Recently, my husband and I had to do some major work at tackling a bad credit score. We wanted to use his VA loan to buy a house, but he wasn’t approved at first. Due to military pay gone horribly wrong (that we are still fighting), my husband’s credit needed help. After researching the heck out of what a credit score really was, and by watching his like a hawk, we managed to make his score go up 58 points in just 3 months. We are now VA approved and house hunting! Below, I’ve tried to sum up the basics of a credit score. Be advised that I am not a financial officer, and I have an English degree. I hate numbers. This is your average gal talking about money. The best advice will come from a financial adviser or lender.
What a credit score is: a number, determined by an equation with many factors (an equation that no one knows), that shows how financially responsible you are. Note: It says responsible. Not stable. Not wealthy. You can have $1,000,000 in your bank account and have an awful credit score! When applying for any type of loan, credit card, rental house, even electricity or cable TV, companies may require your credit score to be above a certain place so they can be sure you can and will pay their bills. What your credit score needs to be depends on what you’re purchasing. It’s always a good idea to be in the 650-700 range or higher. Most home loans require a minimum of around 640 to 660.
Things that determine your credit score:
- Open Credit Utilization: The percent of your credit card “allowance” that your actually using. It = credit card maximum allowances divided by credit card balances. Ex. If you have a $10 balance on your credit card with a $100 max, your credit utilization is 10%. You want to keep your credit utilization between 1% and 20%. 0% will hurt you just as much as 50% will. For this reason, I never fully pay the balance on our credit cards. If my balance is $30 come due date, I’ll pay like $25. The amount you leave on it (in that case $5) will acrue interest, but if it’s only $5, your interest may be all of like 0.30 cents, which is worth not risking your score dropping due to a 0% utilization.
- Percent of On-Time Payments: This is just what it sounds like. It’s the number of payments you’ve had divided by the number of them that were paid on time. You want this number to be 100%, but not lower than like 98% or 97%.
- Average Age of Open Credit Lines: This is the average of how long you have had credit accounts open. This is where young people get hurt because most won’t have more than 2 years or so. If you’ve had a credit card for 2 years and student loans for 4 years, your average age of credit will be 3. The higher that number, the better. That’s not something you can change quickly. What you can do, however, is not close out your oldest credit card. For example, my husband has a credit card through the Army PX (Military Star Card) that he no longer uses. However, because it is his oldest credit card, I did not close it out because it would make this number drop.
- Total Number of Accounts: This is simply how many credit lines you’ve had open–ever. Again, this number makes young people suffer because we have less credit experiences. Most young people will only have 2 to 3. Having student loans helped me drastically here. Do not rush into getting new credit lines to improve this number. It will happen over time.
- Hard Credit Inquiries: A credit inquiry is where a company pulls your credit to see whether they should approve you for their loan or service. A hard inquiry is a detailed one that goes on your credit report. You only want between 0 and 2 at a time. If you go applying for a bunch of credit cards and loans at once, it will destroy your credit. There are soft inquiries (done by home loan lenders, etc.) that do not go on your credit report, and, therefore, do not affect your credit. Hard inquiries usually take 12 months to fall off your credit report (making your credit score go up when it does), but some can take longer. So, when you apply for something that pulls credit, make sure it is worth it!
- Derogatory Marks: These are kind of like stamps from companies that say “You are bad with money!” They usually happen when you continually miss or refuse payments with a company. These derogatory marks only come off after months and months of improving your on-time payments with that company. It’s hard to get one of these, but when you get one, you can almost be guaranteed to be denied for a loan or credit card. One or two missed payments rarely ever make a company give you a derogatory mark.
Steps to Improve Credit:
- Shop for a credit card. If your credit score is low, look into a secured credit card (where you pay the max on it…so you’re spending your own money…thereby eliminating the risk for the credit card company). My husband got the Capital One secured card and we only put a $200 max on it. It worked wonders!
- Use the credit card like I explained under the “credit utilization” section. We put $30 of gas in a car once every credit statement period. That was an easy way to make sure we didn’t go over-board on spending and ruin our utilization. This method alone did amazing things with credit!
- Use a free app like Credit Karma. While the credit score is not exact (because it’s not a FICO [a.k.a. official] credit score), it will give you an accurate picture of the categories listed above. My credit score on CK is about 40 points lower than Experian, while my husband’s is 20 points higher. So, don’t worry too much about the exact credit score it gives you. However, if your credit score jumps by like 30 points on Credit Karma, you can bet it probably made a big jump with FICO, too.
- Use your one free credit report per year. You can get it online through various websites. Just make sure it’s actually free! You shouldn’t have to put in any credit card info. This is how my husband found out he had a student loan debt in collections, which of course killed his credit a few years ago. The school told him he wouldn’t have to pay the loan back while he was in the Army, but he was told wrong. And of course, when they tried to contact him about the loan being due, he was on the other side of the world and never got a word of it. The only way we found out was by pulling his credit report a year later. It will let you see exactly what may be hurting your credit score. There are also cases where someone may have stolen your identity or opened a card or loan in your name. This will alert you to anything like that, and you can then dispute that item.
- You can get a small personal loan (for, say, $1,000), but this is a long-term change. It can take 1 to 2 years for this loan to positively affect your credit score. As you see with my husband, a credit card works much faster (and is easier to get).
I hope this info will give you a basic no-brainer look at what it takes to, hopefully, pull your credit score up! Have you found anything else that works? What advice do you have for other readers?