How to Improve Your Credit Score and Life
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Oh, the world of credit. We hear about it everywhere.
Your credit score determines if you can open a credit card, get a loan for a car, or buy a house. It essentially determines your future. I don’t know about you, but I think it’s pretty unfair that one thing can dictate how we live our lives.
Chances are, if you’re reading this, you need a little help to improve your credit score. Don’t worry, we all need a little help now and then. I know when I was first starting out life as an adult I had no idea how any of this stuff works. However, I quickly figured out that there’s a lot that goes into a credit score and what makes up a good one.
Since my goal of this blog is to guide people in figuring this whole life thing out, I thought it would be kind to share my experiences with the credit world. Because after all, it makes up a big chunk of our lives, and it’s something a lot of people don’t fully understand.
How Your Credit Score Works
The first step to improving your credit score is learning what the heck it actually is.
I’ll tell you right now, I had no idea what a credit score actually was or how it worked. I just knew it determined if you could open a credit card or get a mortgage. But after being exposed to different lines of credit in my 4 short years of moving out of my parent’s house, I quickly figured out what it is and how it works.
So like I said, learning how to improve your credit score starts with understanding what your score is. I know everyone’s heard of a credit score, but what actually is it?
Well, a credit score is a number based on a person’s credit files. Now there’s more to it, but that’s essentially what it is. A collection of a person’s credit files combined to form a number that plays a huge role in that person’s life. This determines whether someone is eligible for a line of credit (loan, credit card, mortgage, etc.), what rates they will get, and their credit limit.
So what are these files that make up the score?
For a person who has a credit score, it’s based off of their lines of credit. So to put it plain and simple: their credit score is based off whether or not they’re in good standing with their lenders. That means if they pay their bills on time and are reliable and trustworthy to loan more money to.
Now if you have never opened a line of credit (credit card, loan, financing, that sort of thing), then your credit score is essentially non-existent. It’s not at zero and it’s not at 300. It just doesn’t exist.
And that’s because you have no credit history. So there’s nothing to base the score off of. You might be wondering how you can improve your credit score if you have no credit history. That will be discussed further down. 🙂
There are different types of scores, the most common being the FICO credit score. The ranges differ slightly, but they are between 300 and 850. A credit score of 300 means you have really poor credit, and 850 means your credit is perfect.
It is important to have good credit, and understanding how it works is the basis for a good credit score.
Hard Hit vs. Soft Hit
Hard hits, also known as hard inquiries, have an effect on your credit score. A hard hit means that a financial institution is viewing your credit report to determine if you should be approved or denied. I always feel self-conscious when I get denied because it feels like a personal attack on me (although it only happened once over a year ago).
Every time you apply for a line of credit, whether it be for a credit card, loan, mortgage, or other financing, your credit takes a hard hit. Each hard hit lowers your credit score about 5 points. After so many hits, your credit score can start to really go down.
That’s why you want to minimize the amount of hard inquiries you are “charging” to your account.
Hard inquiries stay on your credit for 2 years or until the account is closed. If you have too many, your credit score will suffer, so don’t apply for too many lines of credit at once.
A soft inquiry does not affect your credit score. Rejoice! These are typically credit inquiries that can happen without your permission. An example is a background check. Some employers check your credit when they perform a background check. The good thing is that it doesn’t affect your score.
Another example of a soft hit is when you check your own credit score. Using a company like Credit Karma to check your credit score does not hurt your score at all – I usually do this once a month just to see where I’m at.
For more information on soft & hard hits, you can visit the Credit Karma page here.
To keep track of my credit score, I use Credit Karma.
It is 100% free and gives you an update on your credit score. Credit Karma also shows what lines of credit you have open and gives you tips on improving your score.
However, it is a bit off sometimes. When I applied for my credit card, my credit union told me my credit was really good, like 760. Credit Karma, however, was around 708. Nevertheless, it is still a great way to get an idea of your credit score, inquiries, and open lines of credit! There is no need to pay to check your credit score, so just stick with Credit Karma.
How to Improve Your Credit Score
When I started college, I knew nothing about building credit. Over the last 4 years, I’ve taken out loans, leased a car, and opened my first credit card, introducing me to the world of credit. Here are the things I’ve learned along the way, and trust me, they really do work.
However, like all great things, improving your credit score takes time. It will not happen overnight. Sorry, that’s just not how it works.
There is no “super fast” way to build up your credit. But, if you listen to these tips and actually know how your credit score works, you’ll be in good shape as quick as possible.
Good Credit Utilization is Key
What is credit utilization and why is it key?
I’m so very glad you asked because it’s one of the most important things you need to understand about your credit score. Once you know about credit utilization and how yours can be in good or excellent standing, there’s not much more you need to know.
So, turn your brain to memory saving mode and take in everything that comes next.
Credit utilization is the ratio of your credit card balance to your available credit.
To maintain good or excellent credit, it is suggested you only use up to 30% of your available credit. It is even recommended you stay around 20% credit utilization. Sometimes it’s not always possible to stay near 20%, but you should never exceed 30% credit utilization.
Many people don’t realize this and they max out their credit cards – this is one of the easiest and most common ways people end up with bad credit. DO NOT MAX OUT YOUR CREDIT CARDS!!
Credit card companies want to see you using your credit card, but not using it too much. A high utilization rate typically indicates that the borrower (you) won’t be able to pay the money back. Therefore, your credit takes a hit.
You need to show your lenders that you are responsible with money. This will allow you to get higher credit limits. Once your credit limit is higher, so is your available amount under that 20% (or 30%) utilization rate.
For example, say my credit limit is $5,000. I can charge between $1,000-$1,500 (20-30% utilization rate) of purchases with my credit card per billing cycle. If I stay between 20-30% utilization, lenders will be more willing to trust me and I’ll be more likely to get a credit limit raise. But remember, lower utilization is better.
