This is Episode 8 of our Financially Boundless Podcast. You can listen to the full-length episode using the player, or read the transcript below the player.
Hey folks and welcome to the Financially Boundless Podcast, we’re now on episode eight of the Podcast. My name is Dane Janas, I’m an IRS-licensed Enrolled Agent – a tax professional, bookkeeper, and payroll professional. If you need any help with any of those items I just mentioned hit me up at boundlesstax.com. I want to talk to you today about getting a higher credit score, and improving your credit in general.
I see a lot of videos out online and a lot of other Podcasts talk about how to get a good credit score in X number of days. First off, I want to talk about these for a second because it’s impossible to increase your score in a week or two weeks.
One month is usually the minimum for this, since scores are only refreshed by the credit bureaus on a monthly basis. I just wanted to put that out there because a lot of people that look to refresh and improve their credit and their credit score look to do it within a week or two because they need to purchase a new car, they need to get a new apartment, or whatever the case may be, and you really can’t improve your score that quickly. It’s only on a monthly basis, and even after that, your score might not improve necessarily in a month or two, it might take six months, or it might take a year. It might take even longer than that.
I just wanted to say that up front before we get too far into this topic because it is really difficult to get a good credit score and it’s even more difficult to keep a good credit score.
I’m going to go through a couple strategies to first off get a good credit score, and then I’m going to go into keeping that good credit score. The first strategy I want to talk about is a strategy on how to better your credit. If you have a bad credit score right now and you’re looking to beef it up a little bit, these are some strategies on how to beef up your credit pretty quickly.
Credit Score Tip #1:
Become an Authorized User
The first strategy is becoming an authorized user on someone else’s credit card. I know this is a hard concept if you’ve never done this before, but this could be a parent – your mom or dad – or it could be your sister, brother, friend, boyfriend, girlfriend, husband, wife, etc. You becoming an authorized user essentially gets you a copy of their credit card with your name on it. That allows you to make charges and make purchases on that card. However, the original person is always liable for making the payment and paying off the debt, not you. This is a really good method to build your credit but not take on your own actual debt.
Now let’s talk about the original person’s credit for a second. The original person is probably going to put up a wall about this saying, “well, you don’t have any credit of your own. And your credit score is in the dumps..” (If they know you real well, they’ll know your situation real well, and they’re going to put up a wall about this.) Something for you to say to this person when you pitched this idea to them: their credit is not affected.
While you might make some purchases on that card, I would recommend becoming an authorized user on someone’s card and not using it. Don’t use the card. Just say, “Hey, I need you to do this to help me fix my credit for a little while. I won’t use the card, I’ll lock it in a safe or whatever, and you can continue using the card and paying on the card as you normally would. I’ll just have a copy of it out there that I’m not going to use.”
It’s different than co-signing!
This way, the original person’s credit is not affected whatsoever, and you get the benefit of their good credit. (We’re not talking about co-signing here. This is totally different than co-signing. We’re not talking about loans or anything like that. I’m talking about credit cards here. Co-signing is not the same because if you’re taking out like a car loan and your co-signing on that car loan, yes, your score might be affected by that, but loans have “hard pulls”, which will get into in a second, and you’re going to have to close that line of credit in the future at some point. That’s not as good of a situation to be in.)
Getting back to being an authorized user, however, you will get reported as an authorized user separately to the credit bureaus. This means Equifax, Experian and TransUnion will have record of you separately as unauthorized user of someone else’s card so you can begin to build your own credit, piggybacking off of that other person’s good credit history on that credit card already.
With this method, this is the hands down best method to building your credit quickly. Your score will go up tremendously using this. I’m not going to go on and guarantee anything, but I’ve had plenty of people that have gone through this method and your score goes up tremendously – I’m talking 50 to 100 points in a couple months, sometimes even more than 100 points in a couple of months. Now, this really all depends on the credit score of the person that you’re becoming an authorized user of.
However, there is one caveat. After the subprime mortgage crisis of 2007, banks can sometimes now look past this and look deeper into your credit history and see that you are just unauthorized user and you don’t even really have a credit card of your own. This means you can still be denied when you go for a line of credit or a loan or a credit card on your own. Keep that in mind. It’s not necessarily a fix for everything.
Regardless, you can use this [other person’s] score to your advantage and use it to inflate your score and possibly open up a line yourself once your score gets high enough and keep your score on your own.
Credit Score Tip #2:
The second thing I want to go into on how to get a good credit score is disputing mistakes in your credit reports (if you have any mistakes, and if they are actual mistakes).
What do I mean by actual mistakes? While there’s plenty of stories along the lines of husband and wife getting divorced and one being liable for all the joint debt and it ending up going against the credit of both people, with that being an error on the credit bureaus part. Or, maybe you have actual error where there was identity theft that occurred and something on your credit report shouldn’t be there. Point is – there’s plenty of situations where this might occur, but you may be able to dispute those mistakes in your credit report. With technology now, you can dispute these mistakes online, depending on the credit bureau. Some credit bureaus are more behind [the times] than others, so you may have to still write physical letters to the credit bureau, describing what is wrong and why it’s wrong and what they can do to get it fixed.
Look at your Credit Report
+ A Secret to Getting one Every 4 Months
How do you know if you have mistakes? I recommend requesting a free copy of your credit report. You can request one per year from each credit bureau. The Web site is going to be down in the description of the podcast, its annualcreditreport.com. This is a government-run website. The Federal Government actual states that every US citizen, by law, can request one free credit report from each bureau every year, and there are three bureaus.
So if you can request one free credit report from each of the three bureaus once a year, that means you can request one credit report from each bureau every four months.
