There are many factors to improving your credit score and it can seem overwhelming, but once you understand what you need to do for your situation, it’s simply a matter of picking what’s most important and taking steps to make it happen. If you focus only on improving one factor, it will improve your score. So, do not be overwhelmed, if you take only one thing out of this, that will be enough to put you in a better position. I believe in you, and I’m so happy you’re interested in improving your credit score.
For background and information on how I know what I know: I used to work at a credit card company and I currently work for a bank, but I’ve also had the experience of starting off with bad credit at age 18 for being a legal adult (2 months after 18th birthday) on a lease that was broken and taken to collection. I believe my score must have been 500 something at age 18 and I currently have a score of 785. I did not go to a credit specialist or to a company to improve my score. I do recommend you seek professional help if you are uncomfortable with your collections negotiation or have an error on your account, but otherwise I think credit improvement can be done on your own. I’ve learned so much in my journey and very happy to share.
Disclaimer: I am not a CPA, CFP, and am not giving financial advice, but sharing tips that have worked for me. All screenshots are from my Credit Karma account.
Here’s my current credit score.
I had a big jump recently as I was considering refinancing my home, so I paid off a $6,000 balance (0% interest) and got 20+ point jump. I know what I’m doing, so I’m not afraid of credit anymore. I know what levers I can pull at any time, and my goal is not to have a perfect score all the time (so I use credit), but I do want to have a super high score when I’m doing things like applying for a mortgage or any other big loan. I do not recommend everyone use credit, and we’ll talk about why and how you should use it depending on your situation. So, let’s jump right in.
The Top 3 factors to your credit score are:
- Your Payment History
- Anything in Collections
- Your Credit Card Utilization
We will discuss these top three primarily, and also touch on the other, lesser factors a bit:
- Age of Credit History
- Number of Accounts
- Hard inquiries
The “lesser” three have an impact on your score, but are not weighed as heavily, so it’s important to be mindful of these in context of the others, but they are not as important.
FACTOR #1: PAYMENT HISTORY
Easy to Understand, Hardest to Improve Short-Term
I hate payment history. I have 3 late payments out of 557 payments on my credit score. It’s from the same stupid credit card that just recently built the capability for automated payments. I have my whole life on automatic payments, so to remember to pay a card I use maybe a few times a year was obviously challenging.
Enough about me. I recommend you put your whole life on automatic payments. I don’t even know how people function and remember to pay their bills on time if they are not on auto pay. Side note on auto pay: I have friends who say they don’t trust the auto pay system. They don’t see the money coming out of their account by the due date, so they just cancel the transaction and pay manually. First of all, that’s a lot of stress. Secondly, if the auto pay system doesn’t work, the company cannot ding you for that. They will have to fix it on all ends (any unnecessary interest acquired, credit impact, etc.). Also if the auto pay system didn’t work, they would be losing all sorts of money, and we know those companies like their money.
Another tid bit is that payments are considered on time if it was initiated on the due date. For auto pay, this usually gives you a few extra days for the full withdraw to occur as ACH (Automatic Clearing House, basically how money moves when a routing number and account number is provided) typically takes 2-5 business days. All financial institutions know this. This is a good thing for you, do not worry about lateness, it is not late. If you are still writing checks and mailing them, most companies will honor if the check is written out and mailed on the date the payment is due. This is why most companies don’t automatically report to the credit bureau when the due date is passed. They usually wait the full 30 days to see if you will freakin’ mail a check or something.
Anyway, on-time payments are critical as your payment history will stay on your credit score for 7 years. So, if you are late this month, you’ll be seeing the impact of that for another 7 years. However, how long you are late does matter. So, if you are only one month late, pay it! Don’t throw in the towel. Payment history does take into account if it is 30, 60, or 90 days late, so don’t make it worse. Secondly, know that the more on-time payments you make, the better your ratio will be. If you have 5 payments on your history and they’re all late, that’s not good at all. But if you have 10 payments, and 5 are late, that’s a little better. So, focus on getting more on-time payments, and if you’re already late on some payments today, get on the “latest” one and put yourself back on track. Most people know that late payments are bad for their credit, but they make it worse by letting them either continue to be late, go delinquent, or not make on-time payments the next month. All of these things matter.