You should also note that in order for your credit utilization rate to be greater than 0%, your purchases need to be on your billing statement. Once they’re on there, you can pay off your balance. If you pay it off too soon, your credit report won’t show any credit utilization, thus not helping your score.
I personally only use my credit card to boost my credit score and gain rewards points. It’s only used for small purchases, such as groceries or eating out. And I always make sure to pay it off each month.
Pay Off Your Credit Card Balance Each Month (and On Time!)
Continuing into the next tip, always pay off your credit card each month. And always make your payments on time!
Credit card companies can have very high interest rates. When you leave a balance on your credit card, you are being charged interest, and sometimes this can be a very high percentage.
My rule: when I can’t afford to pay for something in cash, I will not put it on my credit card. If I don’t have the money and I know I won’t have it in time to pay my balance, then I can live without it.
Have Several Lines of Credit
Most of the time, financial institutions like to see that you’re in good standing with a variety of accounts.
For example, it is good to have a mortgage and a credit card. While it may not sound like a good thing for your wallet, it is certainly good for building your credit.
However, you should always make your payments on time and keep your credit utilization low. This shows that you are not a risk because you are paying back the money you borrowed and you aren’t borrowing too much.
If you don’t need several lines of credit or cannot afford them, do not apply for and open them. This is not only bad for your credit (because you can’t make payments), but it’s not good for stress or living a comfortable life. Only borrow what you can pay back each month and nothing more.
DO NOT apply for lines of credit if you can’t afford the hit(s) or the payments. This will just ruin your score and make opening new lines in the future more difficult.
Join a Credit Union
Why a Credit Union? Because they’re awesome. And they are NOT-FOR-PROFIT, meaning they aren’t serving you just to serve their big, fat wallets like banks do.
I was in high school when I opened my first checking account, which was through Chase Bank. Last year, however, I switched to a credit union and I’m very glad I did.
For starters, I tried getting the Amazon Rewards Credit Card through Chase Bank and I was rejected. Nobody likes rejection. 🙁 A week later, I went to my credit union and was approved for a credit card that very same day. I was even given a $2,500 credit limit – at the age of 19.
If you are having difficulty getting a credit card, try going to a credit union. They can help you improve your credit score – I’m proof of that.
Another example of where the credit union saved the day was when we were trying to buy a tractor.
We went to a Kubota store and Ian applied for their 0% financing program on a $20,000 tractor. He had just bought a house (at 23!) and knew his credit was good (minus the hard hits from the mortgage). However, he wasn’t eligible for the tractor financing, so we had to figure something else out.
We decided to buy a used New Holland tractor for $12,000. He went to his credit union and was approved for the loan within a week. Yes, it is a significantly smaller loan, but we were able to get that loan without a problem and we should have just done that from the beginning. Ian would have one less hard inquiry if he would have gone to his credit union first.
Credit Unions also have better rates and fees than banks, as they are nonprofit institutions. I recommend switching to a credit union if you’re not already a member of one. They are amazing and don’t take tons of tax breaks and charge ridiculous rates like the big banks do.
Have Someone CoSign With You
This is what got my credit started. And it can help get yours started, too. Because we all know that opening a line of credit on your own if your credit is non-existent is pretty much impossible to do.
I was only 17 when I started college and I needed about $3000 more to cover my freshman year’s tuition. Unfortunately, I had no savings so a private student loan was the only option. One of my aunts so kindly cosigned on a loan with me.
Since it was in both of our names, and I was making the payments, I had an active line of credit and my payments were always made on time. This started building my credit. I even paid it off in less than a year (because it was at 10% interest!).
What also helped build my credit was leasing a car. A few months after I took out that private student loan, I also started leasing a car. I didn’t have a car or money and didn’t know what other options there were besides leasing (there are a lot btw so don’t lease a car because there are smarter options out there).
So, another aunt of mine cosigned the lease with me, and again I made the payments which were always on time. It was a 3 year lease but I ended up paying it off 7 months ahead of time for several reasons.
So by the age of 20, I had 2 lines of credit paid in full ($12,000+). Checking Credit Karma at the end of this, my credit score was at 710. It’s definitely not perfect, but for a 20 year old, it’s great.
And it’s what helped me open my credit card at the age of 19 with a $2500 credit limit, which I can probably raise if I needed to. I’ve also been able to open up other lines of credit, like the one to get our foundation fixed – a max credit limit of $8200. Not bad for a 20 year old!
Credit Cards for College Students
As mentioned earlier, I had difficulty finding a credit card until I went to my credit union.
However, there are certain companies that offer special cards for college students. I had no idea that these existed when I was looking for a credit card, so hopefully they help you. There is also one that is good for non-students (check out the Journey Student Rewards from Capital One).
Below are some of the best reviewed student credit cards around:
Discover it For Students: This credit card doesn’t have an annual fee. It has a rewards rate of 1.00%, gives you a bonus for being a new cardholder, and a bonus for good grades! Some of my friends have this card and like it.
Citi ThankYou Preferred Card for College Students: The Citi Preferred Card also has zero annual fees, offers 1 point for every dollar you spend, and offers a sign-up bonus.
Journey Student Rewards from Capital One: As with the Discover and Citi cards, the Journey Student Rewards card offers $0 annual fees, a 1.00% rewards rate, and they offer a bonus for making your payments on-time. This card is even eligible for non-students — which is great if you have bad credit and are trying to improve your credit score.
I really hope this answers your questions about your credit score and how to improve it. However, this is not intended to be professional advice, so do not act based solely on my recommendations. Do what is best for you in your situation, and don’t do something you’re unsure of.