The following is a guest post from YFS, the owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances. Join YFS’s mailing list for straight forward easy to understand financial advice by clicking here.
Improving your credit score seems like it should be a fairly easy thing. Pay your bills on time, and you should have a good credit score, right? Well, that is not always the case. While it is always a good idea to pay your bills and to pay them on time, simply paying on time will not always guarantee a great credit score because other factors are involved.
Credit scoring is somewhat of a mysterious realm, and the people who score your credit are not letting the mere mortals in on their secrets. These people put your information into their system, and then they give you a number. The FICO score is the most common, and it ranges from 300 (bad credit) to 850 (excellent credit). Banks and other lenders check your credit score to determine your creditworthiness. Your credit score, in part, helps determine how much money a bank will lend you. This is important when you want to make a big purchase like a car or a house.
Due to the mystery surrounding credit scoring, it is not exactly clear what improves your credit score. Nonetheless, there are some general tips that are likely to improve your credit score, and many of them are good habits. Some of the following tips are good common sense, while others are less readily apparent. These tips will also be helpful if you want to repair your credit after a bankruptcy or want to have good credit to buy a foreclosure.
1. Number of Credit Accounts – In order to have a credit score, you have to have open lines of credit. This generally comes in the form of credit cards, and it is thought that having around five or six credit open credit accounts is best for your credit score. Anything you finance, such as a car or your college education, is a form of credit.
2. Balances and Limits – On one hand, just having open credit accounts is not the best way to improve your score—you need to have a balance on the credit account for it to be as useful as possible. So, while having an open credit account is good, having an active credit account (one with a balance) is better. On the other hand, having a balance on your account that is close to the limit (especially multiple balances that are close to the limit) is not good for your score.
3. Payments – As discussed, paying your bills is important. Late payments will negatively affect your credit score. So, you should be sure to pay everything, student loans, mortgages, etc, on time when possible. If you ever have trouble making payments, you should contact your credit company. For example, if you are unemployed, you can often defer your student loans for a time.
Also, if you do have late payments, their effect will be reduced over time. For example, late payments last year will be less important than late payments last month.
4. Credit Inquiries – Every time you have your credit checked, it will affect your score. However, this should not stop you from checking out a few lenders if you are preparing to buy a home, for example. Also, you checking your score on your own does not affect your score.
5. The Credit Score Killers – Certain things, such as tax liens, collections, multiple late payments, and foreclosures will kill your credit score. Bankruptcy will negatively affect your score for years.
The Bottom Line: The best thing for your credit score is to have multiple credit accounts with relatively low balances, to pay your bills on time, and to avoid the credit score killers.
Have you worked to improve your credit score? What did you do to improve your score?
Feel Free to See your Free Credit Scores!
A re-habbed spendaholic, The Happy Homeowner began blogging as a way to stay accountable and to chronicle her quest for financial freedom. From paying off over $14,000 in credit card debt in one year to purchasing her own condo in the expensive Boston real estate market (on her own!), she shares her financial ramblings, musings, and fabulously frugal ideas here.
I have a confession to make: I used to be a complete financial disaster. Not only did I carry mountains of credit card debt (over $14K at one point), but I had no semblance of a budget, I had no idea where my money was going or how I was spending it, and I developed habits of sticking my head in the sand and shredding statements before even opening the envelopes.
Ignorance is Bliss, Right?
For years I ignored the signs of my impending financial doom. On the outside, I was a cheerful, well put-together, intelligent young woman. Inside, I was one nervous breakdown away from being carted off to the nearest psychiatric hospital. The source of my inner conflict? My financial—or lack thereof—habits were keeping me from living the life I desperately wanted and I had no idea how to change my ways. I was consumed by the stress of my daunting debts, meager income, and inability to get a hold of myself financially.
And so I continued to stumble through life in a debt-induced, materialistic-loving haze. I shopped my heart out, took vacations I couldn’t afford, and dined in restaurants in which I had no business being. If I maxed out one credit card, I simply opened a new one. If I couldn’t pay the monthly balance on a particular card, I blindly sent away only the minimum payment. I subsisted in this semi-permanent state of flux for nearly 4 years before I began to wonder if I had missed the financial responsibility boat.
On one particularly low day, I found myself mindlessly browsing the Internet when I haphazardly clicked on a link for a series of financial message boards. For the next 6 hours, I poured over the contents, amazed at how people were struggling with managing their debt, budgets, and financial futures. Then it hit me: I was one of those people! I needed to change my situation, and I needed to do so immediately! But what’s a gal to do when she has very few options? I couldn’t ask other people for money to bail myself out. I had no interest in taking on another job, and I certainly wasn’t in the frame of mind to cut back on my spending.
