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Like many young people, I knew relatively little about my credit score until one day, it mattered. Whether buying a car or a house, all of a sudden this magic number became incredibly important overnight, and while most of you know that a credit score reflects how responsible you are at paying your bills, there are a million other factors influencing that number, and it can be a daunting task to figure out how to raise it without paying a lot of money.
The first hurdle is of course, to know what the heck that number is for you. There are several ways to get a good idea, but I’ve found the easiest way to build and track your credit is by downloading an app, and check it regularly – I personally use Credit Karma, but there are several out there that do essentially the same thing. Credit Karma gives you 2 scores for comparison, and breaks down various categories so you can see where you’re doing well and where you need some work. It updates on a weekly basis, so it’s a great, free way to keep an eye on things will you’re working on improving your credit.
Let’s start with some credit score basics. First off, there are 3 credit bureaus, and they all score your credit a little differently. Equifax, Experian and TransUnion can all provide you with a score, but they will vary slightly based on a multitude of factors and the importance they assign to each of them. Second, your score will vary based on what type of credit you are applying for – long term, short term, type of purchase, etc. – all these things factor in when pulling your score. Third, and perhaps most importantly – your credit is constantly changing, based on your purchases, accounts you’ve opened and closed, payments you’ve made, the list goes on… so getting an idea of where you stand is incredibly important, because it’s less about the exact number and more about the range.
Now let’s talk about those ranges; credit in the US is generally scored on a sliding scale between 300 and 850. Anything below 550 is considered “bad” – a score in this range indicates to a lender that you are not a responsible borrower, and lending money to you would be extremely risky. Between 550 and 650 is generally considered “poor”, 650-700 is “fair”, and anything above 700 is considered “good”. The magic number for most lenders is somewhere between 720 and 750 – if you can get over this hump, your credit score is considered “excellent” and most lenders will offer you the best rates, the largest lines of credit, and will generally approve you for most credit you apply for.
For those of you panicking right now, keep in mind that a big factor in your credit is time; younger people tend to have less time in their credit history, and thus it’s more difficult to get up to those higher scores. Credit scores are broken down into a number of categories, and one of the main ones is the age of your credit history – if your oldest credit card is only a few years old, and all your other accounts are newer, it’s not surprising that they see you as a “new” borrower, and thus more “risky” to lend to.
Another major category is the number of accounts you have – if you have one credit card, a modest car payment, and some student loans, that’s only a handful of accounts, so once again, they aren’t convinced that you’re a safe bet. Let me add a disclaimer here – do not go open a bunch of accounts you don’t need just to add to the total number of open accounts you have, since opening new lines of credit can actually set you back temporarily. Application for credit (generally known as “hard inquiries”) count against you, and stay on your credit for 2 years – whether you are approved or not – so be careful not to apply for new accounts for the sake of having them.
Now that we’ve touched on some of the basics, let’s talk about the title of this post – how you can improve it right now without paying anything. One of the most important factors in your credit score is your credit card utilization, or how much of your credit you are “using”. Let’s say here that you have a credit card with a $10,000 limit, and you currently have $5,000 on that card. Your credit card “utilization” would be 50%. In this category, the key is golf scoring – you want to keep your utilization as low as possible, without being zero.
Now ideally, you’d pay off that $5,000 and be out of credit card debt, right? WRONG – this is one of the simplest mistakes made because it’s simply not advertised – if you pay off your credit card in full, you now have a 0% utilization, meaning you aren’t using it at all, and this counts against you. Anything below 10% utilization is considered excellent, and since this is one of the biggest factors in your credit, the lower you can get this utilization, the more your credit score is going to jump.
So what’s the simplest solution to this math problem? Raise the limit. Call your credit card company, go to your bank, or go online, and request a credit limit increase. Do it on every single credit card you own, and do it regularly – I request increases about every 6 months or so. Now let’s go back to our $10,000 limit scenario – let’s say you request an increase, and they bump you up to a $15,000 credit limit. Now that $5,000 that you have on your card is only 33% of your total – congrats, you just bumped up your credit score! Let’s say in another few months you increase it to $20,000 – now you’re at 25% utilization!
The beauty of this fix is that it costs you nothing, and most banks are willing to give you an increase even if you have a significant amount on your card. I have heard of them denying increases if you’re maxed out, but keep at it – pay a little down and call again, more times than not they are going to extend you more credit. The only caveat here is that this only works if you don’t use more of the credit they’ve given you… if you put $10,000 on your $20,000 card you’re right back where you started at 50% utilization, and now $5,000 more in debt. So pretend like that extra room doesn’t exist, keep paying down your balance, and lowering that utilization ratio.
A second option for improving your credit is closely linked to the credit card utilization again, but this time in the form of a balance transfer. Many people don’t know what they’re paying in interest on their credit cards, and some of the rates are astronomical compared to other cards out there. In our $10,000 credit card scenario, if you have $5,000 to pay off, but that card has a 16% interest rate on it, you could get a new card with a lower rate, and “transfer” that balance over – let’s say you find a new card willing to give you an 11% interest rate and a $15,000 limit… now that $5,000 balance can be paid off by the new card, “transferred” onto the new line of credit, and overall you have a $5,000 balance out of $25,000 of total credit, and your utilization is now down to 20%!
This is more of a trade-off since you get dinged for opening a new line of credit, but ultimately this will help you – more open accounts, for longer periods of time, used responsibly results in a great credit score. Let me reiterate that you shouldn’t open accounts frivolously, but if you only have one credit card and you can get a better interest rate elsewhere, go for it – and don’t close that old card just because you aren’t using it, because it helps you to keep accounts open for long periods of time. If you already have multiple credit cards, do your research and find which one has the best rates, and transfer your balance there.
Another key way to boost your credit without paying anything is to review your credit report for any errors; if you’ve mistakenly been saddled with a derogatory mark or something sent to collections that you didn’t purchase, call and get those removed. Having a clean record is going to improve your credit, and you’d be surprised how often mistakes are found, so take a close look to make sure you don’t have anything on your record that shouldn’t be there.
Once you’ve exhausted those options, the rest comes down to paying your bills on time, and taking on responsible debt. Credit isn’t about paying things off as quickly as possible, it’s about showing that you can be trusted with other people’s money over time, but there are a few loopholes along the way that can help you out – so use that score as a jumping off point, and challenge yourself to take a closer look at what’s behind it; you might be surprised at what you find.