How To Improve Your Credit Score

We previously discussed how credit scores are calculated, and then the benefits of maintaining a solid credit score. So, we’re all pumped and motivated to make improvements, but where do we start?

This post is intended to give you a step-by-step process on how to tackle this task, but feel free to mix it up in any order that makes sense for you. Keep in mind that we are looking for long-term positive growth here, not necessarily temporary swings.

It’s important to know where you currently stand to know where to start when looking to improve. This one sounds a lot more daunting than it actually is.

First things first, check what your current credit score is. You can pay certain websites to get this info, but of course I’m a big fan of getting things for free when I can. If you have a credit card, many of them will offer a source on the app or website for you to get this score completely free. It also doesn’t hurt your credit score to look at it, so feel free to review it as often as you like.

For those currently without a credit card, your best bet would be to check out Credit Karma. It’s pretty simple to sign up, and totally free. Usually, these free sites aren’t showing the exact FICO score on a given day, but rest assured it’s pretty close.

These free sites will also usually have a quick breakdown of what your credit report looks like. Take a peek, and make sure the information looks correct on your end. By law, you are entitled to a free copy of your full credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. This credit report will be more extensive and highlight any negative marks in your credit history. You can request them individually from each credit bureau; or get it from all 3 at once totally for free using annualcreditreport.com.

I definitely encourage everyone to review this once a year. The first time you do it might take a little more time, but you’ll want to double check that there wasn’t anything unexpected on there. Identity theft is very prevalent, make sure everything on the report makes sense.

There are several companies out there that promise to raise your credit score simply by paying them. Don’t fall for it! All they are going to do is challenge every negative mark in your credit report (missed payments, collection items, etc.). While under review each disputed item will not impact your credit score, thus raising it temporarily. Unfortunately, when things are settled and it is determined to be accurate, your credit score will fall right back down to where it was.

Instead, when reviewing the credit report on your own, double check that each event outlined was you’re doing. If you find something fishy, and confirmed it isn’t accurate, you can issue a report with the credit bureau. This can be done by mail, phone, or online. I’d suggest doing it online to help keep record of it, as well as the simplicity factor. You can also dispute it with the company/person making this claim and ask them to rectify this on their current records.

If after 30 days or so the problem is not rectified (which is rare), you can file a complaint with the Consumer Financial Protection Bureau (CFPB). You’ll need documented records of your correspondence with the credit bureau and/or the company making the claim. Obviously, if you are doing this to play games to get your credit score up temporarily, you are wasting a lot of peoples’ time… including your own. Don’t be that guy.

In the case of identity theft, it would be wise to freeze your credit with the 3 major credit bureaus. We’ll go over this in more detail later on, but it will not impact your current lines of credit. It will only stop any attempts at generating new lines of credit in your name in the future.

For those negative marks on your credit report that are indeed yours, it’s time to take immediate action. If you have delinquent accounts, charge-offs, or collection accounts, it’s best to list these out and tackle them one at a time. If any of these can be paid off right now, it’s best to do that first.

You might be able to call them and negotiate. Give an offer that’s less than what you owe to get it completely off your plate and see what they say. When doing this you’ll want to have the full amount you offered ready to pay. Have correspondence in writing that this payment for X amount of dollars is to pay off this account entirely. Far too many creditors will say something on the phone, and then they are nowhere to be found later on. Also don’t give out your checking account info when doing this, offer to write them a check. Lots of “mistakes” happen, and they might automatically draft the original amount owed when processing.

If you have tried this and don’t seem to be getting anywhere, it might be best to see if you can get on a payment plan if you can’t pay in full. Usually getting on a payment plan will get you on the right track to seeing a better credit score, of course you’ll want to get these accounts settled as soon as possible.

Alright, so we’ve taken a look at where we are at and made sure that there isn’t anything fishy going on with our credit report. It would be in our best interest to create a system where we never miss a payment on anything ever again. Payment history, which can only be accrued through time, accounts for 35% of our credit score. My personal favorite way to tackle this is by using automatic payments.

It’s almost always easier to “pull” money from an account than it is to “push” money out of an account. Instead of pushing money from your checking account to the recurring payment (student loans, mortgage, cell phone, etc.); log on to the company website and set up automatic payments from your checking account (or credit card if applicable). I do this with each recurring bill I have except my credit card bills, which forces me to review the month’s previous spending.

