In November 2014, I wanted to start building credit. I got tired of spending money with cash and not getting credit for it. It doesn’t take any more effort to use a credit card rather than to use cash. In fact, it actually takes less effort because I don’t have to plan out my purchases in advance, unlike when I’m buying things with cash. Back then, I opened my first credit card and didn’t start with any credit score. Fast forward, I’m now increasing my credit score (I’m at 743 now) and will share tips on how to increase it.
Right now, I upgraded from 1 credit card to 5 credit cards. I tried desperately to get a credit card with limited income and managed to get a Discover It card for students with a whopping $800 credit limit. No credit history, limited income, and a lot of time was what I had. To this day, I still hold that card and use it with pride. Since then, I moved up from having no credit score to commanding a 743 (762 at its highest 2 months ago) credit score. The first score given to me was a 682, which was acceptable / “good” but not great.
Increase Credit Score and Lower Stress
The 3-digit FICO rating is more important than you think. James Altucher recommends us not to pay off our credit cards because the only repercussion you will get is your credit score being slashed. Hedge funds buy our credit card debt at a significant discount in the end, anyway. He also doesn’t remember the last time that he needed his credit score. I wholeheartedly and respectfully disagree. The 3-digit score means a lot to others who are interested in our credit history and there are numerous people who could potentially be interested in our credit history.
Having high credit card debt is stressful. Not only does it affect the present interest rate, it affects future interest rates as well. Money causes the most stress among Americans today, don’t let something that you control be the cause of your stress!
Credit Score Tiers:
- Very Risky: 300 – 579. Interest rates are the highest in these tiers (if they even approve these applicants). A secured credit card gives you the best chance at building credit from here. A secured credit card requires you to put money down and you can only spend the down payment.
- Below Average: 580 – 669. Rates are slightly better and there are better chances of getting a credit card. In the lower range of 580, credit card companies still may require a secured credit card to build credit.
- Good: 670 – 739. More than half of credit card companies should accept you. Rates may still not be the best. Could be around the high teen – 24% APR rate.
- Very Dependable: 740 – 799. Most credit card companies approve applications. Rates are in the mid teens (my current rate is around 14.49% APR). Credit limit significantly improves as well (I went from a $800 combined credit limit to $30,000 combined credit limit).
- Exceptional: 800 – 850. Best rates with credit card companies begging you to apply for their cards. You’ve made it and additional credit score increases only matter for pride now.
Here’s a graph form if you prefer it in visual terms.
Understanding the Mechanics
I didn’t understand how credit card scores worked until maybe 6 months after I had it. As always, knowledge is power, and being educated will guide you to where you want to go.
Payment history determines your credit score the most (35% of it). This goes almost hand in hand with the length of your credit history. The longer you’ve been paying down your debt, the better your score will be. The next highest determinant is the amounts you owe. In another words, it’s your credit utilization ratio.
Credit utilization ratio is the percentage of your whole credit that you use month to month. It’s based on your combined credit. For example, I have 5 credit cards totaling $30,000 in combined credit limit. A good number to shoot for is a 20-30% utilization ratio. However, I will try to never use $6000 – $9000 per month (at least for the next 5 years).
I spend around $1100 – $1500 per month in expenses and charge around $500 – $750 of that to my credit card. My credit score has NOT increased that much over the last year (713 to 746) and I attribute that to 1) my credit utilization not within the guidelines and 2) applying for multiple credit cards a year. My 23 year-old friend has over a 800 credit score because his credit utilization is in-line and only has 1 credit card.
The last 20% that determines your credit score is self-explanatory and I’ve outlined the most important aspects of your credit card above.
Why Credit Score Matters
These days employers (especially banks) check your credit score when it comes to hiring. One or two negative reports don’t make or break you. However, consistent negative reports act as red flags to an employer. Companies state that they do this to prevent thefts from happening. They are scared that lower credit score applicants could potentially steal from the company as a result of having debt. While I don’t completely agree with their logic, they still reserve the right to check credit scores.
According to Credit Karma, a mortgage applicant with a 650 credit score going for a 30-year $400k mortgage could pay more than $70k in interest over someone with a 750 credit score. $70,000 is 27% more than I make in a year! A simple 3 digit score can save you lots of hours working to make money for your debt. Once you have an 800+ FICO score, your rates are the best that it can be for mortgages.
When you have a credit score in the very dependable / exceptional range, it opens up a world of great credit cards that pay you lots of money to spend on things you were going to spend on anyway. I have 5 credit cards and the lowest credit card cash back rate is 2% per month.
I average more than 2% cash back a month because I have a rotating 5% cash back category credit cards and a 3% cash back on groceries spent. I want to maximize the rewards that I get and if I include signup bonuses that I get, it makes complete sense for me to have the credit cards that I have.
Steps to Take to Increase Credit Score
Have an Appropriate Credit Utilization Ratio
Shoot for a credit utilization ratio of 20-30%. If you’re in the higher range of 60-100%, then apply for a credit limit increase and make sure not to spend that increase if you get it. If you had an $800 credit limit and used $500 of it, increasing your credit limit to $1200 and using the same $500 helps your credit score! It does take a little bit of time to prove that you can utilize credit responsibly, so it does take patience when it comes to building or repairing credit. If you’re overusing your credit card, it’s time to take out the unnecessary expenses.
Don’t Open Multiple Cards in a Short Time
One of the reasons why my friend has a 800+ credit score while I have a mid 700 credit score is because of the amount of cards I open up. I open up close to 2 cards a year because I want to maximize my cash back rewards that I get. I pay my full balance bill every month and never missed a payment, but the amount of new cards I open up don’t appease credit bureau’s worries. A rule of thumb to use is opening up 1 card every 9 months – 1 year, if that’s even needed.
Monitor Your Credit
Every year, we’re allowed 3 free credit reports, one from each major credit bureau. The government recommends Annual Credit Report. I space my reports out so I check my report once every 4 months from a different bureau. It gives you clues to whether your identity has been stolen or not, disputes needs to be made, etc. Don’t want any surprises down the road!
A good credit score saves you thousands of dollars over your life. Not just that, it can help your potential employer choose you to hire. It’s not right for you to not have a high credit score when it’s all controllable. A good score opens up so many doors because you’ll be flooded with credit card offers, some of which are great.
So start today and enjoy those savings and credit card rewards!
Readers, do you check your credit often? What are you doing to increase your score? Let me know in the comments below!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
Read more about me here.