Guidelines for Increasing your Credit Score

If you’re looking to increase your credit score or you’re new to credit cards, this guide is for you.

That said, this guide is recommended for for individuals who do not have any outstanding cashflow issues. That means if you’re having trouble budgeting your money, you are better off focusing on solving your cashflow problems and not worrying about credit.

Below I’ve written out a few different credit scenarios and how to best increase your credit score given the situation. But before I go over those scenarios I’d like to begin by reviewing the state of credit today.

State of Credit in the United States for 2014

The credit industry is continuously evolving and changing – very much like any economy. So we look at metrics to measure its current state and to assess it. Which proves to be more troublesome than initially thought.

If you try searching for “average credit score” online you are likely to find very different answers between the sites you visit. The reason is there are varying metrics used to measure credit score. You have:

  1. FICO – The gold standard in credit scoring used in more than 90% of lending decisions. When people talk about credit scores, they are typically referring to this – your FICO score. FICO scores are scaled between 300 – 850, where higher is better.
  2. VantageScore – This scoring system was developed a few years ago by the major credit reporting agencies (Equifax, Experian, and TransUnion) as a competitor to FICO. It ran on a scale of 500 – 900 until 2013, at which point it migrated to a 300 – 850 scale. VantageScore hasn’t really caught on and lenders are less likely to favor it over the tried and true FICO.
  3. PLUS Score – This is a scoring model developed by Experian and is geared towards consumers, and not creditors. It uses a scale of 330 – 830.

 

Rather than identifying an average credit score as being a FICO, VantageScore, or PLUS Score many sites wrongly use these scores interchangeably without even mentioning their source data.

So what is the average credit score in the United States? Well, this question is also tricky to answer as FICO doesn’t report it – instead it releases a state by state breakdown of score distributions.

 

median-FICO-scores-by-state

 

As an alternative answer, we can use the VantageScore system. VantageScore is not the same thing as a FICO score, but because VantageScore reports the averages by metro area, rather than state we can measure performance by geographic area with greater ease.

Experian has a great online page that reviews the “State of Credit for 2014“. According to their data, the national average VantageScore for 2014 is 666. The average debt per consumer is $28,496. And the number of retail cards per consumer is 1.54.

 

experian-state-of-credit-2014

 

I’ve mentioned the above data so that you have a better understanding of where you stand compared to others with your credit score.

 

Guidelines for Increasing your Credit Score

Now onto the good stuff. Let’s look at how to increase your credit score. Below are scenarios that may fall under.

 

I already have good credit, I want to increase it even more.

Well, I’m glad to hear you have good credit and congratulate you on your budgeting discipline.

In your situation, there a few things you can do to increase your score even more.

  • Let time pass, and keep making on-time payments. Your age of accounts, combined with your payment history, account for for roughly 50% of your credit score. As time passes you allow for both of these factors to become better established. Additionally, if you are not seeking new credit during this time, the hard inquiries (which account for about 10% of your score) will no longer be counted against you at the 12 month mark from the dated inquiry.
  • Maintain a low debt burden. FICO rewards customers for paying down debt, keeping their debt levels low, and for paying down balances on loans. On revolving accounts, such as credit cards, the best utilization is somewhere between 1%-9%.

Once you obtain a FICO score of 740+ you are typically approved for prime rate loans from most lenders. FICO Scores beyond this threshold don’t yield lower rates and credit building at this point should be less of a priority. 

 

I have no credit history, and I am looking to get started.

This is one of the commonly asked questions, “How do i start building credit?”. It goes without saying, a long-term history of on-time payments generally yields high credit scores. But getting your foot in the door can at times be difficult as lenders aren’t willing to take a chance on you.

Here is a recommended trackpath to get you started. Your mileage may vary as everyone has different personal situations.

 

Step #1: Assess your individual financial situation.

Your financial health is the heart of any credit undertaking. Understand that your credit score is not everything and it is only useful for when you want to supplement your financial activity. Your first priority when it comes to personal finance is to maintain a health budgeting plan without any cashflow issues.

You should not be seeking to increase your credit worthiness at the expense of your own personal financial health. That means if you do not have an emergency fund set aside, do not have a steady income, do not have a budget, and tend to spend more than you earn you are not recommended to pursue a credit building plan.

If you’re financial stable, continue reading.

 

Step #2: Consider becoming an Authorized User.

If a family member or a spouse has an old credit card with a solid history of on-time payments, you may want to take advantage of this and ask to become an Authorized User (AU).

AU’s are sometimes able to gain the benefit of getting the credit history of the account copied to their report. This often accelerates the process of credit building and is a process called “piggybacking”.