Don’t Fret Over the Long-Term Game
Let me address the 7 years before everyone stops reading and gives up on their very much achievable 700+ credit score. The best story I’ve ever heard about time passing is when someone was talking about what they desired to do in life, and said “that’s going to take so many years of schooling to achieve! Do you know how old I’m going to be by the time I’m done?”. The wise responder said, “You know that time is going to pass anyway, right? And you’ll be that age one day regardless if you do this or not.”
I love that so much. And it’s important to internalize this message as you make some really long-term goals to fix your credit. The time will pass anyway, so decide if you want to be in the same or better place than you are now. If you want to be better, let’s keep going.
FACTOR #2: ANYTHING IN COLLECTIONS
Now that you’re motivated to play the long-term game, let’s talk about collections (yikes! I know). First, understand what you have in collections by logging into Credit Karma. Do not be afraid, knowledge is power and even if you decide not to do anything, know the month and year when the item might fall off your record.
Myth: You are not dinged for checking your credit on sites like Credit Karma
You are dinged, however, if Mr. Loan Officer or Mrs. Credit Card Offerer is “just checking” if you qualify for their credit card at the department store. If someone asks for your social security number and birthday, this needs to always ring some alarms because someone is either running your credit or trying to commit fraud on you. I had a situation recently where I was chatting with the girl (loan officer) who helped me close on my last home, and she started asking me for information after my question on mortgage rates. I literally thought she was just looking up my profile on her system until she asked for either my birthday or social and I thought, “wait a minute” and asked if she was going to run my credit now. She said yes, and obviously asked her not to. Just so you know it is illegal for anyone to run your credit score without your permission, but some sales people are good about asking it in a very subtle way.
What to do with Collection Items
Once you know what is in your record, here are your options based on what you see and how old it is:
- If anything is incorrect, contact the company for a correction, and also contact the bureau’s. The faster you notice an error, the more likely the company will be able to assist you. If it’s more than 2 years, you might want to seek professional help as many companies may not have access to easily modify your account.
- For newly delinquent accounts, you should try to get this off your record by paying it off completely or negotiating a reduced pay off amount. The easiest way to negotiate a lower amount is to be honest on what you can/can’t afford. If the balance is very large, they are more likely to believe you can’t pay it off and that you won’t. However, for a few hundred dollars, you may not be able to negotiate much lower. Again, you can seek professional help here if needed, but consider the costs and weigh your options.
- For accounts that have been on your record for some time, I’d say 5+ years (but it depends on your timeline for getting your credit score up), you might just want to wait for it to fall off your report on its own. It usually takes 7 years to fall off, but there are some that might take longer (up to 10 years). I don’t know which ones take longer as my item did fall off after 7 years.
I’ve heard people say that even contacting the company might restart your 7 year timeline, but I don’t see how that is possible unless you agree on a payment plan, make a few payments, and then fall delinquent again. However, think on your own what you are willing to pay and why, come to the table with a plan.
FACTOR #3: CREDIT UTILIZATION
This is lengthy as we’ll be covering some of the less important factors within this major factor. Let me start by saying if you have no credit, you do need to start with something. Credit is a good thing, but people who don’t know how to use it can make it a bad thing. I’ll cover a few ways you can use credit. I also have some recommendations at the bottom of the post for good places to start if you have no credit.
Stop Paying Interest on Credit Cards
I recommend that you pay off your credit card balance every single month to avoid paying interest. Credit cards have the highest interest rates, and this type of debt should be avoided at all costs. Have an automatic payment withdrawn for the “Statement Balance” (“Current Balance” is the other option and this is usually a higher amount), and you will not be charged any interest. For example, let’s say my statement closes on the 15th and my payment is due on the 21st (sometimes it is the 21st of the next month). I do not have to pay off the purchases I made between 15th and 21st. I only need to pay my statement balance to avoid paying interest. Again, if you are not a responsible user of card, I urge you to simply stop using them. If you are a points guru or otherwise using your cards sensibly, ensure you simply pay off the statement balance every month automatically, and you’re Gucci (in regards to not paying interest).
