How to Help Improve Your Credit Score

Many financial gurus will tell you if you cut out your Starbucks addiction you’ll save $5/day or $100/mo…that’s $24,000 over 20 years! I’m all about living below our means but if you have the money to enjoy Starbucks, enjoy Starbucks. I see people try to cut pennies here and there and then completely ignore the things that have a much bigger impact on their Net Worth, like their credit score.

So how can we improve our credit score and what matters most when it comes to our credit:

On-Time Payments

• Impact: Very High
• A history of late payments – even those missed by a few days – can be damaging. A payment that is 30 days late is often reported to credit bureaus.

Tip 1:

• 35% of your score is reflected by payment history
• Don’t wait until the end of the month to pay your credit card bill. My wife and I pay ours offs usually at the end of every week or based upon our pay cycle which is 2x/mo. Psychologically this is much easier to do. When you see a $4,000 payment at the end of the month it’s a tougher pill to swallow and you start freaking out, likely get mad at the spouse and start a full-on interrogation of your spouse on each $13 charge on the credit card. It’s not healthy, not saying I’ve ever done that but not saying I haven’t either.
• Automation
  • If you have certain bills that draft each month from your credit card set up an automated payment from your checking account for the amount of your bills
  • As you know you shouldn’t carry credit card debt from month to month but if you do at least pay the minimums on time.

Credit Utilization

• Credit Impact: High
• Lenders usually look at how much credit is available as well as the amount that’s been used.
• Tip: Don’t wait until the end of the month to pay your bill. As soon as you use it go in and pull the money out of your account. This helps keep your available credit high and helps prevent you from carrying a balance month to month.

Tip 2:

• Pay it off!
• I know easier said than done but your credit score can have a huge impact on big purchases. For example, if you have excellent credit: 761-850 your interest rate on a mortgage can be 1% less than those who have average credit 621-700. On a $200,000 30 year mortgage you could end up paying $40,000 more in interest over the life of that loan.

Tip 3:

For those of you who don’t struggle with having maxed out credit cards I recommend you call your lenders to increase your credit limit. Here’s why: as you can see above your credit utilization rate depends on how much debt you have on your credit card plus what your limit is. So if you build up $4,000 on your card before you pay it off and your limit is only $8,000 you are at a 50% utilization rate. So simply call you card company and ask for an increase in your credit limit, here’s how:

You: “Hi, I’d like to request a credit increase. I currently have eight thousand dollars available and I’d like sixteen thousand.”
Credit card rep: “Why are you requesting a credit increase?”
You: “I have some upcoming expenses and I’d like a credit limit of ten thousand dollars. Can you approve my request?”
Credit card rep: “Sure. I’ve put in a request for this increase. It should be activated in about seven days.”

Easy. If they give you push back:

You: “I’ve been with you for over 5 years, have paid my bill on time every month and I really enjoy the customer service you provide. I’d hate to move my business to another bank just because we can’t increase my limit. Will you be able to approve my request?”
Credit card rep: Give me 1 minute let me talk to my manager…(I never really know if they actually do that or if they just put you on hold to make you sweat) “Okay great, looks like we are able to approve you for that, it should be activated in about 7 days.”

Oldest Credit Line

• Credit Impact: High
• A history of responsible credit use is ideal under most scoring models.
• Tip: Keep your old accounts open and in good standing. Set up automatic bill payment to occur every month and auto-draft payment to pay it off.

Tip 4:

• Keep your old accounts open and set up an automated charge like a Netflix bill or something (don’t forget to set up an automatic draft to pay it off every month). When you cancel your cards you can’t get that history back and in order to be considered “Excellent” in this category you need to have a history of 25 years of credit. Good is 8-25 years and average is 2-7 years.
• 15% of your credit score is reflected by your credit history
• This is the one category my wife has the advantage because her mom opened a card in her name when she was little and I didn’t start using them until out of college

Available Credit

• Credit Impact: Low
• Lenders may look at dollar amounts on each account, comparing total balances to total credit lines. A low amount of available credit can impact your score negatively.

New Accounts:

• Credit Impact: Low
• New accounts refer to opened in the last two years. From a lender’s perspective, opening too many accounts in a short window points to credit problems.

Recent Inquiries

• Credit impact: Low
• Recent inquiries refer to credit inquiries in the last two years. Lenders see to0 many recent inquires as a sign of credit problems. Most scoring models are lenient when similar inquiries are reported close together because consumers shop around for lowest rate.

Focus on the big wins when it comes to your finances and you’ll be able to enjoy that Venti, iced, nonfat, sugar-free latte with caramel drizzle.