Content of the material
- Kevins Story
- What I Learned from Being Denied for Credit Cards
- How a Secured Credit Card Works
- How To Maximize the Benefits of Your Secured Credit Card
- How I Raised My Credit Score Over 100 Points
- What My Improved Credit Score Allowed Me To Do
- Why You Should Let Your Kids Get a Secured Credit Card
- 3. Pay Your Bills on Time
- What determines your credit score?
- Check and understand your credit score
- 5. Mix It Up
- 6. Do not pay your accounts in collections
- Dispute inaccurate information on your credit reports
- How much will this action impact your credit score?
- 3. Check your credit report for errors
- 4. Dispute Credit Inquiries
- 5. Set up a Credit Monitoring Account
- 4. Be an Authorized User on a Credit Card
- 3. Pay Twice a Month
- 7. Make On-Time Payments
- Establishing or Building Your Credit Scores
- How to Fix Your Credit Score Fast
- Review Your Credit Report
- Sign up for Experian Boost
- Game the FICO System
- Become an Authorized User
- The bottom line
As a junior and senior in college, I was always told that applying for a credit card could be my first step in the wrong direction. With a credit card in hand, my parents worried I would spend money I couldn’t pay off and build a lifestyle I couldn’t really afford, rather than learning to save money.
While these are legitimate concerns, I had to let them know I felt as if I had some control over my spending. My response was always the same: “How would I know until I was able to try for myself?”
What I Learned from Being Denied for Credit Cards
When I was finally prepared to get a credit card on my own, none of the banks I applied to would give me a chance.
It went like this: “I am unemployed, have no credit history, and have a couple of thousand dollars in college debt that I will have to start paying on in the next year or two.”
Not exactly a winning pitch to convince someone to give you a line of credit! Two banks denied me, but one banker was kind and shared some info that has helped me raise my credit score over 100 points in the past five months.
First, I should stop trying to apply for credit cards that would get denied. His reasoning was simple: when you apply, they do a hard credit check which, in turn, can lower your credit score even more.
His second piece of advice was to get a secured credit card.
How a Secured Credit Card Works
He told me that no major bank was going to accept my credit application, but there was actually an alternative option available – one which was especially perfect for those in my exact situation: to sign up for what is called a secured credit card.
While the terms for these are horribly one-sided in favor of the lender, I assure you it is a small price to pay for the result you receive after only a few months.
With secured credit cards, you give the lender a cash deposit up front, and that cash deposit is typically equal to your credit limit.
This process truly confused me at first, since I thought the deposit was money I could actually spend. What I learned, however, is that the deposit is there in case I default.
I couldn’t spend the deposit itself, but I would get it back if I kept my account in good standing until I closed the card.
After you make your deposit, secured cards are also treated just like traditional credit cards. Your secured card will typically look and act just like a regular credit card, so no one will know it is secured.
There is also an annual fee associated with most secured credit cards, but I felt it was a small price to pay for the opportunity to build some credit history.
How To Maximize the Benefits of Your Secured Credit Card
When I first checked my credit score with MyFICO in March of 2011, it was sitting at 621.
I set up my new secured credit card with a credit limit of $1,100. The credit limit should be a function of what cash you have, and also what you plan on using the credit card for.
According to many bankers and friends I talked to, you should try to run a 75% utilization rate on your credit card to maximize your potential to raise your credit score.
So, if you only spend around $300 a month, you should give your secured credit card a $500 down payment so that you are utilizing your credit rather than having a $1,000 dollar limit and only spending $300.
My expenditures were approximately $700 dollars a month so the $1,100 dollar limit fit my needs.
How I Raised My Credit Score Over 100 Points
Raising my credit score with a secured card took some disciplined, conscientious spending.
Here are the rules I followed to maximize the benefits of my secured credit card.
- Spend what you have: After I received my secured card and started spending, I made sure that I would only spend money I already had or would receive, before the next pay period.
- Pay often: I ended up paying off my credit card roughly four times a month to ensure I never carried a balance from one month to the next.
- Know your limits: I would never let my credit limit exceed $800, and I would never pay it off if the card balance was under $300 unless the pay period was coming to an end.
- Make purchases: I would put every penny of my spending on the credit card – from the smallest expenses such as a drink from the gas station to major purchases such as airline tickets or hotel rooms.
