Who doesn’t want to have an excellent credit score? The importance of having a good credit score is key to getting the very best interest rates and loans. Doing this can save you tens, if not hundreds of thousands of dollars over your lifetime. If you are a millennial planning on buying a house in the near future this article will be filled with knowledge for you to increase your credit score.
There are a few big name credit scoring companies FICO, Equifax, Experian, and TransUnion. Credits scores are rated on a scale from 300 to 850. Generally speaking, scores higher than 750 are considered excellent credit scores.
You can grab your free credit score today from Credit Sesame. Once you get a hold of your credit score you can start taking steps to increase it. Start by following these 7 habits people with excellent credit scores follow.
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1) Never Miss a Payment:
By far the most important factor in your credit score is your payment history. Lending companies want to know that you are going to pay them back on time every time. Missing just one payment can have a huge impact on your credit score.
To ensure you are never late or miss a payment sign up for auto bill pay. Another great strategy is setting up a calendar of when your bills are due. We personally use Mint.com which is a FREE fully automated budgeting software. Mint allows you to connect your banking and credit card companies to your account. Doing this automatically sets up alerts and reminders when bills are due. Another company very similar to Mint is Personal Captial.
Our last tip is when you get a bill, pay it! Our garbage bill comes every two months. Normally we open it and leave it on the kitchen table for a week, bad habit. A good habit is placing the bill right on your laptop or computer so when you go to use it paying your bill is the first thing you do.
2) Wach Your Credit Card Utilization Ratio:
According to Credit Karama, your credit card utilization ratio is also one of the most important factors in your credit score. You can calculate your utilization rate by dividing your total credit card balances by your total credit card limits.
To illustrate how important this factor is, Credit Karma sampled around 15 million Credit Karma members who visited the site in 2014 and compared their credit scores and corresponding credit card utilization rates.
As you can see in the illustration maintaining a credit card utilization between 0-20% is your best bet. Paying down your credit card balances multiple times per month will help keep your utilization down. Many credit card companies will allow you to set up text/email reminders after your balance reaches a certain limit.
Another great option if you have had your credit card for a while is asking for a credit limit increase. After you have proven to be a “good” customer, credit card companies will normally grant increases. Make sure you are responsible enough to handle the increase in your spending limit. We have said in previous posts if you are not responsible with your money DO NOT GET A CREDIT CARD. Carrying credit card debt is a sure-fire way to negatively impact your financial freedom.
What if you stop using a credit card? For example, we took out a credit card with Littman’s jeweler for Brittany’s wedding ring to get a large discount. After we made the purchase with the credit card, we paid it off in full within a week. We no longer needed this card since the rewards/benefits were useless after buying her ring. Instead of closing this account we cut the card in half and keep the account open. Keeping the account open allowed us to keep the available credit to help with keeping our credit utilization down. After a few years of having other credit cards with awesome rewards and higher credit limits, we shut the Littman’s account.
3) Keep Your Balances Low:
People with FICO scores of 800 or higher have an average total revolving credit balance of $1,446, compared with $2,040 for the U.S. population overall (who have an average score of 700).
What’s the habit to learn? Maintain control over your spending, charging only what you can afford to pay in full each month on your credit cards. Don’t fall into the traps credit card companies want you to. Not carrying a balance from month to month is the only way to guarantee you never have to pay their high-interest rates.
4) It Takes Time So Start Early in Life:
I was blessed to grow up with parents that were so financially fit, and willing to teach. My parents got me a credit card in high school, let me say this again. My parents got me a credit card in high school. You might be thinking “what the hell were they thinking?” Well, it was not only an amazing learning experience they could control, but it got my credit score off to an amazing start. I learned to be responsible with my money before heading to college. I used the credit card for gas to and from school and that’s it. Always stayed under my credit card utilization and always paid on time. My credit score currently sits at 794, not bad for a 26-year-old. I have never missed a payment and always pay in full.
A good habit to get into is opening up a credit card to pay for small manageable purchases at first. Some great examples would be groceries, gas, cell phone, internet etc. A great way to start would be to only use it to purchase 1 or 2 things in your monthly budget. Everyone has “fixed” bills they have to pay for on a money basis. Why not earn the rewards that come with credit cards?
Opening new credit accounts shorten the average age of your credit history, try not to do this often. Adversely, closing accounts does not affect account age right away. Credit accounts that were closed in good standing can remain on your credit report for up to 10 years.
5) Don’t Apply for Credit Often:
I briefly mentioned this above. Credit score companies see customers who apply for new credit lines often as “risky”. Every time you apply for a new line of credit your score gets an “inquiry” stamped on it. The appearance of many inquiries all at once can decrease your credit score significantly.
Having a good mix of account types helps increase your credit score. People with FICO scores of 800 or higher have an average of 10 revolving credit line. A good rule of thumb is waiting at least 6 months between opening up a new line of credit.
6) Pick the Right Credit Card Company:
Always look for credit cards from big companies that have reward programs that follow your spending patterns and interests. What is the point of getting a credit card that offers travel miles if you don’t travel? Since we love to travel we use Captial One Venture to earn 1.5 miles per dollar spent. They have an awesome sign-up bonus of 40,000 miles free!
Cards that offer cash rewards are always popular. We have used Discover in the past and loved getting cash back to put towards our monthly statements. Again, don’t get caught up in the reward programs as “saving” you money. Use your credit cards for your benefit, not your downfall. Always be frugal and purchase needs before wants in your budget.
Cards that have an annual fee might not be worth it. Always do your research and calculate if having an annual fee is worth it to get premium rewards/cash back. A great website to help you find the best card for your needs is CreditCards.com.
7) Monitor Your Credit Scores and Reports Often:
We recommend checking your credit score at least quarterly. Monitoring your credit score on a regular basis will make you aware of any negative changes and allow you to make changes to correct it quickly. Monitoring your score also allows you to gain an emotional boost when you start seeing your credit score increase significantly.
There is a bunch of companies that offer free credit score monitoring. Credit Cafe has a great article comparing the best sites.
Our absolute favorite is Credit Sesame, they allow you to monitor information from both TransUnion and Equifax. Credit Sesame also provides alerts you can sign up for to make sure you get notified when a big change happens on your credit score.
Do you use a credit card on a regular basis, why and why not?
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