First let me say that credit scores are such a scam. I really believe that it’s a way rate poor people’s money management skills and use it to deliver high interest rates and more debt. With that being said, money and credit rules the world and in order to be successful, you have to know how to maximize your score.
In no way am I a credit adviser (disclaimer- can’t trust me) – these are just the steps that I’ve taken over the last year to improve my credit. I have four credit cards. Macy’s, Banana Republic, Kohls, & Bank of America Rewards. Yes, I know that these are not “high end” cards but I’ve had 3/4 of these accounts for over 6 years. I originally opened the Macys & Kohls cards to help purchase school clothes for my nephews. I knew that I would be helping purchase school clothes every year, so it made sense to have credit. I applied for the BoA card when I went to college at 18/19 years old. I knew I would need a card for emergencies after I moved out on my own, and I’ve had the Banana Republic card for about four years now because I needed work clothes my final year of college and after graduation.
There is a trend here. I’ve had these cards for at least five years which is important. If you’re not patient enough to build credit, stop reading this now. Credit bureaus look at how long your accounts have been open. This is the reason I don’t have an AMEX or a Nordstrom card. Although I’d like to look cool, opening new accounts dings your score. Beware, closing accounts dings your score as well. I recently spoke to a friend who closed two accounts to save money and try to improve their score – didn’t work. Instead of closing the accounts you don’t use or need, keep them open and put the cards to the side for emergencies. I also grew up with the myth that “you have to use the credit cards you have in order to keep a good score.” That is not necessarily true. I only use my Kohls card once a year, that’s it. It’s important to keep in mind that this card has no annual fee, so I only use it when I need it. I don’t recommend opening cards with annual fees for two reasons:
- There are plenty of cards out there that are willing to make money off of your interest alone, choose one of those.
- They cost you money when you’re not using them – no one likes that.
So, if I don’t apply for new cards and I don’t close any accounts, how did I increase my score? First, I had to know what my score was. Checking my credit score on CreditKarma helped my understand what my score means and they give tips on how to increase you score as well. It’s free and it doesn’t ding your score based on my experience. I started with a score of 640. Ouch. Most people would not put their score on blast but I don’t really care because this is all a scam anyway. I had no car at the time (I sold it as didn’t need a car when I moved to San Francisco), I have over 18K worth of student loans, and these four credit cards – that’s it.
Second, Pay your damn bills. This is common sense that you need to pay your damn bills and pay them on time. Do you need to pay the entire balance each time – no. Will the minimum payment work? Yes it will, unless you’re being charged a high interest % on a high balance. At that point you may not even be paying your actual debt so pay attention to that.
Third, make sure you stay under 33% credit utilization. This tip helped me increase my score. I realized that I needed to increase my credit limits to “reduce” my overall utilization. This meant I needed to stop being afraid of “credit dings” and ask for increases on my credit card limits. This worked for two reasons: I pay my bills on time and I had an increase in income between the time I applied for the card initially and the time I applied for the increase (during college vs after).
I had about $1500 in credit card debt and my limit went from $2,500 to $12,000. This took my credit card utilization from 60% to 13% and eventually increased my overall credit score of over 100pts. Basically, the credit card companies said “Oh you have a job now after college, sure we’ll let you increase the amount of debt you can accrue” but I fooled them because I barely use my cards at all. Now, they continue to increase my limits without asking for being a loyal customer.
So – here is an overview:
- Pay your damn bills – on time
- Apply for the cards you need and don’t cancel the ones you have
- Make more money – so creditors trust you with more debt
- Ask for an increase – eventually you won’t even have to ask, they’ll make it rain
- Stop while you’re ahead. Having credit is convenient but it can get out of hand quickly if you like clothes and shoes as much as I do – so be smart.