- Be consistent: I repeated this process for 5 months to establish a credit history of regular use and always paying on time.
What My Improved Credit Score Allowed Me To Do
In August of 2011, I had to purchase a car so I could switch jobs.
When I filled out the credit application to see if I qualified for lower financing rates, my credit score came back as 731.
In other words, I raised my credit score from 621 to 731 in just five months!
This is a very big deal because, at 621, I would have been denied a loan for the car, or would have had an interest rate that exceeded 9% on the auto loan.
Since I chose to get a secured credit card, I was able to take the car loan on my own and qualify for the low rate of 3.99% financing.
The difference in the loan between the two interest rates would be $750 over the life of the loan, far surpassing the card’s annual fee, and the opportunity cost of my secured credit card holding my $1,100 for five months.
Why You Should Let Your Kids Get a Secured Credit Card
To all of the parents out there who worry about letting their college kid apply for a credit card, I can tell you it worked for me in five months and will change my financial future for many years to come.
Secured credit cards offer a foolproof way to raise your credit score when it is not possible through a regular bank credit card.
It’s a safe way to earn credit if you do not trust your kid to spend responsibly.
The worst that can happen with a secured card is that you cannot pay your bill, your company closes out the account, and they pay off your credit with the money you already have on deposit.
My secured card worked perfectly for me and I have now been accepted for a credit card with a major bank.
3. Pay Your Bills on Time
This may sound elementary, but if you can’t pay your bills on time you’re going to have a hard time raising your credit score by 100 points. This is the number one concern of lenders. The best way to pay your bills on time is to get organized and set up automatic payments. The majority of the bills we receive are predictable and putting your utility bills, credit card bills and car payments on automatic payment will assure that you at least pay the minimum amount due.
What determines your credit score?
Five factors make up your FICO score calculation:
- Payment history: 35% of your score
- Credit utilization ratio: 30% of your score
- Average age of credit: 15% (a longer credit history will raise your score)
- Credit mix: 10% (a mix of installment accounts like car loans are better than revolving credit accounts like credit cards)
- New credit: 10% (opening too many new accounts and having too many credit inquiries over a short period can lower your score)
An improvement in any of these categories can help boost your credit score. But to see the biggest impact, make sure you pay all your credit accounts on time and keep your credit balances below 30% of their total limit.
Check and understand your credit score
It’s important to know that not all credit scores are the same, and that they fluctuate from month to month, depending on which credit bureaus lenders use and how often lenders report account activity. So, while you shouldn’t worry if you see your scores rise or fall by a few points, you should take note when a big change occurs.
The two main consumer credit scoring models are the FICO Score and VantageScore. Here are the factors that comprise your FICO Score and how much each factor is weighed:
- Payment history (35% of your score)
- Amounts owed (30% of your score)
- Length of credit history (15% of your score)
- Credit mix (10% of your score)
- New credit (10% of your score)
Here are the factors influencing your VantageScore:
- Total credit usage, balance and available credit (extremely influential)
- Credit mix and experience (highly influential)
- Payment history (moderately influential)
- Age of credit history (less influential)
- New accounts (less influential)
There are a variety of options for checking your credit score for free.
For example, Discover cardholders can get a free FICO Score from the Discover Credit Scorecard, or anyone can get a free VantageScore by creating a LendingTree account. American Express and Capital One also offer free VantageScores to both card account holders and the general public, though many other card issuers offer free access only to their cardholders.
Here are the tiers that credit scores can fall into, according to FICO:
|FICO Score tiers|
|800 or more||Exceptional credit|
|740 to 799||Very good credit|
|670 to 739||Good credit|
|580 to 669||Fair credit|
|580 or less||Poor credit|
5. Mix It Up
A few years back, I realized I didn’t have much of a mix of credit. I have credit cards with low utilization ratios and a mortgage, but I hadn’t paid off an installment loan for a couple of decades.
I wanted to raise my score a nudge, so I decided to get a car loan at a very low rate. I spent a year paying it off just to get a mix in my credit. At first, my score went down a little, but after about six months, my score started increasing. Your credit mix is only 10% of your FICO score, but sometimes that little bit can bump you up from good credit to excellent credit.
I wasn’t planning on applying for credit within the next six months, so my approach was fine. But if you’re refinancing your mortgage (or planning something else really big) and you want a quick boost, don’t use this strategy. This is a good one for a long-term approach.
