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Strategies For Improving Your Credit Score

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Your credit score is extremely important, nowadays. It determines whether or not you qualify for other credit accounts, and if so, what terms. It plays a factor in where you live, and it can even impact job opportunities.

That said, it’s crucial you do everything you can to improve and keep your score high.

What impacts your score?

There are five factors that play a role in calculating your credit score. They are listed below with percentages to discern how big of a role each one plays.

  1. Payment history (35%) – How frequently do you make on-time payments. This number should be 100%
  2. Credit utilization (30%) – How much credit have you used compared to how much you have available. For example, if you have $20,000 of credit available and used $5,000, you have a utilization rate of 25%. Credit rating agencies want to see it below 30%, but the lower, the better.
  3. Credit age (15%) – How old are your current credit accounts? The older, the better. This means that every time you open a new credit account, your credit age drops.
  4. Types of credit (10%) – Credit cards, loans, student loans, etc. Variety helps here.
  5. Number of credit inquiries (10%) – Hard credit inquiries negatively affect your score. Like the utilization, low numbers are better.

(Source)

What hurts your score

There are a few things that negatively impact your score. I’ll list the bad things from the list above, then I’ll list a few others.

  • Poor payment history – If your payment history is below 100%, you’re already starting from behind. Anything under 100% gets notched down.
  • High utilization rate – As I said, rating agencies want to see utilization rates under 30%, so anything over that will bring your score down.
  • Low credit age – Older accounts are better for your score
  • Only one type of credit account
  • A large number of credit inquiries
  • Bankruptcy – Negatively affects your credit score and stays on your credit report for 10 years.
  • Liens and judgments taken out against you – Negatively affects your score and stays on your report for 7 years

Starting from a low score

If you are starting from a lower score, it could be from past experiences (bankruptcy or liens), and if that’s the case, you can only improve. Unfortunately, time is your enemy right now until those drop off.

The first place I would start is to pay off your current debt. If you don’t have any open credit accounts, the next step is to open one.

Individuals with low scores will have trouble opening credit accounts, so I would start with a secured credit card.

A secured credit card is like a regular one, except you establish the credit limit with a deposit. The amount of your deposit is the amount of your limit.

This is a slow and steady way to improve your payment history and show the credit rating agency that you’re responsible.

Current credit accounts

Speaking generally, I advise people to keep their credit accounts open. The one exception is you do plan on closing a credit account, make it one you recently set up.

Getting rid of a new account will increase your credit age, which should increase your score.

New credit accounts

If you’re looking to increase your score, I’d recommend abstaining from opening any new accounts, unless you’re someone that needs to open that secured credit card to rebuild your score.

The other two exceptions would be opening an account for a credit card balance transfer or a personal loan for debt consolidation.

Opening new accounts hurt twice. One, you effectively lower your credit age. And two, when you apply for a credit account, it counts as a hard credit inquiry.

Don’t do it unless you have to, and if the long-term benefits outweigh the short-term penalties.

Pay down debts

Paying down debt is a slow way to improve your credit score, but it’s a tremendous way to improve your finances overall.

Less debt means less money needed to service that debt. Less debt means a lower utilization rate (number 2 factor).

Also, when you make debt payments [on time], you’re strengthening your payment history (number 1 factor).

I recently wrote an article, linked here, about paying down debts. Give it a read. In that article, you’ll also find helpful resources on similar topics.

Utilities

The last thing I would do is check to make sure your utility provider (for me, my local municipality has its own utility company) is listed on your credit report.

My previous utility company (WE Energies) did come up on my credit report. It’s another “credit type” and another way to strengthen your payment history.

Further reading:

How To Pump Up Your Finances

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By “pump up,” I mean to do something that improves your financial situation in any way. Reduce expenses, start a rainy day fund, invest for the future, etc.

With that said, let’s take a look at some simple strategies to pump up your finances.

Cut the fat

I’d start by creating a budget. Look at the past three months of income and expenses. Total the expenses, total your income and compare the two. This will give you a clear picture of how much you are spending versus how much you make.

After that, you can go back with a magnifying glass and see exactly where your money is going, and stop spending money where it is necessary, or at least reduce it.

You can also reduce the fees you pay to invest. Mutual funds and ETFs are the most popular vehicles used today, but they come with a cost. It’s listed as an expense ratio. That ratio should be as low as possible. Ideally, it’ll be under .20%.

A quick tip to cut your expenses – get rid of cable/dish. There are too many services available now. You don’t need to spend $100+ on TV anymore.

Increase savings rate

Hopefully, you are saving something. If you are having trouble setting money aside because of limited resources, give this article a read for some help.

You should be saving in at least two places. An emergency fund and a retirement plan.

  • Emergency fund – Say you are contributing $20 per month. This is a good place to start, but you’re going to want to save more so you have enough in case your car breaks down or you lose your job. After three months of saving $20/month. Increase that amount by $5. After another three months, at which point you’ll have gotten used to not having that extra $5, increase it again. Rinse and repeat.
  • Retirement plan – If you have a retirement plan with your employer and they match, you’ll want to contribute at least enough to get that match. That’s your starting point. Then you’ll follow the same steps as the emergency fund. After a few months, increase the contribution percentage. If you don’t have a plan with your employer, set up an IRA, start contributing what’s comfortable for you, and follow those same steps.