Let me explain that a little bit, because I recommend requesting one every four months from each credit bureau on a rolling basis. Let’s say for example, on 1/1/2020, I go onto annualcreditreport.com. I request my credit report from Equifax and I look it over for mistakes and bad marks, and I dispute any mistakes that I might find.
Then I wait four months, and on 5/1/2020, I can now go on to that same website, and maybe I’ll request the report this time from Experian. That’s a different credit bureau. That’s two out of the three now, and I look over that credit report over and make sure there’s no bad marks or mistakes or anything, and I report any mistakes to Experian.
Then I wait another four months On 9/1/2020, I request a report from TransUnion. So that’s three out of three credit bureaus (Equifax, Experian and TransUnion). I look at the TransUnion Report and I look that over for mistakes and bad marks, and I report any of those mistakes to TransUnion.
Then, come the year after that on 1/1/2021, I can start this process all over again in the same order and stay on top of my credit reports every four months.
The easiest way that I remember to do this is use your Google calendar, use the calendar that you use on your phone to set automatic recurring reminders. Have an appointment that goes off on the first of the month every four months telling you to request a credit report.
Credit Score Tip #3:
Avoid “Hard Pulls”
The next step in building credit is avoiding too many “hard pulls”. Now what do I mean by “hard pulls”? This comes from applying for loans, credit cards, and lines of credit. “Hard pulls” generally occur when a bank or a lending institution is dialing into your credit report and needs this credit report right now, instantly, because I want to make a lending decision in the next day, week, or month, whatever it may be. This would be considered a “hard pull” on your credit. The three credit bureaus tracked these heavily, so your score will go down over time. If you have too many of these lumped together in a short period of time, it’s guaranteed to affect your score.
If it’s something that you’re not sure if it’s going to be a “hard pull”, then the other option is a “soft pull”. A “soft pull” will not affect your credit score. In fact, it is guaranteed not to affect your credit. Some banks and lending institutions are coming around more to the “soft pull” concept because it doesn’t affect your credit score on people are more credit-conscious than ever. Check with the institution that you’re applying with to see if they do a “hard pull” or a “soft pull” on your credit. Most of the time, the traditional loans that you think of (mortgage, a car loan or credit card) are all going to be “hard pulls” on your credit.
“Soft pulls” might be something like setting up a payment plan on a cell phone. However, it is worth it to mention that even some cell phone payment plans now do “hard pulls” on your credit. [Be sure to double check before agreeing!]
Credit Score Tip #4:
Keep Your Utilization Rate Low
Another thing I want to talk about to keep your score as high as possible is have a low utilization rate. The industry standard on utilization is to only use about 1 to 10% of your credit limit. This is a great benchmark. Your FICO score really only wants you to use this 1 to 10% of your credit limit. That’s what the credit bureaus say you should be doing. You should have that low utilization rate to keep your score high. This means that although you have credit and you have available credit that you’re not constantly using credit to pay for things that you can afford. If you have a 50 to 60% utilization rate, that means every month 50 to 60% of what you spend is on credit. And if you’re not paying that down every month, then you can’t afford to make those purchases.
Credit bureaus look at this very negatively and say, “well, if you’re buying 50 to 60% of what you purchase per month on credit, how you going to afford your payments?” You’re not. You’re overextending yourself, and that’s how they look at it.
This makes up avery large portion of your FICO score. They only want you to use 1 to 10% of your credit limit. If you have a $10,000 credit limit, you really only want to use about $1,000 of that credit limit before you’re over that utilization limit.
Or, if you use more than that, make sure to pay it off that month before it starts accruing interest. If you’re at a 15% to 20% interest rate, you don’t really want 50% of your credit limit accruing this 15% to 20% interest rate every month and paying tons of interest on these credit cards. I know some things are expensive, and I know sometimes things just aren’t affordable with the situation you might be in. But try not to get into the hamster wheel of credit card debt.
The last two tips in this podcast episode here are how to raise your credit and also how to monitor and keep your credit score as high as possible.
Credit Score Tip #5:
Don’t Ever Miss a Payment!
First, the biggest tip that I can give you is don’t miss a payment ever and pay as much as possible on your credit cards. Even if you can’t pay a lot, always make sure you pay the minimum payment. It’s usually only $25-$100 a month. Make sure you can afford that before you go ahead and open a credit card. Sometimes there is a temptation to say that you don’t have much money this month to pay my credit card bill, so you’re just not going to pay it. No, that’s the worst possible thing you could do. If you miss a payment, it counts is a default on that credit card or a line of credit, and your score will dip dramatically.
For example, if you went through all the strategies I said earlier in the podcast, and you’ve got your score up to 750 for example, and you miss a payment, that 750 could skyrocket right back down to 600. I don’t want this to happen. Always make sure you pay the minimum payment, even if you can’t afford to pay anything more, make sure that minimum payment gets paid for somehow, even if it’s not by you. What I do personally so I never miss a payment on my credit cards is set up automatic payments from your bank directly. If you have a checking account, set up automatic payments from that checking account to your credit card so that you never miss a payment, even if it is the minimum payment.
Credit Score Tip #6:
Keep Tabs on Your Credit
Now, the last tip I have for you today on monitoring your credit and keeping your credit high is exactly that: monitor your credit. Pull those credit reports I talked about earlier. You can pull one credit report from each of those three credit bureaus every year, so that means you can pull one credit report every four months if you use the three credit bureaus to your advantage.
In addition to your credit reports, monitor your FICO score. This is what we commonly refer to as your credit score. Fortunately for most people, most banks and credit cards and credit unions offer monitoring for you as part of their online banking suite these days. It’s an easy way to monitor your credit that’s already built into the bank and credit card accounts if you have another option to do this.
Alternatively, you can use CreditKarma at creditkarma.com.
And we’ll see you next Monday for another Podcast. Have a great week and thanks for becoming Financially Boundless with us!