6. Do not pay your accounts in collections
If a collection agency will not remove the account from your credit report, don’t pay it! Dispute it! A collection is a collection. It doesn’t help your score AT ALL to have a bunch of collections on your report with a zero balance. The only way your credit score will improve is by getting the collection accounts removed from your report entirely.
Don’t pay collection accounts without a pay-for-delete letter. A “pay for delete” is an agreement that you will pay the outstanding debt if the collection company deletes the account from your report. You may be able to settle the balance for less than you owe, but many will want you to pay in full if they are deleting it from your report.
Dispute inaccurate information on your credit reports
Sometimes, your credit score might suffer because something wound up on your credit reports that shouldn’t have been there. Of course, you won’t know unless you check them.
Under normal circumstances, consumers are entitled by federal law to one free credit report every year from each of the credit bureaus — Equifax, Experian and TransUnion — accessible through annualcreditreport.com. However, during the coronavirus pandemic, the bureaus are allowing consumers to access their reports weekly through April 2021.
If you spot legitimate, incorrect information while reviewing your reports, such as accounts that aren’t yours, a name mix-up with another person or incorrectly reported payments, you can file a dispute. The Consumer Financial Protection Bureau, a federal agency responsible for protecting consumers and offering financial education, provides dispute instructions for each bureau.
It’s worth taking a look at your reports, even if you have no reason to suspect there might be a problem. According to a report from the Consumer Financial Protection Bureau, 68% of credit or consumer reporting complaints received by the bureau in 2020 dealt with incorrect information on people’s credit reports.
How much will this action impact your credit score?
Whether your credit score changes and how much it changes depends on what you are disputing.
While some disputes might be resolved within two to three days or within a couple weeks, it could take up to 30 days in other cases; if you’re asked to provide additional information regarding your dispute, that could extend the time frame further.
For example, if there was a late payment inaccurately listed on your credit reports, getting that removed is likely to cause a big improvement in your score. On the other hand, disputing a wrong address won’t affect your credit score in any way.
3. Check your credit report for errors
One way to quickly increase your credit score is to review your credit report for any errors that could be negatively impacting you. Your score may increase if you are able to dispute them and have them removed.
About 25% of Americans have an error on their credit reports, so it's important to take the time to review. Some common errors to look out for include fraudulent or duplicated accounts, as well as misreported payments.
"Most of the clients we meet with have not reviewed their report within the past year, and are often surprised by what we find to discuss with them," says Thomas Nitzsche, a financial educator at MMI.
4. Dispute Credit Inquiries
Credit inquiries will affect your credit score for 12 months. But, you can dispute hard inquiries on your credit profile and have them removed, I wouldn’t try this until you have disputed more important account information first.
Call the credit bureaus to dispute inquiries. The creditor has to verify you authorized them to pull your credit. Inquires aren’t removed often, but I have seen some removed from credit reports before, so it’s worth a shot.
5. Set up a Credit Monitoring Account
One of the best ways to stay on top of your credit score is to work with a paid or free credit monitoring system. Many financial organizations will offer complimentary credit monitoring services.
Use services that provide you with real-time alerts and free credit score tracking. If you see inaccuracies on your credit report, these monitoring accounts will allow you to open online disputes immediately. Monitoring your financial accounts will also help you detect possible fraud quickly to minimize risk. Ideally, every time your account balances change you should be notified and your monitoring system should keep track of your credit utilization ratio.
4. Be an Authorized User on a Credit Card
Having a family member with a higher credit score than yours can add you to their credit card as an authorized user. Doing so can positively affect your credit score when the card has a long account history, on-time payments and a low credit utilization ratio.
3. Pay Twice a Month
Let’s say you’ve had a rough couple of months financially. Maybe you needed to rebuild your deck (raising my hand) or had to get a new fridge. If you put big items on a credit card to get the rewards, it can temporarily throw your utilization ratio (and your credit score) out of whack.
You know that call you made to find out the closing date? Make a payment two weeks before the closing date and then make another payment just before the closing date. This, of course, assumes you have the money to pay off your big expense by the end of the month.
Take care not to use a credit card for a big bill if you plan to carry a balance. The compound interest will create an ugly pile of debt pretty quickly. Credit cards should never be used for long-term loans unless you have a card with a zero percent introductory APR on purchases. Even then, you have to be mindful of the balance on the card and make sure you can pay the bill off before the intro period ends.