In order to make sure I always have enough in my checking account to cover expenses, I always have that one month’s cushion just in case something unexpected happens. Check out my approach to savings to help come up with a system. Also, to take it one step further, I set up a calendar to notify me when automatic payments are going to hit, as well as when my credit card payments are due. This way no surprises happen, and I’ll get a friendly reminder to manually pay my credit cards.

We have established that credit utilization is a big factor of your credit score. Credit utilization is the % of credit used on revolving accounts at any given time. The Savvy Solo would aim to keep it under 10% at all times; but absolutely under 30% to avoid negative impacts.

To keep it simple, if you have a $10k credit limit between your credit cards the Savvy Solo would try to spend $1k or less at any given point throughout the month (definitely below $3k). All purchases beyond this given amount would be done via debit card or cash for the rest of the month.

If a Savvy Solo is looking to increase their credit card spending (most likely to get more points), the first step is to ask for a credit limit increase on existing credit cards. This won’t get flagged as new credit and is an easy way to widen the gap for those with sufficient credit history. This can usually be done online (or in most cases right in the app), but it can also be done over the phone.

Opening a new credit card will put an immediate ding on your credit score. Not only will it be a new hard credit pull, but “new credit” will also be impacted by the new line of credit that is being opened. It still might be worth it over the long run depending on timeline you have to work with.

Don’t forget one of the golden rules to personal finance here: know thyself. If having a higher credit limit is going to entice you to make purchases you otherwise wouldn’t, it’s perfectly fine to keep things the way they are.

If you are looking for immediate improvements to your credit score for a large loan in the next 6 months (i.e. mortgage or personal loan), avoid opening new lines of credit at all costs for the time being. New credit only accounts for 10% of your credit score, but there’s no telling how it will impact the loan rate offered, particularly for those hovering around the 700 or 780 marks.

It might be tempting to get a new credit card before applying for a mortgage for the credit utilization factor, but don’t do it! Like noted above, you can attempt to raise your credit limit on existing cards or simply use debit/cash on purchases beyond 30% credit utilization (more favorably beyond 10% if possible).

Once the mortgage is locked in, and I mean really locked in (preferably already moved in), feel free to get a new line of credit at that time. You’ll see a dip in the credit score for a short time after, but it potentially could help with your credit mix and will allow for more purchases with a healthy credit utilization rate. I wouldn’t go shopping for a new car after all those money moves, but hey, to each his own 🤪.

In the same way you want to avoid opening new lines of credit, it’s best to keep old lines of credit open. The length of credit history is a factor when it comes to your credit score. Closing your oldest credit line will not only re-establish the age of your oldest standing account, but it will also change the average age of all credit accounts.

At one point, unfortunately a few months before I applied for my first mortgage, I noticed a credit card of mine initiated an annual charge. I decided to cancel that credit card and applied for a new one that offered better benefits without the annual charge. DUMB MOVE! Not only did I negatively impact my credit history (the age of accounts got younger), but I also put a ding on my credit score with a new hard credit inquiry and new credit line.

The Savvy Solo in this case would have moved that original line of credit with the credit card company to another card that didn’t have any annual fee. Better yet, I could have called to have the fee waived (this works more often than you might expect). I then should have waited till I moved into my new place before opening a new credit card to get those better rewards I was seeking.

Mistakes were made, but I learned from them. Overall, this wasn’t a huge hit to my credit and probably affected my mortgage rate minimally. That said, it’s always wise to optimize the opportunities ahead, especially if a large purchase is on the horizon.

Overall, the best way to raise that credit score is to have a long history of on time payments and healthy credit utilization (under 30%). Keep in mind, credit score isn’t the end-all be-all of one’s credit future. There are plenty of other factors that can come into play.

It’s worth noting that your debt-to-income (DTI) ratio isn’t factored into your credit score but will most likely be reviewed by lenders. Your current assets and employment history may play a part as well, depending on the size and type of loan you are pursuing.

Attaining a great credit score, like most things in personal finance, is simple but not easy. It takes time and consistency to see the positive benefits. Making an extra effort to develop good money habits a little bit at a time can have long lasting positive effects on your financial wellness and overall health.

Stay classy Solos! ✌️