Credit scores. If you've ever rented an apartment, bought a car or applied for a loan, you know what it is. It's a score that tells lenders how financially reliable you are and how good you are at paying off your debts. But it's so much more than that, too.
There are rules to the credit score game. They're just not so easy to find.
"It really is a game of the less you know, the more the person that you owe can earn from you," says Tiffany Aliche, also known as the Budgetnista.
For example, you've probably heard conflicting advice when it comes to your credit, like: You should pay off your credit card in full each month. And then, no, you shouldn't pay off your card in full each month, it's good to leave a little balance. Aliche says there are all kinds of mixed messages on purpose.
"It's not in a creditor's best interest for you to know how to play the game, because if you know how to play the game, then they don't make any money," Aliche says.
But thankfully, Aliche says the rules aren't that hard to follow once you know what they are. Out of all the basic financial tenets (debt, budgeting, investing, insurance) Aliche says credit is the easiest to manipulate.
First, we give you some tricks and tips to boost your credit score. Then we'll give you a basic breakdown of how credit scores work.
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What is considered a good credit score?
There are lots of credit score calculators, but Aliche recommends focusing on your FICO score. "If you have a decent FICO score, which is the typical score most lenders use, then your [other] scores will probably be good no matter what credit score system someone's using," she says. "The FICO score ranges from 300, which is an F minus, minus, minus to 850, which is A plus, plus, plus, plus." And she says there's no point in trying to achieve an 850 if your score is 740 or above. "You're likely to get a yes on most things that you ask for when it comes to your credit once you hit 740," she says.
How can I improve my credit score?
If you have no credit, little credit or bad credit, a parent, friend or family member (who pays their bills on time and has good credit) can do something to boost your credit score. They can add you to their credit card as an authorized user ... and you will inherit their good credit from that card.
"Yes, you can inherit the good behavior, but you can also inherit the bad. So you want to make sure that you are an authorized user on someone who pays off every month in full," Aliche said.
This is Aliche's main credit score hack.
"Really the point of an authorized user was to give younger folks access to a card that they would not normally have access to. But we're not using it like that. We're just using it to boost their credit score."
Aliche's dad actually did this for her.
If you want to add someone on as an authorized user, call your bank or credit card company and ask to add an authorized user onto your credit card. Technically, you can give this authorized user access to your physical credit card, but Aliche recommends you not do that. Just add them as a user — with no card — to boost their credit score.
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Never get too close to your credit card spending limit
Let's say your credit card company tells you you can have a credit card with a $100 spending limit. That's how much money you can borrow and spend. But ... you actually shouldn't spend that full amount. You shouldn't get even close to your $100 limit. You should spend much less. Just 30% of your spending limit, so $30. If your credit card limit is $1,000, you can spend $300. If you spend more than 30% of your limit, that hurts your credit.
So if you have a good credit score and you want to maintain it, spending 30% of your credit card limit is fine. If you have a $100 credit card limit and you only spend $30 each month, that keeps you at 30% utilization of your card, and the credit score people like that.
If you want to increase your credit score, though, you need to spend less than 30% of your spending limit. Only use $20 of your credit card limit. Or $15 (if your limit is $100). That shows the credit bureau that you don't need all of their credit. And for some reason, that makes your credit score go up.
If you do need to use your full credit card limit, one way to get around this is to pay your balance before your statement date. Your statement date is different from your payment due date. The statement date is the day that credit card companies notify the credit bureaus of your card usage. If you can beat them to the punch and pay off the card before it's reported, you can use more than 30% of your spending limit.
It can sometimes be hard to find your statement date, though. Aliche recommends you call your bank or credit card company directly and ask them what the statement date is.
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Is it better for your credit to pay off your credit card in full each month or keep a small balance?
"Paying off a debt in full every single month is like fairy dust on your credit score. It's like you paid off a mortgage. It's like you paid off a car," Aliche says. It doesn't matter how big or small your balance is. The credit bureau just likes to see that you pay off your balance, in full, every month. It's the habit that counts.
You might have heard it's good to keep a small balance, but Aliche says that's a misconception.
"Only the credit card companies want you to keep a balance, because if you don't keep a balance, what are they going to charge you? There's no fees when you pay off in full."
What about asking for a credit limit increase? Can you ask for it? Will that hurt your score?
When you ask for a credit limit increase, Aliche says, the credit card company will either do a "hard inquiry" or a "soft inquiry." A "hard inquiry" is when you give someone permission to "to see all of your grades and then they make a decision whether they want to lend to you." That inquiry can impact your credit score.
Before you ask for an increase, ask your credit card company if it's a hard inquiry. If it is, you need to ask yourself if it's worth the potential credit score hit. There's no way to know if you'll be approved for the increase, Aliche says, but if you have strong credit (740 or above), you're more likely to be approved.
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Now, here's some credit score 101:
What is my credit score composed of?
The five components that make up your credit score are:
- Payment history (35% of your credit score): This is the most important part of your credit score. Basically, payment history means what it sounds like: Do you pay the people you owe on time? This applies to school loans, credit cards, etc.
- Amounts Owed (30% of your credit score): Think of this as your spending limit. (This is the credit utilization we talked about above). You never want your credit card balance to be more than 30% of your spending limit. Aliche says credit card companies have this little trigger that says, " 'Danger, danger, danger, she's using too much of her card. She must be in financial trauma and turmoil.' And so that's why they punish you by bringing down your score [if you spend more than 30% of your credit limit]. Because if your score is low, guess what? You can't qualify for more debt. You see, they're literally slowing you down." So 30% is a new 100%.
- Length of Credit History (15% of your credit score): The longer you've had credit, the stronger this part of your credit score will be. Keep your oldest credit card open and pay off a small, recurring bill each month on it and you shouldn't have to worry much about this 15%.
- New Credit (10%): Each time you open a new line of credit (think: applying for a loan or new credit card), this 10% of your score is affected. You can lose points just by applying for a new credit card, so make sure you don't apply for new credit unless you really need it. Buying a car or trying to get approved for a rental is probably worth it. But is that fourth credit card worth it? Maybe not.
- Credit Mix (10%): You don't need to do anything for this component. Lenders just like to see that you have a mix of credit such as revolving credit like a credit card, and some installment credit loans, like a mortgage. "They just like to see that you have a mix," Aliche says. "The longer you live, the more of a mix you'll have."
What is not included in my credit score?
The credit bureaus don't take into account your job, your income, how much money you have saved, your marital status or if you have children.
When should I start building credit?
Start building credit when you know you can manage it effectively. Only take out credit if you know you won't abuse it. Aliche says she would much rather someone not take out credit than to severely abuse it. "The abuse of it is way more detrimental" than having a "thin file."
How many lines of credit should I have?
Typically, if you're looking to buy a home, Aliche says a bank will look for about three lines of credit. "So I guess if there was a sweet spot, it's that: three lines of credit," she says.
So that would be like a car payment, a credit card and a student loan. That's three lines of credit. And if you have five lines of credit that's not bad, Aliche says.
"It's not necessarily bad if you're managing them well," she says. "To me, between three and 10 is probably best. But honestly, why do you need more than five?"
Where can I find my credit score?
Some people can find a credit score through their online banking portal. You can get your FICO score here. You can also find your score through one of the major credit reporting agencies: Experian, TransUnion, and Equifax.
You can expect to see slightly different scores depending on where you look. Here's more information about how to find your score.
This piece originally published on November 10, 2020.
The podcast portion of this episode was produced by Clare Marie Schneider.
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