If you want to buy a house or get a good interest rate on a car, you need a good credit score. Check that, you need a great credit score.
And if you want to get the absolute lowest rates, you need a perfect credit score.
So, how do you get a perfect credit score, or at least a score good enough to qualify for a loan? I've got some credit card hacks you're going to want to implement.
While there's no "tricking" the system, there are expert ways to improve your credit score fast.
Let's get at it.
What is a credit score?
Your credit score is a numerical representation of how well you handle your financial obligations and how well you may handle future debt.
Whenever you take out a loan or get a credit card, for example, your history with those companies are reported to major credit bureaus.
The credit history shown in those bureaus gets analyzed and a number gets calculated based on your credit history.
This number is your credit score and can be used by lenders to determine if you should be approved for a loan, what your interest rate should be, if you need a down payment, and it can even be used when deciding to let you move into a new home or if you’re eligible to work at certain jobs.
Your credit score is going to fall within a range of 300-850. It is calculated based primarily on your current open debt obligations and your past history with repaying debts.
There are many other factors that can hurt or help your credit score, and we’ll get into that a bit more further down.
Benefits of having a good credit score
Having a good or bad credit score can affect many aspects of your life and can easily influence your quality of life.
Having a good credit score can mean the difference between being able to get a mortgage, or having to rent an apartment.
A good credit score can also heavily influence the interest rates you pay on money you need to borrow. Someone with a good credit score can go buy a car and get a 3.9% interest rate on their loan.
Another individual may go buy that same car, but have less-than-stellar credit, and end up paying 12.9% interest. This can mean the individual with the lower credit score may end up paying thousands of dollars more over the life of the loan.
If you were to have an emergency come up that could not be covered by your emergency fund (you do have an emergency fund, right?) then do you think the bank would give you multiple thousands of dollars without any collateral to back it up?
Individuals with higher credit scores are better prepared for emergencies and unforeseen circumstances.
Your personal life can even be affected when it comes to your credit score. There are many amazing jobs out there, life-changing jobs, that you may not be eligible for with bad credit.
This can include various high-paying commission jobs like mortgage loan originators or financial sales, security positions, many government jobs, and even political jobs.
How is a credit score calculated?
Equifax, Experian, and TransUnion - These are the three main credit reporting bureaus that your financial history and debt obligations are most likely reported to.
Sometimes creditors report to just one or two bureaus, sometimes all three. Each credit bureau may have a different score for you, but it will almost always be very close to what the other bureaus are reporting.
Here’s a breakdown of how your score is calculated:
If you show a history of being able to juggle many different types of loans, credit cards, and other obligations, your score will positively reflect that.
If you simply have two credit cards but nothing else, it could potentially hold you back.
Having freshly-opened accounts on your credit history can be negative. If you’re about to apply for an auto loan or a mortgage, try not to open any new credit cards as it may affect the interest rate on your loan.
The longer the history of your debt obligations, the better. If you just took out a loan two months ago then that’s not really enough time for a lender to see how responsible you are.
Alternatively, if you’ve had the same credit card for 10 years that you pay on time every month, that will certainly boost your score.
This isn’t an exact dollar figure, but a ratio of how much you owe compared to how much credit you originally had available.
A credit card with a $10,000 limit and a $3,000 balance looks great.
A credit card with a $10,000 limit and a $9,750 balance is not so hot.
The most important factor in calculating your credit score is how well you do with making timely payments.
This part of your score can be affected by something as small as one single late payment.
Other major payment history factors can include bankruptcies, charged-off accounts, debt settlements, and delinquencies.
How do you check your credit score?
Nearly half of all Americans just outright check their credit score. Even less actually check it on a regular basis.
The three most common reasons people avoid checking their credit score is:
You can check your credit score for free from many different places. For starters, the federal government runs AnnualCreditReport.com which is the only true credit-checking service with no hidden fees or upsells.
