Credit Score: Additional Tips

As mentioned in my previous post, “What the F*** is a Credit Score?” I said I might post some additional tips to manage your credit score. Some of these may be obvious, and some you may know, but I hope there are one or two that are new to you.

Tip 1: Keep the credit applications to a minimum.

If you keep applying for credit and keep getting rejected, this will continuously hurt your credit score. When I became of age to get a credit card I had an unusually hard time getting one and made multiple applications within the year, and got multiple rejections — this is not good. Be aware that credit card applications are not the only applications your score is checked on, some others could include: applying for multiple apartments, houses, cars, bank loans, etc. If you are uncertain, ask if they will be pulling your credit — you can refuse; however, for some processes not having your credit checked could be an automatic refusal. So what are my options? Well, if you think you will be applying for a lot within a year you can always purchase your credit report (there may be free services now, I am unsure). This is really unfair that you have to buy your own, but I believe it is a good way to avoid having your credit pulled constantly (last time I purchased mine it was $20.00). You could scan and email, or fax the company your score if it is fairly recent (I think it would depend on the situation as to what exactly is “recent”). This should suffice in lieu of pulling the actual score, and you won’t have to worry about possibly reducing your score. Another advantage of buying a report (or getting a free one if you can) is to check your history, there could be a payable on there from a long time ago you had forgotten about that has been eating away at your score, or there could be complete erroneous entries which you can call about to have corrected.

Tip 2: Try to keep the purchases below 75% of the credit limit on credit cards.

Since a lot of people associate credit score with credit cards (maybe because it is an easy way to boost your score if you know how) I thought it would be good to mention the “75% rule”. Continuously maxing out your credit card is no good, even if you have the money and pay it off on time; therefore, it is good practice to try and keep the purchases below 75% of the limit. This could be strange and almost difficult for people just starting out, say with a $500.00 limit because you may be eager to show you have the ability to pay debts on time. However, to avoid maxing out your credit card you can always raise the limit, this is usually fairly easy to do if you have had the card for 6 months or more and want to raise it to a reasonable amount. If you have a $500.00 credit limit on your card, do not try for a $10,000.00 credit limit as your increase; maybe try for $1,000.00 to $1,500.00. If you just recently received a credit card, maybe your first one with a limit of $500.00, you can manage what you spend on it by earmarking the card for specific purchases. For example, if you don’t want to go over that 75% mark on a $500.00 card, earmark the card for only gas purchases or only groceries, this will typically keep you under $375.00.

Tip 3: Be 100% certain you’ll have the money to pay down/off the debt.

Some people, it seems, think credit is free money — well it is certainly not. For example, if you have a credit card with a $1,500.00 limit do not go and buy that new big screen TV you always wanted without looking into your personal cash flows first. If you start saying to yourself “oh yeah I’ll just put this on my credit card, I’ll definitely have to money later” without actually checking or quickly thinking about it, you’ll be in for a rough time. You want to be ABSOLUTELY certain you will have enough money to pay the credit card off on time, and this does not mean paying the “minimum payment”. The “minimum payment” is a horrible measure, and you should never go by that because you will end up with an unending amount of debt. The reason for this is the “rule of 72” whereby you take an interest rate and use that to divide 72 by, and you end up with how many years it will take that money to double (for you or against you). For example, your credit card has an interest rate of 19% and you let money sit on the card collecting interest, against you, it will only take 3.79 years to double.

Tip 4: Don’t pay debt with debt.

I’ve heard of people doing this all the time, using a line of credit to pay a credit card or student loan money to pay for items they do not need like a tattoo. If you want to be debt free, which I believe everyone should strive to be, you cannot start spiraling down the path of paying debt with other debt as it will turn into a never ending cycle. There may be some exceptions to this, but for the most part I would try to avoid it at all costs as this will end up haunting your credit score when the “house of cards” falls down.

Tip 5: Be cognizant of what counts.

You may be surprised as to who reports your credit, and how they determine your limit — it is good to be aware of this (another reason to get your credit report). If you come into hard times and have to forego making a payment on something, if you know who reports your credit you can chose someone else to skip a payment on. Alternatively you could call and explain your situation and they could grant you 30 extra days (my insurance did this for me when I was switching). Knowing how some businesses/companies come up with your limit is also good to know, say for a cellphone. You may have never thought cellphone companies report credit on your payments, and how they determine your credit limit. Well, the cellphone provider I am with does just this — the way they determine my credit limit is my highest bill paid to date. So if you racked up a bunch of roaming or data charges once, you increased your credit limit with the cellphone company. This is actually not all bad because you now have a better chance at staying below the 75% mark, but if you have never racked up a bunch of extra charges I am not recommending you do that — just be aware if they report your history and do not to make late payments. Lastly, it is good to know your oldest reported credit history and who holds that record because if you cancel/drop them — all that history goes with them. For example, you switch banks and you think to yourself “well screw them, I don’t want their credit card anymore either”, before cancelling the card check to see how much history you have developed with them. This is important because you could lose a lot of history if you constantly switch around cards and services. How do you avoid this? Try to keep your oldest history — if it is a credit card, instead of cancelling, keep the card and put a little money on it each month to keep your good history with them.

Tip 6: The bad things do go away, but not quickly.

It will take seven years for any bad credit history to disappear, so be careful with how you manage your credit score.

So there you go 6 additional tips for managing your credit score. If you have any to share I would be more than happy to add them just comment, tweet, or email me and I’ll put them up.