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I see so many people doing so much extra work (and paying so much extra money!) because they don’t understand how credit works. I used to be one of those people! Paying cash is ‘good enough’ right? Right?! WRONG.
I’ve done my research though, and I’ve pulled it all together for your convenience. Here is what I’ve learned (and some tasks I’ve even tested, and proven) about building a high credit score:
- What determines a credit score
- Where can you get a (free) credit report (this IS NOT the same as a credit score)
- Why isn’t paying in cash enough
- Why do you even need good credit
- How will you raise your credit score by a hundred points or more, in less than 30 days
- How will you remove nicks from your credit, even ones that are YOUR fault
Let’s hop right into it!
Know your Situation
You can see what your credit score is at Credit Karma. Looking at your score through Credit Karma does NOT affect your score.
You can see your credit report at Annual Credit Report. This lets you see exactly what made your credit score (late payments, hard inquiry pulls, etc.). You can only get a report every twelve months, however, there are three reporting agencies: Equifax, Experian, and TransUnion. You can get an annual report from each of them, which means that if you don’t check them all at once, you can get a report every four months.
Payment History– Always pay your debts and credit cards on time, and in full.
How much you owe– Don’t charge your cards more than 30% of their limits.
Length of Credit– Keep your oldest credit card accounts open.
Miscellaneous– Have different types of credit builders. Having at least one credit card and at least one loan will help.
New Credit– Don’t open more than one credit card within a 12 month period.
Find Your Motivation
Having good credit significantly opens up what opportunities you may be presented with, even if you always pay with cash. If you don’t pay cash, you can save ridiculous amounts of money by having good credit. ‘Credit’ isn’t some ‘adulty-not-so-important-thing-of-life’. Your credit score is your financial reputation, and the general public is entitled to see it. You absolutely need that to be a good reflection of you! Here are some ways that good credit can really benefit you (use these reasons as your motivation):
- Your future / current employers can see your credit score &/or report. Especially if you’re applying for a new position or a promotion, your boss can look at your financial history and determine if you’re responsible enough for the job.
- Your potential landlord can see your credit score &/or report. I grew up in a family that rents homes out, and I can confirm that land lords almost always pick the applicant with a better financial history. Don’t lose out on your dream house because of your credit!
- If you don’t have cash to start a business (most businesses require an average start-up cost of $30,000) you need a loan. Your lender’s decision is heavily (if not completely) swayed by your credit score.
- Auto Insurance is absolutely inevitable. You can get discounts on your insurance just by having a better credit score, which is a huge motivator.
- Your home and auto loans are largely based on your credit. If your credit is poor enough, you may be rejected for the loan altogether! Even if you do get a loan, how much you pay varies by your score. Assume you want to purchase a home for $100,000. With a credit score of 780, your APR is 3.1%, or $427.20 / mo. With a credit score of 620, your APR is 4.7%, or $518.64 / mo. Over the course of 30 years, there is a difference of almost $33,000! What would you do with that money you do with that money?
Repair Old Issues
So now that you know your score, and why improving it is really good for you, you’re totally ready to raise it!
Look over your credit reports and see if you can find any errors. Here are common issues you may find:
- They (a business, lender, bank, dealership) didn’t report information that may help build your credit. This could be loans they omitted, types of credit you have, how long you’ve had your credit, or something similar.
- They reported your information wrong. Perhaps there’s accounts that docked you that aren’t even yours. Maybe you have a hard credit pull (inquiry) that you aren’t responsible for.
Credit Karma has a really useful walkthrough to help you dispute any errors. It is so worth your time to dispute these. The worst thing that can happen is that they reject you, and you have to increase your score another, slower way.
See what hard inquiries you have had pulled. These take up to two years to drop off your score, so it is worth it to remove them immediately.
- Find the address of each inquiring creditor. Write the creditor a physical letter (use this template as a starting point), asking for proof that you authorized the inquiry. They have thirty days after receiving the letter to respond with proof. If that doesn’t happen, they are required by law to remove the inquiry. Be sure to mail the letter with a ‘Certified Mail Return Receipt’ requested.