7. Make On-Time Payments
If you miss your payment due dates, stop.
Your payment history is the most influential credit score factor with a 35% weighting. Even if you can only make the minimum payment, your account remains in good standing—and you avoid late fees.
Establishing or Building Your Credit Scores
Depending on your experience with credit, you might not have a credit report at all. Or, your credit report might not have enough information that credit scoring models are able to assign you a credit score.
With FICO® Scores, you need to have at least one account that’s six months old or older, and credit activity during the past six months. With VantageScore, a score may be calculated as soon as an account appears on your report.
When you don’t meet the criteria, the scoring model can’t score your credit report—in other words, you’re “credit invisible.” As a result, creditors won’t be able to check your credit scores, which could make it difficult to open new credit accounts.
Some people may be in a situation where they’ve only opened accounts with creditors that report to only one bureau. When this happens, they may only be scorable if a creditor requests a credit report and score from that bureau.
If you’re brand new to credit, or reestablishing your credit, revisit step one above.
How to Fix Your Credit Score Fast
Review Your Credit Report
Begin by investigating your credit report for negative information and have it removed. Yes, such things are entirely possible.
- Request your full, free credit report. You are owed one per year from each of the big three credit-reporting agencies: Experian, TransUnion, Equifax. One in five credit reports contain errors and/or omissions that can significantly drop your score. Vigorously dispute every discrepancy; provide copies of documents that support your claims.
- For accounts in collections, explore “pay to delete,” a method of removing negative information by negotiating a settlement with the agency holding your bad debt. Get the agreement in writing before you send money.
- Send “goodwill” letters to creditors with whom you’re having difficulties. Typically, goodwill letters are short, simple, pleasant, and direct requests to lenders asking them to remove negative entries. Creditors are not obligated to oblige, but you may strike pay dirt, especially if you’ve had only a few blemishes with the company in an otherwise punctual history.
Sign up for Experian Boost
If your low score is primarily the result of being new to the credit-seeking game and you are timely with your payments for utilities and your cell phone, ask the lender to pull a report from Experian, using its “Experian Boost” plan. This hybrid model draws on what the industry calls “alternative credit data” — non-traditional payments that provide lenders useful insight into an applicant’s creditworthiness.
The way forward gets a little steeper from here, so it’s a good idea to know what you’re up against.
Game the FICO System
Of the five categories influencing your credit score, there’s really only one you can influence significantly short-term: your credit utilization ratio.
Pro tip: Make sure payments arrive before the statement closing date. That way, lower balances get reported to the FICO and the big three.
Most other factors being equal, consumers with scores in the upper 600s — the bottom of the “good” range — have credit utilization ratios between 40-50%. To get into the 700s, your utilization must sink below 30%. If you’re in a hurry to help your score, use under 15%. The less you use, the better.
Fixing this is a cinch … if you have a fat savings account or maybe a wealthy (and generous) uncle. Otherwise, you need to find extra money in your budget (or extra income in your month), combined with spending discipline, to whittle down those balances.
Another way to attack high balances is with a debt-consolidation loan — if you can swing it. Present your plan to a bank or credit union, or go online to any of the assorted peer-to-peer lenders and you may be able to zero out your credit-card balances at the same time you secure a lower interest rate than you were paying Visa.
We’ve read here and there another way to lower your credit utilization ratio is to seek a boost in your balance limits from your current lenders. The mathematics of this gambit are undeniable, but the idea of seeking higher balances when we’re having trouble managing the balances we have makes our stomaches ache.
Become an Authorized User
If you have a mystifyingly benevolent parent with impeccable credit, ask to be added to his/her account as an authorized user. This will not only help your credit utilization (ideally the added account doesn’t have a high balance) but it should also lengthen your credit history. Remember, this card is strictly for a credit boost, so do not under any circumstances, use the card when it arrives in the mail.
The bottom line
As it is with many of life’s problems, there’s no better time to address the issue than now. By making on-time payments and carefully assessing your financial needs, you will be on the right track toward building strong credit.
Keep in mind that the path to financial recovery takes time, sometimes even years. But regardless of the dilemma you may find yourself in, a proactive approach is the best way to tackle financial recovery. And your credit score will thank you in the long run.