3 Ways to Take Control of Your Credit
Legal Disclaimer: I am not a finance professional nor an advisor, so the information in this article should be taken with a grain of salt and supported by your own research.
Credit cards, we all have them. We can earn cashback or points and pay off those balances at a later time. As cash begins to lose popularity in place of cards and even virtual payment methods like Apple Pay or Google Pay right on your phone, having a credit card has never been more important. But are you using your credit card responsibly? According to a TIAA Institute study in 2018, millennials tended to make a number of questionable financial decisions compared not only to other age groups but also compared to young adults ten years ago.
Findings of the study include things such as:
43% of millennials have outstanding student loan debt, which is up nearly 10% compared to ten years ago;
60% of millennials engage in risky credit card behavior such as missing payments, paying late fees, using cash advances or only paying the minimum amount every month;
Only 16% of millennials qualify as financially literate.
These statistics are due to a number of factors, including many that millennials had no part in creating. In any case, getting smart about how you can make your credit work for you will save you a lot of money down the road.
1#: Taking Charge of Your Credit Report
Let’s just keep this short and sweet, because I know you have things to do and time is money. So, let's take a quick minute to dive into credit reports. You most certainly have credit already, and thus a credit report. Either in the form of a credit card or student loans, you’re already making decisions that impact your credit report. Your credit report is basically a report card that assesses, based on a number of factors, how well you manage your credit and how worthy you are of certain credit options. Knowing how to read and work on your report will reflect increases in your credit score. And who doesn't want an A+ on their credit report card?
The infamous Credit Report: This report consists of five main components that assess your creditworthiness:
Payment History (35%): This is the biggest factor in your credit report. Basically, this means that when you use your credit card to make purchases, make sure you know when those payments are DUE and pay them ON TIME. Even one late payment can really hamper your score for years to come. A “payment” counts as just making the minimum payment (which is usually $25-$35), although look to make bigger payments, when you can, to avoid those trademark high interest rates. You’ll save money in the long run.
Credit Utilization (30%): This is also a big player in your credit report. This shows in a percentage how much of a balance you carry each month in relation to the amount of available credit you have in your name among all your credit cards. Ideally, you want to keep this under 10%. To do this, pay off your credit cards in full every month, when possible. Also, look to increase credit limits on your cards or open up more lines of credit. The higher the limit, the lower the utilization (which is good).
Length of Credit History (15%): Unfortunately, this can’t be changed overnight. The best tip here is to start as early as you can. This is calculated as an average. So opening up a new credit account will most likely hurt this part of your score in the short term. Tip: The first credit card you receive will probably not be the one you use forever - yet when you upgrade to a better card, RESIST the temptation to close old credit accounts. If you close your oldest account just because you do not use it anymore, it could severely damage the average length of your credit history.
Total number of credit lines (10%): Pretty self-explanatory, but the more lines of credit you have open, the better this part of your score will be. Plus, the more lines of credit you have open, the higher your overall credit limit is and the lower your utilization will be (all good things).
Number of hard inquiries (10%): A number of financial endeavors require an inquiry of your credit report to see how worthy you are. This is done most often when applying for loans and credit cards. Unfortunately, the more times a company inquiries on your credit score, the lower it can go. This isn’t a large part of your score and these inquiries will be removed from your report after about two years. It is just important to know when you are applying for credit to know how many inquiries you have on your report. Ideally, keep the number under five.
#2: What Constitutes a Good Score and How to Check Yours
When looking at your credit score, you might encounter differing numbers. One score might say 685 while another says 701. This is because there are three main credit reporting agencies: TransUnion, Equifax, and Experian. They all differ slightly on how they calculate scores and how they weigh the aforementioned factors on your credit report. So while one agency may qualify your score as good, another may say it falls in their fair range.
Reference the graphic above to see the differing range of what constitutes a good, very good, or even excellent score. When given a number of scores, I think it is just best to take an average of the scores to determine where your actual score lies.
Before you can do any of that, you need to know what your score is. My rule of thumb: NEVER PAY FOR YOUR SCORE. There are a number of ways to access your score online and, best of all, for free. First, I would recommend you start with your credit card company. Many big companies offer free credit monitoring right in your banking app. For example, I use Chase for one of my cards. In my app, I have the ability to check my score and see my report, anytime at no cost to me.
Another option is to use an online service. The one I use and recommend is CreditKarma.com. This site features a super easy-to-use interface that charges you absolutely nothing. NADA. They even help you understand your score and give you tips on how to improve it. Did I mention it was free? I digress.
#3 How to Improve Your Credit Score
There is no one-size-fits-all approach to fixing or improving your score. These factors depend on your personal situation, which is why it is important to get familiar with your score and all the aspects of your report.
HOWEVER, here are some basic guidelines that can help you, as they helped me in bringing my score up:
You should only charge your credit cards for the amounts that you can pay off, in full, each month. Try not to carry a balance from month to month.
NEVER MISS A PAYMENT. Just never. Don’t. If you’re short on money one month, make at least the minimum payment.
If you have been with a credit card company for a while, making payments on time, and are in good standing, try asking for a credit limit increase. Be aware, this is likely to require a hard inquiry on your report, meaning a slight, short-term decrease to your score.
Try opening up more lines of credit. The more lines you have, the more credit you have, and the more your score will increase. WARNING: Just because you have a lot of credit available to you, does not mean you should use all of it. Rule of thumb: Credit companies like when you have a lot of credit but don’t use it.
Beware of delinquencies: After moving out of my apartment, I moved to a different country. What I wasn't aware of, however, was that my internet provider charged me for an extra month of service after I moved out. Because I didn’t know, it was never paid. Because it was never paid, it went to a collection agency. Because my account was now in collection, it was negatively impacting my credit score. After a quick phone call and payment, my score shot up 25 points in one week after paying the account in full.
Becoming educated on how your credit works puts you in the driver seat of your financial decisions and will save you considerable money in the long run. And then you can brag to your friends how high your score is (and they probably won’t care).