It allows all American citizens to check their credit once per year. This is what every single person reading should be doing at the absolute bare minimum.
In an ideal world, you would check your credit score on a regular basis.
One of the most common third-party services to do this with is Credit Karma.
They’ve got over 100 million members and have an A-rating with the BBB. Their services are also free and supported by revenue-sharing suggestions with other lenders in the forms of credit cards, loans, and various other lending products.
Credit Karma also has free credit monitoring that can help you spot inaccuracies on your credit which can lead to lower credit scores. Their credit monitoring is also a great way to combat fraud.
Although there is a much better option for safe-guarding your credit, which we’ve mentioned further down in the article.
Why credit scores are (really) important
If you need reminding regarding the importance of keeping your credit scores high, this article is a quick reminder of the harms that low credit score can inflict in your personal financial life.
Here are the top five ways that a bad credit score can harm you.
It’s a common practice for landlords to ask for credit scores for people applying to rent.
This makes a lot of sense, because if you’re the landlord, you don’t want to be in the position where your tenant skips out on you, and you have no recourse except for, of course, the deposit.
The landlord needs to weed out bad tenants and he does this by checking their credit scores.
You can eliminate a lot of the drama by doing a credit score or a credit history check on the person.
Because like it or not, credit scores reflect your overall credit risk – the better your score, the higher the chance that you’re going to pay your bills and that you would be a good person to rent to.
If you have a low credit score, chances are, you might not get a credit card with a low-interest rate. You would still get a credit card; that’s not a problem. In fact, people who’ve declared bankruptcy still get credit cards in America.
The problem is, getting the right kind of cards. These cards, of course, are the ones with low-interest rate and you, probably, will not get those offers if you’re a bad credit risk.
How do banks find out if you’re a bad credit risk? Your credit score. The same goes for getting a limit increase on your credit card. If you have a low credit score, your credit card limit would be quite low.
There are certain very sensitive jobs that require background checks, and, oftentimes, these background checks also look into your financial records.
It would look really bad for certain jobs that involve money and credit security if your credit score is quite low. There have been many people that didn’t get jobs because of a low credit score.
When the time comes for you to buy a home, and you need to take out a loan, you will need to get a credit assessment and your credit scores will come up again. And guess what, it is the same story as the others above.
Worthiness is determined primarily by your credit score, and if your credit score is low you would have a tough time getting a good mortgage. You can still get a mortgage but the interest rate would be quite high and the terms will be a little bit more oppressive.
A good mortgage with low rates and relatively easy terms would only be attainable with a good credit rating.
While it’s not as prevalent as before, having a low credit score and being known as a bad credit risk can lower your status and your standing with your friends and family.
While your friends and family might be more accepting other people might not be. So friends of friends might be a little bit more judgmental when it comes to this kind of thing. They might think twice when it comes to lending you money.
Keep the harms above in mind so you can focus on keeping your credit score high or working to improve your credit score. There is a reason why people place so much emphasis on credit score. It’s time for you to understand this so you can improve your personal financial life.
6 common credit score myths: debunked
Beginning in the 1980s, banks began implementing an algorithm-based system to help lenders and banks assess the creditworthiness of consumers.
Over time, it has become increasingly important for consumers to fully understand their credit score – your valuation as a borrower.
Sadly, this is not the case with so many misconceptions out there regarding your credit score, what hurts it and what helps improve it.
For some, this confusion has come from having issues grasping the traditional three-digit number used in grading the score.
For many, the misconceptions run deeper. The result is that many rank very low on the credit ratings as they struggle with rising debts and high interest rates.
To understand your credit scores, you must first do away with the misconceptions that cloud your judgment. Then and only then can you begin to grasp how to improve your credit ratings. What follows are some of the top misconceptions and why they are all false.
Credit checks have two different effects depending on who is checking and why. There are the “soft inquiries” and the “hard inquiries”.
Soft inquiries have no effect on your credit scores. Soft inquiries are usually a part of a background check carried out by potential employers, landlords, and even insurance companies.
