Last week, we talked about what impacts your credit score. There are 6 factors that have varying degrees of impact. This week, we wanted to cover how I improved my credit score by 314 points and how you can do the same.
It wasn’t always an easy path nor was it quick. It took me 3 years to go from a 445 to the current 765 score I have now.
We’ll start out with my credit story and then jump into some actionable tips on how you can improve yours too.
In high school, I knew some people that got credit cards, but my parents always preached to stay away from credit cards until I was responsible enough for them (i.e. not a teenager). I got my debit card when I got a car in my junior year and mostly just used cash. Then I went on to college.
A Rocky Start
I lived on campus during my first two years of college so my credit wasn’t needed. Then my parents co-signed with me for the house I rented with four other people (their parent’s all cosigned too). It wasn’t until we moved in and were trying to get cable and internet that I got my first hard inquiry. And was denied. Hard.
I had a 445 credit score. This was August of 2016.
I laughed it off, thinking it was actually funny it was so bad. I didn’t know the first thing about credit scores.
I thought that by putting the water bill in my name for that same house, that would help my credit score. Turns out they don’t report to the credit agencies (although some do!).
My First Credit Card
So, I didn’t end up opening my first credit card until February of 2017 (age 20). I had a full-time job and felt comfortable enough to pay it off every month. It was a store card for Target so I am pretty sure they approve everybody.
I signed up in-store and put my first purchase on it right there. The card came in the mail and I kept putting off activating it because I knew I really shouldn’t be shopping at Target as much as I wanted to.
I kept getting these spammy collection calls that I would ignore. Until one day I was sitting in bed and realized “Oh shoot. Those collection calls are real!”
I had never paid for my Target purchase from that first day back in February. It was now May 2017.
It was almost three months after I had purchased the items and I was now 30+ days late on my payment (with how the statement periods work when you open a card). Not a good way to start my credit journey.
Turning it Around
I knew this was no bueno so I called and explained my story. They waived my late fee of $35 but the late payment was still on my credit report and would be for seven years. I immediately set up auto-payments for the FULL amount two days before the due date every month so I would never miss another payment.
And three years later, I have not missed a payment since and yet I still sit at 99% payment history (urgh!).
My next card was a student credit card with some cashback and a good grade statement credit. I opened that in December of 2017. Again, they are made for students so they accept pretty low credit scores.
I continued practicing good credit habits by paying my bills in full and on time. This continuously increased my payment history and kept my credit utilization low.
There is, unfortunately, no way for me to check my score’s history unless I had manually tracked it throughout the years, but I definitely did not.
Here’s all I know, though:
- 445 in August of 2016
- 711 in November of 2018
- 765 in November of 2019
Lessons to Improve your Credit Score
My story may be a bit extreme since I was starting at such a low number and my poor score was due mostly to a lack of credit history. But I am sure so many of us start out this exact same way. Not knowing a thing about credit and walking blindly into the world with a bad score.
First, let’s recap what impacts your credit score and how much:
- Derogatory Marks: High Impact
- Payment History: High Impact
- Credit Utilization: High Impact
- Age of Credit: Medium Impact
- Total Accounts: Low Impact
- Credit Inquiries: Low Impact
Now on to how I improved my score by that 320 point difference.
Pay On Time
This was the most important aspect for me to immediately work on as I had missed my VERY FIRST PAYMENT. That meant I had a 0% payment history. After paying the next one it jumped up to 50%, then 66%, and so on.
Regardless, these are all result horrendous marks to my score. Here’s the scale from Credit Karma for payment history.
- Ideal: 100%
- Good: 99%
- Fair: 98%
- Bad: 97%
- Extremely Poor: <97%
I had to get to 97% just to break out of the poorest score. With one missed payment, that meant I had to make 34 payments on time. With one credit card, that would take all 34 months (2 years 10 months).
And to get 99% I had to get 100 on-time payments (8 years 4 months with one card).
Over the course of the last three years, I have been able to successfully make those 100+ payments on time and am now sitting in the 99% club, allowing for a large bump in my credit score since Payment History is such a high impact factor.
How? For every card I had, I set up automatic payments for the minimum amount just in case anything ever happened. I also placed every due date on my calendar so I could pay the full amount. I could have just as easily set up the automatic payments for the full amount but I was worried about overdraft fees (this was pre-FI movement).