Balance Transfer Heaven
The next day, the daily mail delivery held what I thought (at the time) was my ticket to financial freedom: an advertisement for a balance transfer program at Citibank. I instantly tore through the envelope, sat down at my computer, and signed up for the program. With a few clicks of the mouse, I had sent most of my high interest credit card debt to the new card, which boasted a glorious 0% for the next 12 months. I rode the subsequent high all the way to the mall, where I charged another outfit I didn’t need in celebration of my newfound financial literacy.
In a few weeks, reality hit me when I saw what I owed as a minimum payment to the new card given its (very high) balance. Fortunately, I had always found a way to keep up with at least the minimums on all of my cards, so I scheduled the online payment. Then I went to another website to research more balance transfer deals. Over the course of the next 4 months, I opened, closed, and transferred thousands of dollars of credit card debt between countless cards. Because I had always made my payments on time, my credit score was still relatively high so I continued to take advantage of all of the offers I was solicited with.
At first, it was all a game to me. I loved the feeling of being “in control” of my debt; that I could simply transfer the balance elsewhere when I didn’t like the terms of my current card or account. Somehow, I mistakenly thought that I was being financially responsible. I filled my browser favorites folder with links to my various accounts, and I diligently logged into the accounts weekly or monthly to manage my balances. I sailed along smoothly for months, eventually chipping away a few hundred dollars of my credit card debt that had now ballooned to over $14K.
Then I went on another vacation—to a place where I would not be taking my laptop with me. Distracted by the high of the vacation excitement, I completely forgot about (disregarded?) my debt and boarded the plane with gusto. I had the time of my life for the first 4 days of the trip. On the fifth day, my credit card was denied. As was the second, third, and fourth card. I withdrew some money from my ATM account and went on my way as if nothing was wrong. But deep inside, a pit was growing ever larger in my stomach; I knew I was going to return home to a mess.
Balance Transfer Hell
And a mess it was. During my absence, I had missed multiple payment deadlines and was hit with late fees that pushed me over my available credit balance which in turn yielded over limit fees. As I sat on the phone with rep after rep after rep, trying to repair the damage, I felt as if an elephant was sitting on my chest. I couldn’t breathe, I wasn’t seeing straight, and I certainly had no clue how to calm my racing heart and thoughts.
In essence, I was suffering from my very first (and luckily only) panic attack. After hanging up the phone with the last rep, I asked my roommate to drive me to the emergency room. While being examined, the doctor asked me about my current stress levels, to which my response was to burst into tears. After clearing me medically, he made me have a consultation with one of the attending psychiatrists. It was clear to her that I was just tuned up beyond belief, so she sent me home with strict instructions to relax or else I’d end up seeing her again soon.
On the drive home, I felt an odd sense of calm flood my body. It was then that I realized why I had experienced a panic attack: I needed a financial intervention the size of Texas, and I wasn’t going to get it by playing balance transfer roulette.
Over the course of the next 3 weeks, I laid out a plan to go cold turkey with my spending habits. I also made some changes professionally and personally in order to set myself up with as much success as possible. I’m pleased to report that I paid off my $14K in credit card debt in less than a year, and I haven’t carried a hint of a balance since.
Crystal’s Comments: I could almost feel the stress!!! I am so glad you took the bull by the horns and killed your debt and I am so sorry that you had to learn the very hard way. I’m trying to kill our last debt now, the mortgage, but I can only imagine the stress you felt on those phone calls. Thank you very much for the guest post!
Have you ever hit a wall like this? Learned a lesson the very hard way?
One of my readers, Aimy, asked me to “find the best credit card that racks up the most points for travel” for her daughter. Well, I passed along that question to Dave who runs Free Travel Genius, a website dedicated to teaching readers how to travel for free by leveraging credit card points. Here is his response:
That is a very open ended question, so I will do my best. First, let me caveat that one should only be focused on getting reward points when they have good credit and are able to pay off their credit cards each month. If you are having difficulties, please read advice such as this post by guest blogger Ross. Otherwise, read on.
“Best” Travel Reward Credit Cards
There are three types of “best” cards. First are the ones with the best signup bonus. Next are the ones with the best long-term return on your spending. Finally, there are the cards that give you direct benefits (such as lounge access or free bag check). I am going to focus on the “Mega Bonuses” today since, for most people, this is how to amass a lot of free travel quickly. If you want to learn more about Long-Term Spending Cards or Travel Benefit Cards, please see my website.
