Growing up, no one told me how important credit was, I had to learn how to increase my credit score on my own. I was always taught that if I didn’t have the money upfront, then I had no business buying it. I guess that just comes from an old fashion mindset in an old fashioned family tree.
Nonetheless, we live in a different world than the generation before us and even the generation before them. It’s a different time, where credit practically runs everything. The housing market has increased in cost threefold in the last 50 years, vehicle purchases are almost entirely run on credit and our cost of living continues to climb.
1 year ago, I had a credit score of 480. It was the first time I had ever reached a point in my life where I saw marriage and buying a home. Someone had told me that if I got married, my credit score was going to affect my future wife and to forget about ever buying our dream home.
That didn’t sit with me very well. I felt like I had let her down. I felt like I was punishing her with all of my financial mistakes. That night I sat awake wondering how I was going to fix this dilemma that I was in, so I began my research. What I’m going to share with you are the tools I have found that have taken me from that 480 score to a 700 in just 1 year.
Trust me when I say this is not an easy road. It’s a long and uphill battle most of the time but increasing your credit score is absolutely doable. Keep reading to learn how.
Building credit is a long-term investment and there’s no single thing you can do to make that happen immediately. Credit history will gradually build as you continually increase the number of on-time payments, just know that it can take 30—60 days to reflect on your credit report.
The best way to build and improve credit is to do so steadily, by paying all your bills on time every month, managing your credit utilization ratio and ensuring you use a mix of credit types wisely.
In order to understand how to fix your credit, you need to know how credit works and what types of credit you’re dealing with.
Types of Credit
Consumer credit (the kind of credit you use, as opposed to what corporations might) is generally available in four types:
Revolving credit: This type of credit is open-ended; when you borrow, you’ll agree to repay a certain amount each month, but you won’t be expected to repay all the money by a definite end date.
Instead, you’ll be able to carry a balance and borrow more — up to a preset limit — each month. The longer the principle of the debt remains unpaid, the more interest you’ll pay on it. Credit cards are the most common form of revolving credit.
Charge cards: They look and work much like credit cards, but with charge cards you have to pay the balance in full each month.
Service credit: Anyone who provides you with a service and bills you in arrears (after you’ve received the goods or services) is extending service credit to you. This type of credit includes your utility companies, landlord (if you rent an apartment), mobile phone provider, etc.
Each month, you pay an agreed-upon amount. While this kind of credit doesn’t typically appear on credit reports, if you fail to pay your bills on time, these creditors could report the late payments to the credit bureaus or send the account to a collections agency that reports late payments, causing the negative information to appear on your credit report and harm your credit score.
Installment credit: This is the kind of credit most people typically think of as loans. If you have a mortgage or a car loan, it’s installment credit. It’s probably the most commonly used and easiest form of credit to understand.
You borrow a specific amount from a lender, and agree to repay it with interest in installments of a specified amount over the life of the loan — usually ranging from months to years.
Let's Dive In
Enough talk, let’s dive into how I increased my credit by 200 points in just 1 year!
Self Lender is a great way to increase your credit score. With Self Lender, you pay a set amount into a holding account for a set term period. What’s cool about this program is, you set the amount you want to pay and the length of the term period yourself. The higher the payment, the shorter the term.
For example: Paying $45 per month will get you a 12 month term. While paying $80 per month will get you a 6 month term. Each month, that $45 will go into your holding account and will accrue for 12 months, after 12 months, you’ll receive it all back in the form of a credit card with a $540 balance.
While you make the payments, Self Lender will report your payments to all 3 credit bureaus whether they’re on time or not, building your credit in the process.
Become an Authorized User on Someone else's Credit Card
This one is a little more challenging, yet incredibly simple and passive. Best part, It doesn’t cost a thing, which makes this a great tool to learn how to build your credit score.
First, you must find someone that you trust and that trusts you to become an authorized user for their credit cards. Preferably a spouse or close family member with good credit and is in great standing with making on time payments.
While being an authorized user, credit companies see your name on the credit report, alongside the main credit holder. So in their eyes, you’ve been making 57 (hypothetical amount) consecutive on time payments on their credit card and it helps jump your credit score drastically.
This trick works great if you’re a parent! When your child is born, put them as an authorized user on your credit cards. By the time they are 18, they will have perfect credit which will give them a tremendous jump start on life.
Get a Credit Card
Once you’ve raised your score up enough, you should receive offers from credit card companies. Make sure you find the best fit for you, preferably one without an annual fee, If you are unable to find a card with no annual fee, just make sure the fee isn’t outrageous and the interest rates aren’t through the roof.
Look for a card with a low spending limit, which may be easier to qualify for if your credit history is limited. Make small charges that you can easily pay off right away, and pay the balance in full every month. This will help build a profile on your credit report of responsible credit use and reliable payment.