- If they do provide proof, you can respond with an objection (also mailed with a ‘Certified Mail Return Receipt’ requested) saying the language of the authorization was too complicated, and claim you will contact the State Banking Commission to report their deceptive and unclear authorization form, if they refuse to remove the inquiry this time. This should work, but if not, you’re not out anything except for time and mailing products.
Missed / Late Payments
What if you don’t have any issues that are reported wrong, you just have late or missed payments hurting your score? Surprisingly, you may be able to fix those too!
- If you’re in good standing with the creditor / lender, you can politely write a letter requesting that they remove the one late payment. This is called a ‘goodwill adjustment’, and it is best to send a physical (not an email) to the lender.
- If you’re not in good standing (ie, you owe money still) write them a polite letter and promise to pay the remaining sum (either in bulk or in payments) as soon as possible in return for a good report. It doesn’t always work, but it is worth a try.
Find New Ways
Even if you don’t have a credit score yet- worry not. Doing these listed things can really help you create and then build your credit.
- If you don’t already have one, get a credit card. It’s best to start with ONE (you can apply for more later if you’d like). Get your first card from your bank. If you don’t qualify, that’s okay. Secured credit cards are going to be highly beneficial to you. A secured credit card allows you to put down some cash at the bank, into a ‘savings’ account that you don’t have access to. If you put $500 in this secured account, you’re given a credit card with a $500 credit limit. This card looks just like any other unsecured credit card, and you should treat it like one.
- Utilize only 30% or less (10% is ideal) of your credit limit. This helps you appear to be more responsible, and that builds credit. For example, if you have a limit of $1,000 you should only use about $300 of it at most. It also doesn’t matter if you have 300 one dollar transactions, or 1 three hundred-dollar transaction. The Credit Bureau doesn’t look at the individual transactions, just make sure you use your card at least once a month every month, and that you pay it off in full every single month. Create automatic payments if possible (link it to your primary checking account, and make sure your checks direct deposit). Showing that you regularly use your card is really going to boost your score.
- Pay the majority of your credit card back BEFORE payment is due (perhaps leave $10 unpaid). This keeps you from paying so much in interest, but shows you’re utilizing your card. When you get your monthly bill, pay it in full and on time.
- After you’ve had your card a minimum of 12 months, and you feel comfortable with it, you need to boost your credit limit by using one of these two options. Option 1: Call your credit card company and ask for them to increase your limits. If you’ve been good about paying on time, and utilizing 30% or less of your limit, they will most likely comply. Option 2: Get one more card. Having more than one card boosts your total credit limit, which means you’ll be using a smaller percentage of your limit (that is a really good thing). You don’t have to use this card at all if you’re not comfortable with it. The reason why you need to wait that 12 months or more to open another card, is because opening several cards at once makes it look like you desperately need access to more money (which hurts your score).
Credit Building Programs:
Some credit unions allow you to make payments that goes into a secured account (that they can access, but you cannot). They report that you pay on time and in full to the credit bureaus. When you finish (say you put in $1,000) they give you your money back.
If you don’t want to go to a credit building program, you can approach a bank (preferably one you already bank with) for a personal loan. Take the full amount of money they’ll give you, and pay it back quickly. This builds credit, but make sure you ask the bank beforehand if they report to the credit bureaus.
Auto, Student, Home Loans:
It’s best to wait on these loans for as long as you can (so that you can qualify for a lower APR), but when you do, make sure you pay on time and in full. Having a variety of loan types and credit cards will improve your score.
Stay the Course & Reap the Benefits
Don’t take on more debt than you can pay back every month. Keep up the good work of paying on time, keeping your old credit card accounts open, and keeping your credit types secured. Don’t forget to check your credit score, and your free credit reports when available.
Enjoy your low APR rates, your ability to take out larger, unsecured loans, and your overall greater trust with lenders, banks, and businesses.
How do you feel about credit cards? Do you have any advice for new people starting out with credit? Have you ever significantly improved your credit score? As always, thank you for reading!
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