My general rule is that I won’t sign up for a new credit card unless I get at least $400 in value back. There are just too many lucrative offers available today and there is a limit to how many new cards you can get each year. There are techniques to pull in hundreds of thousands of points each quarter, but I am going to give more realistic advice for a first timer and assume you will start with 1 or 2 cards (if your credit score is < 720, I would probably start with 1). Note that all of these techniques can be replicated for each family member over 18 with a good credit history and enough household income.
For those that fly domestic and live near a Southwest hub, the best card available right now is the Southwest Rapid Rewards Plus Card by Chase. This card gives you 50,000 Rapid Reward points after your first purchase which translates into $833 of discount economy tickets on Southwest for a $69 annual fee. $833-69 = $764 net value by getting this card. Sounds great to me!
If you don’t fly domestic a lot, I would consider the Chase Sapphire Card to be a great alternative (note that it is difficult to get two new Chase cards within a few months). This card has no annual fee the first year and gives you at least 53,000 ultimate reward points after spending $3,000 within 3 months. You can simply have them send you $530 for the points (not bad for 30 minutes of work), get $625 toward airline travel or 53,000 United miles. If you travel international and/or business class a lot, the United Miles could be worth well over $1,000 to you.
If you are going for a second credit card on your first Mega Bonus run, take a look at my site for more ideas.
Crystal’s Comment: Hope this helps, Aimy! I just use my Discover More card to get 5% cash back in rotating categories and 1% overall. Then I can use the cash back on gift cards or just get cash directly for trips…
The following is a guest post from Martin of Studenomics. Martin has just released a super-helpful guide that shows you how to completely conquer credit before you hit 30. “You can’t leave your mark on the world if you spend your 20s paying off credit card debt. I did all of the boring research for you so that you can see how easy it is to figure out credit.”
I’ve learned from Crystal and many other internet entrepreneurs that transparency is the way to go. Today I’m going to be more transparent than I’ve ever been before. I’m going to make a confession about being in credit card debt. I often mention (perhaps brag?) that I’ve been able to avoid credit card debt and student loans. Well today I need to confess to something.
I recently spent just under a month being stuck in credit card debt.
For the first time in my life I found myself in credit card debt and scrambling to get out so that I didn’t start getting hit with interest payments. I finally knew how it felt to be on the other side of the war against debt. This is my story…
How did this happen? How did I get myself into debt?
I was traveling through Europe for a month with my backpack and my laptop. I was using my laptop to work on Studenomics and my other online ventures (don’t worry, I’m not becoming a lifestyle design blogger). I pretty much bring my laptop everywhere I go because I can’t go more than a day without checking up on my blog stats, responding to comments, and checking my email.
There’s just one problem with this. I had been using some crapy laptop that I bought for like $500 three years ago. It was nothing special, but it got the job done. Considering the amazing technology out today, it was embarrassing when I pulled out this brick in a coffee shop. I had debated purchasing a new piece of equipment before I hit Europe because I knew that I wanted something more reliable and a lot lighter. I ended up not buying a new laptop because I put it off for too long.
Everything was going well until one day my laptop just wouldn’t start up. Normally I would just go to the computer store on the corner or call a buddy up to help me out. The only problem is that I was in Budapest, Hungary. So I sort of freaked out! A few of my new friends at the hostel tried to help me figure it out. I used a friend’s laptop to Google every possible solution. I found out that the software had just died.
The good news was that I was able to recover some of the files through using Linux (well the German version since my new friend Toby didn’t understand English and he was doing all of the fixing).
The bad news was that I was out of a laptop. I knew that I needed a new laptop. I didn’t know that this would happen in Budapest.
Then it happened. I guess you can say it was a blur. You can compare it to a drunken night out on the town because I don’t really remember much. All I remember is walking around town with my friend Zack from Long Island. Then I vaguely remember walking into an Apple Store. Then my next memory is walking home with a MacBook Air.
I went from using the worst laptop on the market to holding a brand new MacBook Air. I had my credit card to thank for this. I was officially in credit card debt.
How did I pay off my credit card balance?
I don’t write about my financial infrastructure as much as Crystal does and I definitely understand that I need to be more transparent. I wanted to try being transparent by showing you how I paid off my credit card debt.
I have two main banking accounts:
1. An account with ING Direct where I keep all of my main savings and my free checking account. I also have my sub-accounts setup for my various goals.
2. Then I have an account with a local bank where I’ve connected my credit card, retirement account, and investment accounts.
