I remember the very first time I considered seriously using credit beyond just charging something on a credit card as a consumer, and I was terrified. The terror I felt was deeply out of proportion to the action I was taking by applying for a Small Business Administration Loan (SBA Loan) to grow my law practice.
Now, after 15 years of the full range of using credit to manage my life and fund and grow my businesses, including borrowing hundreds of thousands of dollars, filing bankruptcy in 2012 and now having a business that does $5M a year in revenue without debt and another business that has no revenue and is carrying about $130,000 of debt, I understand where my terror came from.
I didn’t trust myself when it came to accessing or using credit. And, that terror was well-placed. I didn’t know what I didn’t know.
But now I do, and I’m sharing it all with you because accessing credit and using it wisely is a critical personal resiliency system for you to have in your life.
So here are the 3 basic steps to start to get you into right relationship with credit and your credit score.
a. Remember, You Are Not Your Credit Score
Your credit score is a numerical value given to you that evaluates your risk of being able to pay back the debt you borrow. It’s not a reflection on YOU, other than to reflect back to you how well you know how to engage with the system.
Learn how your credit score works and work with it as an asset, not as a reflection of your personal worthiness. Do not crumble under the weight of a low credit score, just see it as a reflection of a resource you are not using as well as you could, and get into action to learn to clean it up.
Your credit score is what gives you access to credit. Access to credit is a critical resilience resource for you to maximize and use wisely. Don’t crumble under the weight or stories you’re living with about what your credit score means, just clean it up.
b. Clean Up Your Credit Score
Pull your credit score from CreditKarma.com. That’s my favorite resource because it’s free, and I don’t get any hard sell to buy anything from them or upgrade to anything. They make their money by making credit card offers and recommendations to you, not by selling their own service.
If your credit score is low, either because you’ve never accessed credit or because you’ve made mistakes in the past, commit to cleaning it up. This could be easier than you think.
I filed bankruptcy in 2012, and today my credit score ranges from 619 to 700, depending on how much I owe on my credit cards relative to my available credit (called debt usage ratio, more on that in a minute), and is the easiest way to impact your credit score either positively or negatively.
If you are not able to get any credit cards because your credit score is low, you may need to start with a secured credit card. This is the first thing I did after my bankruptcy.
Capital One offers a secured card, and my experience is that in general Capital One is the quickest to be willing to give people with low scores small credit limits to build up their score. The secured card I got back in 2013 right after my bankruptcy now has a $1,900 limit and no security is required to back it. And Capital One has given me another $10,000 credit limit on another card. Thanks Capital One.
I’ll share more on cleaning up your credit score in future articles, so stay tuned. But for now, check your credit score and get whatever credit you can, based on where you are right now.
c. Apply For All the Credit You Possibly Can
Other than paying your bills on time, the best thing you can do for your credit score is have a low “debt usage ratio.” Your debt usage ratio is simply the amount of credit you are using relative to the amount of credit you have available to use. So, if you’ve got $10,000 of total credit available, and you are using $5,000 of that credit, your debt usage ratio is 50%. If you are using $3,000 of that credit, your debt usage ratio is 30%. You get it, right?
If you keep your debt usage ratio below 30% on any individual card and across ALL cards combined, your credit score will go up. If you use more than 30% on even just one card, your credit score will go down. The good news is that you can pay down that one card, and your credit score will go up again.
Lowering your debt usage ratio so that you are using less than 30% of your available credit on any individual card, and across all cards, is the fastest path to increasing your credit score. Once your credit score is at 700 or higher, there’s all sorts of cool things we can do to increase your access to capital and your ability to use it wisely.
In future articles, I’ll share ideas on how to get the money to pay down your credit to increase your credit score to allow you to borrow more and give you more available credit to use. If you want to be sure to be notified, make sure you are on my email list at http://www.eyeswideopenlife.com.
For now, if your credit score is good (and by good I mean over 680) contact every credit card company you have and ask for a credit limit increase. Then, apply for as many credit cards as you can that have no annual fees, so you can increase your available credit.
And, no, don’t close credit cards you aren’t using, unless you are paying an annual fee for benefits you do not use.
If your credit score is not good, watch for more information from me in the future on how to clean up your credit score in more detail. But, for now, consider a secured credit card to get you started, and of course make sure you are paying your minimum payments on time, every month.
If you are a business owner, read my article here on Funding Options for Your Small Business Without Ruining Your Personal Credit Score.
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