One of the most dreaded topics of discussion for many adults is credit. After years of studying and repairing my own credit, I felt it was necessary to help others understand this complex topic. I will discuss credit score ranges, the definition of a good credit score, and how to improve bad credit for free.
I do not understand why credit and finance courses are not implemented in a high-school curriculum. A lot of us learn the ins and outs of credit when it’s too late and the damage has already been done. It honestly feels like not receiving the knowledge early on is a setup.
The gullible college student
When I turned 18, every time my dad and I talked, he made sure to tell me that credit cards were the devil. Like a typical teenager, I would just agree and carry on with our conversation. It wasn’t until I was on the phone crying to my mom about Capital One threatening to take me to jail, that I realized my dad was right all along.
Like a typical broke college student, I saw green when Capital One sent me my first credit card. Can you say…..balllllllling!!!! I was buying every outfit Body Shop made and all the drinks at the club for my girlfriends.
That is until I couldn’t pay the card’s minimum payment.
What was originally a $500 balance turned into an $1800 balance. Yessssss!!! That is the correct total! My card balance nearly tripled due to the high APR that was tied to my card.
After the Capital One ordeal, I decided to research ways that I could improve my credit for free. I began to understand how credit works, and how credit bureaus develop a credit score. In roughly a few months, I was able to raise my score by 200 points.
What is a (FICO) credit score?
A credit score is a numerical rating that is populated based on a person’s credit file. Think of it as a GPA. Each of your credit accounts that are reported to one of the three credit bureaus will be graded. The typical credit score range is 300 to 850. The closer your score is to 850 the better it is. When you perform poorly in school, your GPA drops. Credit scores work the same way. If you pay your bills late, your credit score will drop.
How do you build a credit file?
A lot of people think you only build credit by using credit cards, which is wrong. Car loans, student loans, mortgages, utility bills, furniture leases, are home rental contracts examples of accounts that report to your credit file.
You are losing money because of your bad credit
Having good credit is important in our economy. You can have all the money in the world, but it means nothing to a finance company if you have bad credit.
Here are some tips I learned while researching various ways to improve bad credit.
1. Check your credit frequently
Credit bureaus are not perfect and identity theft is real. You want to check your credit regularly to make sure everything that is being reported, is accurate. One of my favorite free credit check websites is credit karma. They provide you with your full credit report and your score. If you see errors on your credit report, file a dispute with the credit bureau. (file a dispute article)
2. You need at least 5 years of credit history
You can accomplish this by being an authorized user on a relative’s credit card. Make sure it is a credit card with a good history. You don’t want to be an authorized user on an account that has derogatory remarks. By being an authorized user, you automatically assume the credit history of the person who opened the account. If your mom decides to add you as an authorized user to her 10-year-old credit card, automatically, you also have 10 years of credit history.
3. Pay your bills on time
Late payments negatively affect your credit. If you know you have a tendency to forget when your bills are due, set calendar reminders. Calendar reminders are a great way to stay organized and on top of your finances. If you know you may fall behind on a bill, call the creditor. You will be surprised at the outcome! Many creditors will work something out with you. Also, be aware that anything paid 30 days after the due date will hit your credit report. Try your best to pay all bills before that 30-day mark.
4. Keep your credit card balances low
You want to keep credit balances below the 30% utilization mark. I have seen a credit drop by almost 40 points due to high credit utilization. If you have multiple credit cards, be sure to keep them all below the 30% utilization mark. If one card is at 10% utilization and the other is at a 60% utilization rate, this will lower your score. For example, if your credit card balance is $1,000.00, you should not have a running balance higher than $300.00.
5. Do not apply for credit frequently
If you need to open a new credit account, only do it once every few years. If you have your credit report pulled multiple times a year, your credit score will drop drastically. Many finance companies say applying for multiple credit accounts in less than 14 days is okay because a creditor will see that you are shopping for the best rate. Personally, I did that when purchasing a new car, and my score dropped quite a bit. My advice would be to shop around for good rates yourself, pick a lender, and only have your credit pulled once.
6. A mix of accounts helps
Having good credit is not all about credit cards. There are many other types of accounts that go on your credit file such as, mortgages, student loans, utility accounts, and much more. If you open different types of credit accounts, you will see an improvement in your score. Credit diversity shows creditors that you can manage various types of accounts simultaneously.
7. DO NOT CLOSE OLDER CREDIT CARD ACCOUNTS!
If you pay a balance off, keep the card open. If you do not want to be tempted to use the card, then shred it. A credit card account will close if there is no activity after a certain amount of time. I avoid account closures by using the account to pay for a monthly reoccurring membership (i.e. Netflix). I also set up a reoccurring bill pay to cover the credit card balance every month.
8. It takes time
Do not stress yourself if you only see minor changes in your score monthly. It takes 30 days for changes to reflect due to credit reporting laws. Continue to work at it and stay focused! The good thing is that many major purchases in life do not require a perfect credit score.
Credit repair alternatives
If repairing your credit on your own is too much for you to handle, you can also pay for credit repair services. There are tons of legitimate credit repair companies to choose from. One of my personal favorites is Lexington Law. They have been in business for many years. Many of my family and friends have used their services and speak very highly of them.
More credit questions? Comment below and lets discuss them together.
Thanks for reading