I took some money from my Random Savings Account in ING Direct, transferred some money from Paypal, and moved some money from my checking account. I was finally able to become debt-free.
It took me almost a month (until my balance due date) to pay off my credit card because I didn’t know where I should pull the money from. I had the money saved up, I just didn’t have the money budgeted in for a brand new MacBook Air. You can bash me in the comments!
How can you prevent this from happening?
This credit card debt dilemma could’ve easily been prevented. I want you to prevent yourself from getting stuck in a similar situation. Here’s how you can do it:
- Don’t be a sucker for a brand name. I obviously didn’t have to get the MacBook Air. I could’ve easily purchased any other laptop for like half of the cost.
- Always be prepared. You can call it an emergency fund or you can call it a savings account. Call it what you want but you need to save up some money just in case.
- Invest in yourself. I preach the gospel of investing in yourself and yet I still found myself using some old laptop to get my work done. It never hurts to have excellent technology on your side.
How did it feel being in credit card debt?
I absolutely hated being in credit card debt. The stress of knowing that you owe someone money is just too draining for me. Even though I had the money I just couldn’t handle knowing that I had to see it go. I really couldn’t get myself to transfer the money to my credit card. That’s $1,800 that I’ll never see again.
Now don’t get me wrong, I believe in using debt as leverage (which I’ve done but that’s another story for another guest post). It just totally sucks to spend today’s income on yesterday’s fun. If you’re in debt, I want you to get out of debt. If you’re not in credit card debt, I want you to avoid it at all costs.
Have you ever found yourself in credit card debt out of nowhere? How did you handle this?
Don’t forget to pick up your copy of Completely Conquer Credit.
Crystal’s Comments: Based on this definition of credit card debt, simply having a balance but paying it off before interest hits, I am in credit card debt every day of my life pretty much. My husband and I use credit cards for everything but pay off the balances within a week of the monthly statements being emailed to us. BUT, MD doesn’t seem to have all of those little, crazy emergency fund and savings accounts my husband and I have for splurges and pop up expenses, so I can understand why he freaked out. Thank you MD for sharing here! Good luck with your new book!
My husband and I use two main credit cards to pay for everything that we can, and then we pay off the balances every month. The Discover More card gives us 5% cash back on rotating categories and the PenFed Visa gives us 5% cash back on gasoline. I check the monthly statements between the 14th and 17th of every month when I type every expense into our budget spreadsheet, and then I pay off the balances even if they aren’t due for another 3 weeks. I was recently reminded of what a good idea it is to check your credit card statement before paying the bill.
Our Info was Stolen
Two months ago, someone stole our credit card information somehow and bought something that cost $499. They used our Discover Card info through Paypal, so it took 2 calls for me to figure out what happened. The first was to my husband to find out what he bought that was $500. He verified that he didn’t buy anything that expensive. I then called Paypal and found out that someone ordered a $499 fishing pole from Trinidad through my husband’s Paypal account.
Handling the Charge
I then asked them to freeze our account and look into the issue, but when they said that it could take up to 6 weeks for their investigation, I thanked them and called Discover instead. Their representative immediately froze our account, let me know which monthly payments seemed to be auto-billed so I could call and have them moved to our other credit card, and issued us new cards for a new account that arrived 3 days later. Within 3 weeks, our new account showed that the issue had been resolved and we were never on the hook for any of the $499. I opened my account with Discover when I was 19 years old and have been impressed ever since.
Changing our Auto-Pays
The biggest hassle was changing all of our utilities and subscriptions to be auto-charged to the Visa. A few companies let me change my card info online, lost my change, tried to charge my old Discover anyway, and then sent me a notice that my account hadn’t been paid. I was very glad I printed confirmations of my changes and could prove that I owed no late fees and they screwed up. But other than a few annoying situations like that, the issue was wrapped up pretty quickly.
Check your Credit Card Statements Before you Pay
This did reinforce the idea that I need to check every, single credit card charge every month though. If I hadn’t, I would have paid for someone else’s $499 fishing pole. You’d think I’d have noticed that much extra on our bill, but it was during the same month we had vacation charges and some pet bills, so the overall bill actually didn’t seem to be so bad. It was even better when I found out I didn’t need to pay for $500 of it, lol.
Do you check your credit card statements every month?
Feel Free to See your Free Credit Scores!
The following is a guest post about credit cards and credit scores from Angie Picardo, a staff writer for NerdWallet, which is a credit card website dedicated to helping consumers find the best credit card.