A side note, I know there’s always promotions on 0% interest. Please note that for the most part, if the balance is not paid 100% by the time the promotional offer is complete, they will charge you all the interest you were supposed to pay the entire time. For example, I was granted a 24 month interest-free credit promotion, I immediately calculated how much I had to pay each month to ensure I was at or under 24 months. When I finally received the monthly bill, they were asking for a minimum payment that was literally $10 less than what I calculated. This minimum payment allowed them to get the most amount of money per month while still keeping me just over 24 months to be able to charge me the whole 24-month interest on month 25. Of course, this card is now paid off and I paid $0 in interest, but I urge you to do your own math and ensure you never pay interest on a credit card. This is the goal.
Tip for a Quick Boost in Score
For those who are using their cards monthly and paying off each month, know that your credit score will fluctuate maybe bi-weekly as you spend (use your credit) and then pay it off in full. This is because utilization really does have a major factor on score. The biggest, most immediate action you can take to boost your score is to pay off consumer debt (credit cards and such). Student Loans and Mortgages are not considered consumer debt. I have multiple cards, so my score is always up and down a few points on any given day of the month, but if you are applying for a mortgage or something big, just pay it all off and get to zero balance at least 2-4 weeks before you apply.
My strategy for those who are behind on credit card payments or carryover balances every month would be:
- List all your credit card debt with it’s balance and respective interest rate. You must know this information. Stop avoiding it.
- Pay off highest interest card (if this has a huge balance, then, start with the smallest balance and pay that one off for a quick-win accomplishment)
- Once you’ve achieved your first major milestone of paying off one credit card in full, choose the next card based off interest rate. The higher the rate, the faster you want to pay this off
- If you are in this boat of late payments or habit of paying minimums, I would urge you specifically to stop using cards all together until everything is paid off. Then, keep them paid off with $0 balance for 11 months.
Myth: You Do Not Need to Maintain a Balance on your Credit Cards
I tell people this and they don’t believe me. Again, auto pay and choose “pay full statement balance”. You are allowed to use your credit card if you pay them in full every single month. If you do not know how to responsibly use credit cards, do not use them. Put them in a cup of water in the freezer. You can only access them after it thaws, and hopefully by then you have come to your senses.
The reason why there’s a myth about keeping a balance is because after 1 or 2 years of inactivity on a credit card, the company can and will close the account. Check the terms of your cards. Or to make this easier, simply make a small purchase once a year on the credit card. Maybe you can do your holiday gifts on the card each year and that’s it! If you’re not able to pay off your card in full every month, do not get in the habit of even carrying around the card. Again, put it in the freezer, and take it out before Christmas for one-time use.
Do not close your accounts
The most important thing to understand about credit utilization is that it’s a simple ratio of how much credit you use compared to how much credit you have been granted. It’s a total of each, and the individual card or company doesn’t really matter.
|Total Credit Used||$|
|Total Credit Granted||$$$$|
The Credit utilization Strategy is two fold:
- Use as little credit as possible (none if you are just starting or are currently paying off or recently paid off balances), and
- Get banks and companies to loan you as much as possible
If you close accounts, you’ll impact your “credit granted” which effects your credit utilization % and if you’re closing an old account, you may also be impacting the age of your credit history. Credit history is an average of all your accounts, so it doesn’t just take your oldest account. This is why it’s important to keep accounts open even if you don’t plan to use them.