Open Cards Slowly
Now, even though it was impossible for me to get up to 99% payment history in 3 years without opening additional cards, it was imperative that I didn’t open too many cards at once.
This will first raise red flags that you’re getting a lot of hard inquiries on your credit all at once. And you will start getting denied left and right. Chase has the 5/24 rule that you can only open 5 accounts within the last 24 months, otherwise, they will deny you.
Most importantly, though, it is easy to spiral yourself into overuse of your credit cards, when you open too many at once. Often times, cards have sign-on bonuses that require you to spend a certain amount in the first 2-4 months. If you’re not careful it can be very easy to use up a lot of your available credit just because it is there. Don’t tempt yourself, start slowly and prove to yourself and the credit companies that you can responsibly borrow money and pay it back on time.
Pay Balances to $0 Every 2 Weeks
This is one of the best tricks to improving your credit score QUICK! I only wish I would have started this method sooner.
If you pay all your balances to $0 every two weeks (i.e. with every paycheck), your credit score will start to see results almost immediately. By paying every two weeks, your statement balances will be half of what they were before and in some cases (due to timing) could even drop all the way to $0.
Since your credit utilization is based on your statement balance (statement balance/total credit limit), actively working to lower your statement balance will help boost your score. Remember, credit utilization is a high impact factor to your credit and the ideal number is <20%. With this method, I have been able to run a 3% average on my credit utilization.
Additionally, it will help ensure you never have a late payment again.
By paying to $0, you not only lower your credit utilization and avoid late fees, but you save on all that interest. You should never pay a penny to interest because you should never borrow (use your credit card) for more than you can afford. Paying your credit cards off with every paycheck will help you reign in your spending and keep you true to only spend what you can.
Lastly, by checking your free annual credit report or using a free credit score reporting site like Credit Karma, you can spot discrepancies in your credit report. This could be anything like a card or loan that doesn’t belong to you or even misinformation on a debt.
I had a credit card attached to my credit report that was opened before I was born! Definitely not mine.
Having false information could be harmful to your credit and potentially harmful to your identity. Someone could have opened a card or loan in your name or maybe there was just a mistake in the reporting. It happens all the time and is quite easy to dispute, so no need to freak out immediately.
Now, those were the top four actionable items I used to increase my credit score. As with all things personal finance, no one’s path is going to be the same. Here are a few more tips that I have that can potentially help improve your score!
Don’t Close Any Accounts
Your age of credit is a medium impact factor to your overall credit score so it does deserve some attention. It takes time to build your age of credit since it takes the AVERAGE of all your accounts and the ideal age of credit is 9+ years. There are two things that you should NOT do at risk of lowering that average significantly:
- Open a lot of accounts at once
- Close your accounts
We already talked about opening cards slowly, so let’s discuss why closing your credit cards is bad.
First, it instantly lowers that age of credit.
Example: I have a very low age of credit for only 2 years and 10 months. It’s only this high because I am an authorized user on one of my parent’s credit cards that have been open for 14 years and 9 months with perfect payment history. If they were to close that account, my age of credit would instantly drop to 1 year and 6 months, significantly lower.
Second, it instantly increases your credit utilization. With your total limit decreased with the removal of that account’s limit, your credit utilization will increase.
Debt Free is Better
A common suggestion for boosting your credit is to open different kinds of debt (e.g.. credit cards, car loans, mortgages, personal loans, etc.). This means that you pile on more and more debt to yourself in hopes of having better credit.
Do NOT do this!
You can be debt-free and have great credit. Do not acquire more debt for a better credit score, it is not worth it. It is FAR better to be debt-free than to have the coveted promise of a better score.
You may also hear that carrying a balance (i.e. not paying the entire statement balance) will help your credit score. This is simply NOT TRUE.
You should always pay your balances off in full. EVERY SINGLE TIME.
Over the past three years, I have been able to improve my credit score by 320 points and am now sitting in the Very Good range by implementing the above methods. Had I known about these methods sooner, I would have been able to improve my credit score much quicker. And that is my hope for you. Take these suggestions and see what will work for you. What areas of your credit need work?
Credit Karma is great because it tells you exactly what your score is for each factor so you can work on the ones that need more help, rather than wasting your time on the categories you are already good in.
Let’s help each other out and share our methods for improving our credit scores in the comments. And please ask questions!
PS This is in no way sponsored by Credit Karma or any of the aforementioned companies and their services. Credit Karma has been extremely helpful in my credit journey and I simply want to share that with you!