Though they are often mistakenly interchanged, there are some significant differences between credit cards and charge cards. Unlike credit cards, charge cards don’t have preset spending limits. The idea of a limitless card may sound dangerous, but since the balance must be paid in full at the end of each month, cardholders are encouraged to think twice before embarking on any shopping sprees. Plus, a card issuer can always cancel the card if they decide you’re too risky.
So how should our friends at Fair Isaac factor a charge card into your credit score? You (hopefully) never carry a balance month-to-month, and since your credit limit is technically infinite, your debt-to-credit limit ratio is zero to infinity. FICO doesn’t waste time with abstract numbers, of course, so we’re left with the question: How does a charge card affect your credit score?
Does a charge card influence your credit score?
According to FICO, the percentage of your open credit lines in use, or your debt utilization ratio, makes up 30% of your credit score. So if you had an $8,000 limit with a $2,000 balance, your utilization ratio would be 25%. A lower debt-to-credit limit ratio translates a better credit score because it shows that you can avoid maxing out when trusted with a good amount of credit. Unfortunately, figuring out the debt utilization ratio on a card with no limit and no balance makes it a little difficult to determine how charge cards affect your credit score.
Allow us fill you in.
Charge card issuers report your highest balance to date, or a “high limit,” instead of your credit limit. They also report the credit line as “open” as opposed to a “revolving” credit line, which has no fixed number of payments. If a credit bureau sees an open account with a high limit instead of a credit limit, they know they’re looking at a charge card. They then disregard the information, so charge cards have no impact, positive or negative, on your credit score.
So what’s the benefit?
Before you write off charge cards as limited lines of credit that don’t help your utilization ratio, consider the cards’ other effects. Over time, having the account bumps up the average length of your credit lines and payment history (that is, if you’ve been keeping up), which adds up to 50% of your overall credit score. If your only goal is to maintain your credit score and keep low balances, a revolving card may be the best credit card for you.
But it really all just comes down to whether or not you are a responsible cardholder. A charge card can be costly if you carry a balance: some charge $35 if you’re late, or worse, 2.99% of the balance. That translates to an APR of over 35% – far worse than most credit cards. If there’s a chance you won’t be able to pay off the debt on your charge card in a month, you should look for a low interest rate credit card instead. Charge or credit, no card can replace keeping a keen eye on your budget and practicing good, old fashioned, smart spending habits.
The following is a post on behalf of Money Supermarket.
While most people’s everyday lives depend on their credit score, often, they have no idea how to check it. If they do know how to check it, they don’t keep constant tabs on the changes and progress made. When you know your credit score, you have some control over your life, your finances and the decisions that you are going to make in the near future.
After checking, you may notice that there are some discrepancies and you can contact a place such as moneysupermarket.com to help you get back on track.
Knowledge is Power.
When you know your credit score, you know how other companies and businesses view you. You can walk into a car dealership knowing that you have a strong score and should be paying a lower interest rate. As you open the mail and come across credit card offers, you know whether or not to take advantage of any of the opportunities presented.
When you don’t have a clear idea of what your credit score is, people can look to deceive you and try to take advantage of you. Knowing your score means that you know just how valuable you really are to companies that are looking for your business.
Be one the Lookout for Mistakes.
There are times when reporting is inaccurate. When you know your credit score, you can keep an eye on the changes. When something doesn’t look right, you can check and make sure that there are no mistakes. Catching a mistake early means that you can have the numbers adjusted right away and get your credit score back on track. Don’t expect anyone else to take care of this number for you.
Protect your Identity.
When someone else uses your credit cards or even your identity, your credit score is one of the first things to be affected. With your credit score and the information included in it, you can track down the unauthorized charges, when they took place and be on your way to getting your credit back in order.
Prepare for the Future.
When you know that your credit score is weak you can begin working to improve it. This means paying off your loans and bills and building up positive credit. You can do this with checking and savings accounts and even credit cards that are specifically made for people who are struggling financially.
When You Can’t Check Regularly.
Some people just can’t keep up with their credit score on their own. You can look into a company that will be able to track your score as well as your report for a fee. They will alert you when they see a problem and will work with you to fix whatever happened.
In the case of identity theft, they will be able to help catch the person who is causing the problems and bring them to justice. Some offer a guarantee that your identity cannot be stolen when they are in charge of monitoring everything.
Don’t let other people tell you about your financial situation. Use your credit score and credit report to learn more about what kind of consumer you are and what you are capable of achieving.
You should know your credit score and check the reports regularly.
Feel Free to See your Free Credit Scores!