Hard inquiries, on the other hand, lowers your score by a few points. A hard inquiry is initiated by a financial institution assessing your credit worthiness to decide if you qualify for a loan.
Whether or not you are approved for a loan, your credit score is lowered.
When you check your credit score yourself, it is considered a soft inquiry. This means that you have nothing to lose by checking your credit score and trying to keep track of it.
Credit scores are like performance checks of your credit behavior over a given time period. As a result, it can increase or decrease, adjusting to changes in your credit behavior.
Credit ratings are updated every 30 days, and can increase by as much as 20 points in a 90-day window if you make payments on time and do not use any new credits.
To put it simply, this is wrong. It is true that potential employers are likely to check your credit report – following your approval – as part of your background check. But that’s about it.
Your credit report is very much different from your credit score. The credit report details your credit history, and can be used to discover fraudulent activities.
Regularly check your report during the year to ensure your credit report is free of errors. You can check your credit report for free at AnnualCreditReport.com.
It is easy to assume that if you have never been in debt, then your credit score must be good, really good. After all, it shows just how responsible you are.
Suffice to say that this is not exactly true. Your credit score reflects your credit history. It proves credit responsibility – that you are able to handle credit responsibly. If you have no credit in your name, lenders will find no credit management history to look to for proof of responsibility.
Applying for a credit card or a loan and paying up on time is one way to build your credit score against any possible eventualities, helping you prove that your credits are paid up when due.
A credit builder credit card can come in handy in this case, if you are refused a mainstream credit card.
This myth makes it seem as though closing old inactive accounts and paying off negative records will build your score.
For one, closing old accounts might inadvertently lower your credit score rather than improve it.
This is because it decreases the amount of credit available to you as against the balances you owe. Indeed, leaving old accounts open improves your rating over time.
Likewise, paying off negative records does not get them off your credit report.
Generally, when you pay off negative records such as collection accounts and ate payments, they remain on your credit report for between seven and ten years.
It will be listed as “paid” but might not have an immediate positive impact on your score, and it might yet continue to have some effect, until it is purged from your report.
Even then, do well to pay off your debts and clean off negative records as quickly as possible to have the positive effects roll in sooner.
FICO is undoubtedly the most popular credit score. But it is not alone.
There are several different credit scores, and several different models designed by credit bureaus, which might be unique to different industries.
Because different industries, and indeed different lenders assess risk differently, there is no consistency in the different scores and scores can differ by as low as 5, or as much as 50 points.
Although FICO is used by many lenders, it is not universal; so you can’t be sure by which score you will be assessed. Regardless, pulling your score from one the companies will give you a general idea of credit health and your “risk range”.
Even if you think you are in good credit health, there is no harm in checking regularly to be sure.
By checking your credit score and report often, you can detect any inaccuracies on time, moving to correct them before they become serious issues.
Pay your bills on time, try to quickly lower your debts, and ensure your records are accurate. A track record of good financial behavior is sure to keep your score on the high.
How to improve your credit score
While, yes, paying your bills on time can improve your credit score, there are many other factors that come into play when getting your credit history cleaned up and boosting your credit score.
With so many consumers out of the loop when it comes to their credit, improving your score can seem overwhelming and intimidating.
We’ve got a few tips (outside of simply paying off your debt) that are guaranteed to help anyone out.
Before I get started: get a copy of your credit report free.
This is the first first step that every single person should take. We’ve mentioned above two different ways you can go about doing this at no cost to you.
Some of the tips and tricks we are about to go over are useless if you don’t have a copy of your credit report in front of you.
The Fair Credit Reporting Act is a federal law that, in part, protects consumers from having false information on the credit histories.
Remember how I said 35% of your credit score comes from you making timely payments?
What happens if you know you paid a bill on time but it was mistakenly reported as having been late? Comb through your credit history and look over every single entry.
