each month.
- Automate your online bill payment to nearly pay the balance each month.
- Wait until your score grows and apply for a credit card that matches your creditworthiness (Best Credit Cards). (repeat step 2-3).
Payment History (35%) on time payments
Credit Utilization (30%) balance/limit*100
Credit History (15%) average age of accounts
Credit Mix (10%) types of accounts (auto/mortgage/credit cards)
New Credit/Inquiries (10%). Less than 2 inquiries