Tip for Credit Cards with Annual Fees
You might have a card with an annual fee that you don’t plan to use, but you don’t want to continue to pay the annual fee. You think you’re in a pickle because now you understand credit utilization and the importance of keeping accounts open. I have a simple solution: simply request a product change. Almost every bank has a no annual fee card. This may have less perks, but if you’re working on getting out of debt, who cares? A product change will not impact your credit score (no closed account, no hard inquiry), and any rewards earned will be transferred or converted (i.e. cash to points if applicable). So again, no need to close the account.
Back to the 2-fold strategy for Credit utilization.
Let me be clear, your strategy must begin with lowering your current utilization percentage as low as possible with whatever credit line you currently have. Do not move onto step 2 at all before you have mastered step 1. Step 1 is so important because there is a direct correlation with your credit score and credit card utilization percentage. Your percentage is more important than the actual amounts. I would make a goal to have a credit utilization under 10%, but 30% is considered good according to Credit Karma.
See example below of the same credit line, but lower utilization. A 10% use will give you a better credit score than 30% use or $300 in the example below.
|Total Credit Used||$300|
|Total Credit Granted||$1000|
|Total Credit Used||$100|
|Total Credit Granted||$1000|
Again, the individual credit granted by a company is not as important as the aggregate. Total everything or log onto Credit Karma to understand where you stand today. Once your utilization is low, you are ready to start focusing on increasing the denominator in the fraction, or the credit granted to you.
Here’s where I currently stand with my credit utilization. Again, this took a long time, and I couldn’t ask for more credit if my utilization was not already low.
Here’s a test to know whether or not you are ready for strategy #2: Would you get excited if your bank/credit card company automatically doubled your credit line? Be honest.
- If Yes – You are not ready for strategy #2.
- If No – You are ready to proceed.
I can’t tell you what to do, and don’t be mad at me, I know this is not a perfect test. Even I would be “glad” to have an increase in my credit line because it’s going to help my score, but there’s no reason for me to be excited. This is just a strategy for my credit score, and has nothing to do with how much I will or should be spending. This is not free money. This is only a credit score strategy, nothing else. It should not change your behavior or spending whatsoever.
Sorry for the lengthy disclaimers, but I’m here to help, and I don’t want to put you in a position you are not ready to be in, that’s all. The best way to know you’re ready (besides my silly quiz) is if you’ve maintained a utilization of under 30% for at least six to twelve months. This is how you can prove to yourself that you can handle a higher credit line.
For those who are ready, let’s move to Strategy #2 for credit utilization. It has two parts, the first is to increase existing credit lines and the second it to obtain new credit lines.
STEP 1: Get More Credit Granted with Existing Accounts
Depending on your relationship (history) with the your bank or credit card company, after 6-12 months of no usage or good usage (on-time payments in full), you should ask for an increase in credit line. If you have a lengthy relationship, consider ensuring you have been historically “good” for most of the time. If you have years of late payments, one “good” year of payments is not enough. I actually don’t think this is possible as most companies will close your account if you are a super bad actor. So, assuming your account is still open, most of the time 6-12 months is enough to prove your worthiness for credit extension. Also, to show them that you no longer carry balances.
In the credit card world, we have two types of users: A Revolver and a Transactor. I’ll give you the Investopedia definitions for each:
- “A transactor is a consumer who pays their credit card balance in full and on time every month. Transactors do not carry a balance from month to month; they always pay their credit card bills in full by the due date. Transactors do not pay interest or late fees.”
- “A revolver – a consumer who carries a credit card balance from one month to the next. Revolvers as a group are a major source of revenue for credit card companies because they pay interest on their balances. But individual revolvers who accumulate large balances and then become delinquent on their debt can cause creditors to lose money.”
What you need to prove (and this will take time) is that you are no longer a revenue-generating Revolver for them. They will grant you larger balances in hopes that you will become a Revolver once again, but with a firm goal in mind and “auto pay in full” at your use, you’ll be able to come on top with a higher credit score.
If you make a request prematurely, for example with recent late payments on your record, they’re going to deny you. So, don’t waste your time. You have to put in the work first. If you recently got a big promotion or pay increase, let them know of your new income. More disposable income (higher pay or lower rent) and good behavior (paying off balances in full) will most likely allow you to get additional credit on existing accounts.