The various aspects of your credit simply come from regular humans doing data entry (well, kind of).
It’s not at all uncommon to see that someone may have entered in something wrong. It’s also not uncommon for someone with the same name or birthday as you to have something of theirs accidentally reported on your credit.
The next commonality that gets disputed comes from identity theft. If someone has stolen your identity and you haven’t found out about it yet, you will certainly discover it whenever you take a look at your credit history.
Anything you report to the credit bureaus must be investigated within 30 days or less, as per federal law.
If you are in a position where you must have some sort of balance on your revolving debt (credit cards, for example) when it’s best to try and have no more than 30% of your available credit used up.
30% seems to be the sweet spot with credit reporting bureaus. It shows you can properly fulfill debt obligations but also that you’re not always maxed out.
Stop making purchases with credit cards, and start paying those credit cards or lines of credit down immediately.
In addition to helping your credit, this should be a top priority as these forms of debt often have the highest interest rates out there.
I know that I’m starting to sound like a broken record by repeating this, but here we go again: 35% of your credit score comes from how you pay your debt obligations.
If you have any past-due balances or delinquent accounts, pay them off!
Just because they’re late or past due doesn’t mean that you’re at some mythical point of no return. You can still get in touch with the lenders or creditors to pay these balances off.
Once you do this, they will go tell the credit-reporting bureaus that your debt obligations have now officially been paid in full.
Seriously, just stop it. 189 million Americans have credit card debt so, statistically, you probably already have credit card debt. Simply applying for a new credit card can hurt your credit score.
Getting approved for, and opening, credit cards in a short period of time can also affect your score.
If you have a bunch of inquiries and/or a bunch of new accounts, that just doesn’t look good.
The only exception to this rule is for those who are looking to transfer all of their high-interest credit card debt to a zero-balance transfer card to take advantage of a 0% interest rate to consolidate their credit card debt.
Cancelling your credit cards or closing your accounts down can affect your credit score negatively.
A portion of your credit score is calculated based on how much available credit you have versus how much of it is spent.
If you close down your credit card accounts then the available credit on your credit report drops drastically. This can also cause your credit score itself to drop drastically, even if you owe nothing at all on the card currently.
If your credit card is past due and you try to close the account, the amount you owe will still show up in your credit history. The only difference is that now you do not have the potentially available credit there to offset your debt ratio.
Unused credit cards? Leave ‘em open. Past due credit cards? Leave ‘em open.
The person that answers is a normal human being just like you and I. They probably won’t bite your head off. These companies exist for the sole reason of turning a profit.
If you’re having trouble paying then you should reach out to them and explain your situation. They would rather get something from you rather than nothing.
There are also many hardship programs in place with creditors for those who have had life-changing events like the loss of a job or death of a spouse.
Just call them and explain your situation to see if they can offer any assistance.
A non-profit credit counseling service is also a great resource for those who are drowning in debt and want to get their credit score improved so they can improve their quality of life.
You will work with a financial specialist to chip away at your debt, and identify what caused you to go into debt in the first place so you can avoid it in the future.
You need to be patient when it comes to giving your credit score a boost. This is certainly not a task that will show you any form of immediate gratification.
Think about how long it took for your credit to get damaged. It wasn’t exactly overnight, was it? The same is true for repairing your credit; It won’t happen overnight.
Just because you’re doing the right thing but don’t see immediate results doesn’t mean you should stop. You need to have patience!
If you want to improve your debt to credit ratio, you could pay down your debt for an instant credit score boost.
Or, you could improve your credit score simply by getting a credit limit increase.
You can ask for a credit limit increase either by phone or online, it's free and easy to try so this is a no-brainer.
Wrapping it up
Credit scores, it's like you go months or years not caring. Then all of a sudden, it's the most important thing ever.
I've been there. In fact, I'm there right now! But hopefully this has helped you find some tips and tricks on improving your credit score.
Any questions or comments? You know what to do!