Every creditor handles the situation differently and rules are constantly changing. For example, Chase may have differing policies than Capital One. Additionally, some creditors have rules for who them accept as Authorized Users – sometimes only accepting family members.

FICO has also diminished the benefit one can obtain from becoming an Authorized User. That said, it is still a fantastic starting opportunity

 

Step #3: Picking a Credit Card

For your first credit card, you should avoid picking a card that an annual fee. You don’t need to pay a cent towards interest of fess to obtain a solid credit score.

I’m a student or graduate with student loans.

If you already have student loans, you have debt. And that means you have some credit history. You should be looking for a starter card.. The most popular and well regarded options for you include the Chase Freedom, Discover It, and CapitalOne Quicksilver credit cards. They offer some cash back and have no annual fees.

You should also consider the bank where you currently have a deposit account as you are more likely to be approved for a credit card if you are a member of the institution.

I am a student who does not have student loans but want to build my credit.

In this case, your credit file is probably completely empty. Since you are student, there are many financial institutions willing to take a chance on you. I recommend taking a look at the following student cards.

I am not a student, but I’m young and have no payment history.

Your biggest hurdle is going to be getting approved. You will want to look for a “starter card”. Nerdwallet has some solid recommendations worth taking a look at.

You may also want to look at the bank where you currently have a deposit account for a credit card as you are more likely to be approved.

I can not get approved and need help.

Since the credit card marketplace is filled with competition I’ve noticed a trend; companies are more willing to take a chance on new applicants. But if you’re having trouble and you’ve exhausted all the above options there is one more option left to try.

You can try to get approved for a secured card. This is a credit card where you place down a security deposit, which effectively becomes your credit limit.

Most of these cards tend to have annual fees which is unfortunate. But if you’re able to keep up with on-time payments for 6-12 months you’ll build enough credit history to stand a good chance to get approved for the cards that denied you before.

I can not get approved for a secured credit card.

This is a very rare scenario. But if this is the case you find yourself in there must be something you are unaware of that is keeping your credit file back. Run a free credit report and see what’s going on.

Do you have an account that is currently in collections? Perhaps you’re the victim of identify theft? Check your credit report meticulously and verify that everything is correct. If you find any inaccurate items, you have to dispute them or get them fixed.

 

The Rules for Using your new Credit Card

If you’re new to credit cards, you should be only be using them for planned expenses or emergencies. Make sure you do not change your spending habits simply because you have a credit card. Rewards are nice, but spending a dollar to earn points that can be redeemed for a mile of airfare or a penny cash back is foolish.

Make sure you always pay your statement balance in full by the due date. No exceptions.

 

I have bad credit and want to repair it.

Depending on how serious your financial situation is, you may find the following points useful. Please note that this is not legal advice and that if you are seeking legal advice, you should be speaking with a lawyer.

  • Bad credit history composed of late payments, liens, judgement, collection accounts, and chapter 13 bankruptcy will expire off you credit report after 7.5 years from the date of first delinquency or the judgement date.
  • The burden of proof is always placed on the creditor. So always ask for documentation. That means when you pay off a debt in collections or under a judgment make sure you have proof of payment (i.e receipt).
  • If you have potential fraudulent activity on your accounts, pull your credit report and begin disputing any inaccurate information. Time is of the essence.
  • If you have any current revolving debt, reduce it to below 30% of its limit. For more creditors, 30% is usually the “red flag” threshold for debt.

Keep making on-time payments.

Over time, bad marks and delinquent accounts will expire off our record. It usually happens at the 7.5 year mark. Bankruptcies can take longer, sometimes even up to 10 years. These two factors will also count less against you over time – so each year their hurtful impact will decrease.

You should be aware that most creditors and FICO weight your most recent 24 months of activity more heavily than the rest of your credit report. These two years are typically a strong enough indicator of risk for lenders but your experience may vary.

Strengthen your personal finances.

Obtaining a higher credit score isn’t the first priority in personal finance. Your should be focused on having enough money for the necessities of life – food and shelter being the two biggest expenditures. Your second priority should be ensuring that you have healthy monthly cashflow with a well tuned budget. If you’re able to budget properly you’re on your way to a strong credit score.

 

For additional help I recommend taking a look at the myFico guidelines on how to improve your credit score.

There are 2 comments

  1. furtdso linopv

    Awesome site you have here but I was curious about if you knew of any discussion boards that cover the same topics discussed here? I’d really like to be a part of group where I can get advice from other experienced people that share the same interest. If you have any suggestions, please let me know. Appreciate it!

  2. Tarpley

    It’s really a nice and helpful piece of info. I am glad that you shared this helpful info with us.

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