If you know you are ready or have been a Transactor for a certain company for a while now, when you ask for the credit line increase, they will ask how much you want. I recommend going pretty high as they will always counteroffer if that exceeds their risk tolerance. So, don’t be shy.
This is a great option because you avoid two things: having another company run your credit score (impacting hard inquiries which should be as low as possible at all times) and you don’t get a brand new account (0 years old) to lower the average of your total credit history. However, getting additional credit granted far exceeds the downside of a additional credit inquiry or effects on credit age. Trust me, I’ve been hyper focused on getting more credit granted, and it’s been helpful to my credit score!
STEP 2: Increase Your Credit Line with Additional Accounts (for those who are ready)
Let’s say you’ve already contacted your existing credit card company and requested an increase in your account, and it was granted. You have other lines, but they are too new, or you are still working on building/improving your relationship with them via additional on-time full statement payments. If you’re still looking for additional ways to improve utilization, get another credit line. Only apply for one card at a time, build slowly as too many cards in a short period can impact your hard inquiries which fall off after 2 years. It depends on the progress you are making, so go “slow” whatever that means for you. This can be 1 new card per year or 1 card every 3 months, but start slowly as wrecking your credit can be a time-consuming and costly mistake.
My Credit Card Recommendations
I have provided some credit card recommendations below, but most require good credit except for one. So if you are building your credit for the first time or otherwise have bad credit, consider the bank you have a relationship with (a checking/savings account or loan). The fact that you have an existing account with them will be favorable towards your chances of getting approved. They will look at whether you have overdrafts or bounced checks or on-time payments if it’s a loan. If you don’t have any or recent negative marks, this will be a great place to ask for credit even if it’s just to get started!
Secondly, I recommend considering Capital One as they seem pretty willing to grant credit. That is why I chose them as my recommended card for those trying to build their credit. I never worked for them, so I’m not sure, but based on my experience, they must have a higher risk tolerance than other companies. Outside my bank, this was one of the first credit cards I applied for and was literally shocked they gave me credit. I now have multiple cards and a savings account with them.
If you’re interested and ready to apply (ready meaning you’ve taken my advice above and you are a responsible credit card user), please use my “refer a friend” links below. Additional credit will really help your credit score.
Here are some of my favorite cards:
Overall Favorite (Requires Good Credit): CapitalOne Quicksilver
1.5% cashback on everything, no annual fee. This is my go-to card. Unless I’m trying to meet a quota for sign-on bonus points, I’m using this card as I don’t have to keep track of categories or an annual fee. Just cashback every time. You do need good credit for this card. CapitalOne has cards with better benefits, but you’re paying an annual fee.
Favorite Rewards and Customer Service (Requires Good Credit): Discover It
5% Cashback on rotating categories every quarter, 1% cashback otherwise, no annual fee. Best part is they match 100% of all the rewards earned from the first year. Customer Service is all in the U.S., and they’re super sweet. I also love that I can pick a card color of my choice.
Favorite Airline Card: Southwest Various Cards (Requires Good Credit)
This one does have an annual fee which varies by the card. I have the premier which benefits includes $75 travel credit which covers half the annual fee in my mind. I might be biased being from Texas, but I love this airline. They are so hospitable, so the cards vary and are all about travel perks with Southwest. The card is issued by Chase.
Building Credit? CapitalOne Journey
1% cashback on everything. Almost as good as the quicksilver, but less stringent credit requirements. Great option for a beginner. I don’t have a Refer a Friend link on this one, but the website should take you to the page to apply. This is marketed as a student card. Companies don’t care if you’re actually a student (tip #52).
Honorable mentions for Reward Cards is Capital One Venture and Chase Sapphire or Sapphire Reserve if you are a big traveler (all have annual fees and require good credit).
I hope you learned something new.
Please post any questions below or message me privately.