When my wife and I purchased our first home, we visited a mortgage broker to get our very first mortgage. He pulled my credit and POW! I had a great score. Then he pulled my wife’s credit; low and behold it was not so great. It came as quite a shock to us both since she had no student loans, was never in credit card debt, and had never been late on a bill.
So what went wrong?
The issue was she essentially had no credit history at all. Growing up she never had a credit card. When she rented an apartment, no bills were in her name, only her roommates. She was taught to pay for everything in cash. On the surface, these were great principals instilled in her, yet they did not benefit her when it came to her credit score. I share this anecdote as a preface about this blog: improvement and creation of a great credit score. Oh and by the way, it didn’t end so badly for my wife (except for the fact she is stuck with me). She now owns half our house, none of the debt, and has an excellent credit score.
Whether you are a parent, adolescent child, or someone in-between, if you follow these tips it can go a long way to increasing that ever important credit score.
- Pay Your Debts On Time.
I’ll start with the biggest factor in determining ones credit score. Pay your debt payments in a timely manner. This alone makes up roughly 35% of your score. I highly recommend setting up all your debt payments (i.e. credit card, car loan, mortgage, student loan) to come out of your bank account automatically. I even recommend making the payment date a few days prior to the actual payment date. This gives a window just in case there is a mishap. Sometimes if you are a few days late certain places won’t report it as delinquent to the agencies. But, why take the risk? We all get busy and as our lives get more complicated, make it simple. Automate and be free!
- Percentage of Debt.
The next biggest factor in one’s credit score is the amount of debt and percentage of overall debt. To be clear, all debt isn’t created equal. Credit card debt is considered bad debt; however, mortgage debt is considered good. The credit agencies aren’t scared if you have debt; they would rather see you can handle debt responsibly. One tip I always give is to increase your credit card limits. (This is not a license to charge more!) One thing the credit agencies are looking for is that you don’t utilize a large portion of your outstanding credit. The rough rule of thumb is don’t go over 30% balance on your credit cards. For example, if your credit card limit is $10,000 you want to make sure no time during the month does your balances show over $3,000. If that isn’t the case work to increase your limits if possible, or pay them down multiple times during the month if need be.
- Check Those Credit Reports.
I have a good friend who switched banks and all his automatic payments were switched to his new bank. Then he went to go purchase a second home. However, despite being highly qualified, his credit score was so low he almost didn’t get approved. What was the issue? His new bank adjusted the payment date of his one auto loan. The adjustment had him constantly paying his loan late by a few days. The lender didn’t notify him and it was showing as a delinquent payment each month, crushing his credit. Unfortunately, I see stuff like this happen all the time. If you check your credit once a year with the 3 agencies (TransUnion, Experian, Equifax), you can quickly catch and rectify an errant situation.
Here’s how to check your credit:
- Phone by calling the nationwide toll-free telephone number at 1-877-322-8228.
- Mail by filling out the annual credit report request form, and mailing the completed form to: Annual Credit Report Request Service P.O. Box 105281, Atlanta, GA 30348-5281.
- Online by visiting annualcreditreport.com
- Requests normally take 2-3 weeks.
- The 3 companies contact if are Equifax (1-800-685-1111), Experian (1-866-200-6020), and Trans Union (1-800-916-8800).
As a reference: a score of 750 & above is considered excellent, 700-749 is good, 650-699 would be fair, 550-649 is considered poor, and 550 & below is bad.
- Minimize Credit Checks.
It isn’t bad to check your credit or even apply for new credit. However, excessive checking (more than a couple of times a year) throws up all sorts of red flags with credit agencies. Remember, they like to see someone who is handling their debts and credits prudently, not erratically. The last thing you want to do is send warnings that you are in financial stress (such as inquiring or acquiring lots of new credit lines). This makes up roughly 10% of your credit worthiness.
- Credit Duration.
We’ve established that the credit bureaus like when you can handle your debts prudently. What better way to exemplify this than to show a long credit history. One mistake people often make is to cancel an old credit card they never use. It’s typically better to leave them dormant rather than close them. The credit agencies like to see the length of your debt management and the average duration off all your debts. One trick I tell clients is to get their kids a credit card of their own or put them on as an authorized user to one of their current credit cards. Of course, you’ll have to make sure they don’t abuse this power, but what a great way to teach them financial responsibility. It will help establish credit history at a relatively young age. This accounts for about 15% of your credit score.
- Separate Credit Cards.
A majority of times, I find one spouse orders a credit card and adds the other spouse on as an authorized user. While seemingly harmless, the reality is the majority of the credit being built here is based off of the main account holder’s information. There are a few cards that let the ownership actually be joint. However, in most cases its better for each spouse to apply for their own cards. This is a great way to build equal credit, while funding can still all come from the same place to pay the debts. Even if you are a non-working spouse, many credit card companies will simply ask household income (or income that can be readily accessible to pay down revolving debt) in qualifying you for a card.
- Credit Mix.
The last component of a credit score (which makes up 10%) is having a nice blend of credit. It shows best if you have not just credit cards or a mortgage or college loans or car loans (you get the point). The 3 main companies look at the fact you can manage and handle many lines of credit as it makes them feel more comfortable in your credit worthiness.
In the end our credit score isn’t everything and bad credit can be rectified with some smart tactics. Changing behaviors and time can help as bad credit instances typically can linger up to 7 years. That said, it is a valuable tool in saving money and affording yourself accessibility to funds you wouldn’t otherwise be entitled to.
As a wise man once told me, you don’t get rich using your own money for things, so take these steps and you’ll best position yourself to utilize someone else’s!
In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.