Low Credit Balance
Low credit balance is a great way to increase your credit score. A credit utilization ratio of 30 percent or less is often considered good by lenders and others; the lower the ratio the better it is for your credit score.
For example, if you have $1,000 of available credit, and only owe $200, your credit utilization ratio is 20 percent.
By keeping your credit balance under 30%, it also helps keep your spending under control. The easiest way to find yourself in debt is losing control of your credit card spending.
Request a Credit Limit Increase
After you have paid down your debt and decreased your utilization rate, or if your credit is already in good standing, you may consider asking for a credit limit increase from your credit card provider. Some credit card providers will automatically increase the spending limit after multiple consecutive on time payments, so be mindful of that.
Your credit utilization ratio is a comparison between the total amount of credit available to you versus the total amount you’re using, and it’s an important factor in your credit score.
Increasing your available credit can lower your credit utilization ratio and positively impact your credit score, as long as you’re careful not to charge up to your new limit.
The lower your utilization rate is, the better your credit score will be. On the other hand, asking for a credit limit increase when you have high balances may not be the best approach, since it may be difficult to get a provider to agree to an increase.
By doing this, it could increase your risk for adding more debt if your spending is not managed properly. This in turn, would negatively impact your credit.
Pay Student Loans Diligently
If you’ve acquired a college degree, or attended college at all, you probably have at least some student loan debt.
Student loans are reported to the credit bureaus, so making your student loan payment on time every month can help build your credit.
Get a Co-signer on an Auto Loan
This tool is a major reason my credit score jumped up so high, so fast. For the longest time I didn’t have anyone to help me, but when I got engaged, my father in-law gave me a gift. He provided me with the ability to have him as a co-signer for a new car since mine was in rough shape.
Auto loans are among the easiest types of loans to obtain, although the interest rate and terms can vary greatly depending on who underwrites the loan for you. If you are planning to buy a vehicle, shop around for the best possible deal, secure the loan and make the agreed-upon payments on time every month.
If you have trouble finding a loan on your own, you may need a cosigner to share responsibility for the payments. Other types of installment loans will also help you with building credit history, such as mortgages and personal loans.
Obtain a Secured Loan
Banks and credit unions understand it’s not always easy to build credit when you’re starting out with little credit history or negative marks on your credit report. Some offer credit-builder loans, or passbook/CD loans — low-risk loans designed specifically to help you build credit.
They work much the same way a secured credit card works; for a credit-builder loan, you deposit a certain amount into an interest-bearing bank account and then borrow against that amount. The deposit is your collateral, and you’ll pay interest at a higher rate than your deposit earns it.
For passbook or CD loans, some banks allow you to use an existing bank account or certificate of deposit as collateral for the loan. Before you take the loan, confirm with the lender that your on-time payments will appear on your credit report.
Ask for Credit where Credit is Due.
Just because you’ve never had a loan or credit card doesn’t mean you don’t know about paying bills. If you reliably pay your rent and utilities on time, you’ve demonstrated good money management habits and you can ask for credit for that good track record.
Rental payments and utility bills don’t typically appear on a credit report — unless you fail to pay and the leasing company or service provider sends the delinquent amount to a collection agency or files suit against you to recover the past due amount. However, recently some companies have been taking steps to change that.
Some landlords may seem annoyed by this request, but if you can explain how important it is that you build your credit, most often they will comply.
Pay off collections
We all fall into hard times financially, you’re not alone. I know it’s hard when you fall behind on payments and companies have no remorse or empathy and send you directly to collections.
I know how hard it is to see a medical bill and stay calm. No one wants to pay $1,500 for an ambulance ride or $900 for an E.R visit when you have nowhere else to go and you have no insurance.
One thing that helped me was signing up with Credit Karma. It’s completely free and I was able to see all of my delinquent accounts in collections, how much I owed and to whom. Credit Karma also offers the collectors phone number and addresses to get a hold of them to settle your debt.
You have to reach out to each one and settle on making on time monthly payments or pay in one lump sum. Usually after you make 10-12 consecutive on time payments, they are removed from collections which help increase your credit score.
My financial journey has consisted of many ups and downs with setbacks and leaps forward. Believe it or not, one of the most important aspects of financial recovery and even financial freedom, is that it comes down to your mindset on the subject.
You have to want to get out of the hole that you’re in. Learning how to increase your credit score is essential in today’s world. Good credit can radically alter your life’s path if you wish it to. Five years ago I was homeless, unemployed and broke. I now have a brand new car, in the process of buying a home and on my way towards a better life for myself and my future family.
I hope my journey can give you hope that you can recover from your credit score crisis and get you to a place where you’ve always wanted to be. If you use any of these tips and they helped in any way, leave a comment below and tell your story!