Hacking your Credit Score

As someone in his late 20s, I’m continually shocked by how little my peers know about their credit score, how it’s comprised, and why it’s important.  Credit agencies use a number of different factors to distill your creditworthiness down to a number between 250 and 850.  Just as colleges give scholarships to those who score high on their SAT, lenders give lower interest rates to those with high credit scores.

First thing’s first: I am not an accountant, a money manager, or a financial planner.  If you have questions about anything financial, I suggest you see a professional.  The tips I’m about to dispense have come through my own analysis of credit score criteria and not through any traditional learnings.

Those with the highest credit scores are not necessarily richer or more intelligent; they have simply achieved high marks in many of the factors that produce a high credit score.   If you follow these tips, you’ll be on the road to credit score excellence in short order.

1.Have 2-3 credit card accounts open

Credit agencies show favor to those who have multiple open revolving credit accounts because, if those accounts are used correctly, it indicates reliability and organization.  Don’t feel any pressure to sign up for credit cards with annual fees.  I’d suggest opening a Visa, Mastercard, and an AMEX.

2, Never close older credit cards

Credit agencies strongly weigh age of credit history.  If you have had one card open for 10 years and a second open for 5 years then proceed to close the first card, your “age of credit history” will drop from 10 years to 5 years.  Please, keep the first credit card you ever opened.

3. Lower your debt-to-credit ratio

Credit agencies look for debt-to-credit ratios under 20%.  That means your credit score will suffer if you carry balances that are greater than 20% of available credit on your cards.  If you have $10,000 in total credit on your cards, make sure to keep running balances under $2,000.  If you carry heavy balances, the best thing you can do is to pay that down over time.

4. Spend on each card every month

I have three credit cards, and I only use one for day-to-day purchases.  The other two generally lie dormant at home.  Since credit agencies like to see some sort of activity on each credit line every month, I put autopay my credit card bill each month with one of my formant cards, then autopay the credit card with my checking account.  I put my gym membership on the second card and autopay in the same manner.  This method allowed my two dormant cards to get activity without me consciously remembering to use them.

5. Bump up your credit limits

Most credit cards have a stated limit, an available balance they are allowing you to spend.  Anything higher and your card will be rejected.  One great way to improve your debt-to-credit ratio is to increase your credit limits or “credit” part of the equation.  Every six months, call the number on the back of each card and ask to be connected to someone who can discuss raising your credit limit.  There are many reasons to request an increase: a promotion, a pay raise, buying furniture for a new apartment or house, needing more credit because of more business travel.  They will give your limits a bump as long as you have been paying your credit card bill on-time and have an improving credit score.

6. Don’t miss a payment

Nothing will destroy the goodwill you’re building with credit agencies than missing payments.  Lenders don’t typically report delinquencies to agencies unless they’re 60-90 days overdue, so you typically have time to correct the problem.  If you can, put as many of your bills on auto-pay to reduce the chance of forgetting a payment

7. Keep your spending in check

The sad truth is if you carry a balance on your credit cards, you are paying way more than the sticker price in interest.  Overspending can put you in a world of hurt, and you’ll have bigger challenges than your credit score.

8. Once you open your credit cards, stick with them

You may get a 20% discount off your purchase for signing up for a Macy’s card, but your average credit history takes an immediate hit.  I know some crafty people who keep two credit cards with a long history, sign up for a new credit card to realize the benefits, cancel it, and repeat the process.  The intricacy of credit card signup bonus strategies is another piece for another time.

9. Pay your installment loans on time

Your student loans, car loan, and mortgage payments may be through the roof, but all credit agencies general care about is that you’re paying them in a timely fashion. 

10. Be patient

Playing one thousand hours of Halo on XBox is likely to improve your player rating dramatically.  The same can’t be said for credit scores.  Much of their criteria measures reliability, and you can only show that over long periods of time.  The best time to start building credit is now, so get started and watch your score rise!  CreditKarma.com has done an awesome job of gamifying the credit score.  Their service is free to use and the user interface is beautiful.  To see your full credit report for free once a year, head over to annualcreditreport.com.

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Hacking your Credit Score

2 thoughts on “Hacking your Credit Score

  1. johnmvalentine says:

    Good point Colin. The only way around that hurting you is if you sign up for a score tracking service…but that costs money.

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