I mentioned you should have AT LEAST these two accounts. Personally, I have several savings accounts. They are set up for different reasons. I have one for holiday spending, one for car repairs, and one for travel expenses. Giving your money a “job” makes it more likely that you’ll use that money for that “job.”

Switch to an online bank

Most online banks have higher interest rates on savings accounts. They also, typically, have lower rates on loans (based on credit score).

If you are saving money for a rainy day and putting it with a brick and mortar bank, you’re most likely earning next to nothing. Better to put that money in an account where you’ll earn a little interest.

Refinance high-interest rate loans

I’m going to dedicate this section to credit cards because that’s what most people think of when they hear high-interest rates.

There are three strategies you can use.

  1. Balance transfer – Many credit card companies offer a 0% APR on balance transfers for a certain period of time. Some have terms for 21 months. The interest rate will jump after the 21st month, though, so make sure your balance is paid off before then.
  2. Personal loan – If you have credit card debt and don’t, or can’t, utilize a 0% balance transfer, then a personal loan is your next option. You get a loan for the total amount of outstanding credit card debt. Then the institution will send a payment to each credit card company and pay off your credit card debt. You’ll be left with one payment. Be advised, credit matters here (also for balance transfers) so if the interest rate on the personal loan is higher than the average interest rate of your credit cards, don’t do it.
  3. The last option is to call the credit card company and ask for a lower rate. More often than not, if it’s available, they’ll give it to you. It won’t lower your payment a whole lot, but it’ll definitely help.

If you want to learn more about credit cards, click here.

Improve your credit

Your credit score makes a difference. It can impact what loans you qualify for, the interest rate, where you live, and where you work.

If you want to start making moves in your financial life, you need to improve your credit.

There are three really simple ways to do this.

  1. Pay more than the minimum on your outstanding debt and pay on time – on time payments is the #1 factor when calculating your score.
  2. Call your utility company and see if they report to the credit agency. It’ll count as another credit account (a factor) and it’ll influence your on-time payments.
  3. Open a secured credit card – You open this type of card with a deposit. The deposit will act as your credit limit. If you deposit $500, you’ll have a credit limit of $500. Make regular, small purchases and pay the entire balance right away. Credit agencies like to so activity and, as I’ve said, on-time payments.

If you want to learn more about improving your credit, click here.

Conclusion

If you want to improve your financial life, it’s actually pretty straight forward. Spend less than you make, save money for the future, pay down debt, and improve your credit. If you do these four things (obviously, easier said than done), goals that once seemed far fetched, can be within reach.

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If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Harvesting Credit Card Reward Points

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Manufactured spending is on the rise, but what exactly is it? Well, it’s the buying cash equivalents with a rewards earning credit card. And the rewards earned are more than the fees incurred. You can use it to meet a minimum spend requirement or if you just want to earn frequent flyer points for travel.

If you’re just starting out, it’s best to use some of the easiest techniques, but you can get into more difficult ones as you start to figure out how it works for you. Here are some of the best techniques for manufactured spending:

Amazon Payments

This is one of the easiest methods for manufactured spending. You can send money to friends and family, just like PayPal and you can fund your account with a credit card without incurring fees. There is one limitation though, you can only send a maximum of $1,000 in a month.

Here’s how to do it: Find somebody you trust to send your money back to you then fund your Amazon Payments account with up to $1,000. Send the money to your trusted friend and have them withdraw it from their Amazon Payments account and send it back to you.

You can also use it like PayPal and send money to a friend you owe for dinner or to pay someone for work done.

Bluebird + Vanilla or Visa Gift Cards

This one is a little more complicated, but still manageable. Bluebird is a reloadable online checking account from American Express so it’s a trusted brand. You can use different prepaid cards to load your account. With Bluebird you can load up to $5,000 per month.

The most popular method for loading is with Visa Gift Cards. There is a fee ($6.95 for $200 card) but you can buy them from stores where you receive higher than usual rewards like grocery stores and office supply stores; earning as much as 5% cash back or points.

Bank Accounts

Another option is to fund your bank account, but most banks only allow you to use your credit card to fund the initial, opening deposit and the maximum allowance is anywhere from $100 to $1,000. Of course, you also incur monthly bank account fees unless you have a minimum balance or receive direct deposit. But some banks offer bonuses and rewards of their own so you can earn extra by opening these accounts.

Another thing to look for with manufactured spending is opportunities to increase your bonuses by earning reward points for more than one program at a time. These programs allow you to earn points with their programs and with your rewards credit card at the same time.

Manufactured spending is a great way to quickly earn points with your credit card rewards. By combining some of these methods and adding funds to reloadable cards or accounts that earn points, you can increase your points balance faster and easier. It just takes a little practice so start slow with just one account until you figure out how it works best for you.