If you’re yet to establish your credit history or “life” has left your credit score in the shi!!er, fear not, I’ve got you covered! And honestly, even if you’re simply looking to better understand credit scores and how to make yours better then this article is a must read. While the road to (re)building your credit may seem long and slow, there are some tips, tricks and techniques that can help you along the way.
STEP 1: UNDERSTANDING CREDIT SCORES
Firstly, it’s important to have some baseline knowledge on wtf your credit score is and where it comes from. Your credit score and report comes from the three major credit monitoring companies…Experian, Equifax and TransUnion. (NOTE: If Equifax sounds familiar it’s because they were recently involved in a major hack).
Breaking down your credit score, sixty-five percent of your credit score comes from your credit payment history and debt level (or credit utilization ratio) while the final thirty-five percent comes from the length of your credit history, the number of credit inquiries on you and the mix of debt types. Obviously it’s a bit difficult to have payment history, any sort of debt level and lengthy credit history when you’re just beginning the adulting phase of your life and trying to get started…but we’ll get to that later in this post. Basically there are the five major areas that feed into your score and it’s generated from the three agencies listed above. For more in depth knowledge on your credit score, click here.
STEP 2: GET FAMILIAR WITH YOUR CREDIT SCORE/REPORT
Second, you need to have an understanding of where your credit stands. The easiest and free-est way to do so is to pull your free Annual Credit Report (ACR). Once per year you can get a free copy of your credit report from the three credit agencies that own your score from ACR. If you’ve already pulled your reports from ACR, you can get them for free as well through sites like Credit Karma. But, sites other than ACR usually won’t give you all three reports for free. For more info on getting access to your credit report, click here.
STEP 3: DISPUTE DISCREPANCIES (IF APPLICABLE)
With credit report in hand, conduct a thorough scan to look for any discrepancies. If you identify anything erroneous, it’s important that you dispute the error in order to get it removed. Items such as accounts that you don’t actually have or late payments that you made on time should be disputed as these types of erroneous items can have significant negative impact on your credit report. There are many ways to dispute credit errors. The dispute process will likely take time, but be patient and see it through.
STEP 4: GET CAUGHT UP!
After a review of your report, tackle any overdue accounts and accounts that have been sent to collections! These are credit score killers! With the right education and some good negotiating, you can often times settle debt with a collections agency for far less than the balance due. Once you’re caught up, tackle any accounts which are over their max balance as the debt to available credit ratio is another important factor in determining your credit score. This ratio is known as your credit utilization and makes up thirty percent of your score.
I don’t want to undermine the amount of planning and discipline that will be required to get caught up if you’re behind. Having a solid budget and a gameplan on how you’re going to catch up is crucial. If the debt appears to be overwhelming and you can’t get credit card and collections companies to work with you, then you may want to consider consumer credit counseling services (CCCS). There are a wealth of options in this arena and plenty of predatory companies looking to steal your money…click here for an in-depth article on these services and what to look for in a reputable CCCS.
STEP 5: ESTABLISH NEW CREDIT
New credit gives you the opportunity to improve multiple facets of your credit score. If you’re paying your balance every month, it’ll not only improve your payment history (35% of your score) but it’ll decrease your credit utilization ratio (that’s a good thing! and it’s 30%) while adding to your length of credit history (15%) and it’ll add a new credit type (10%). So, 90% of what makes up your credit score can be improved by the establishing of and responsible use (that’s the key) of new credit. That other 10% comes from credit inquiries so don’t send out a bunch of applications at one time…simply chose a major credit card you’d like to get and send one application. If that gets rejected consider a secured credit card (where you have to put a security deposit to get a credit limit) or a store credit card (like Target or a Military Star Card). There are resources that can help you select a credit card that may be appropriate based on your credit score/history to increase your probability of securing new credit with your first application!
HELP, NO CREDIT HISTORY!?!
This is a hot topic with a lot of my young Airmen! It begs the question, which came first, the chicken or the egg…how does a person have credit history so you can get approved for credit when you don’t have any credit history!? Fear not, there are ways to overcome this hurdle and establish your credit. One of the ideas below should be able to get you going!
- Apply for a credit card with your bank. Though your bank account doesn’t go on your credit report, you do have an established relationship with your bank and they may be able to offer you a bank credit card.
- If your bank can’t help you, consider a store credit card. It’ll likely get you savings when you shop at that store and it’ll help build your credit history.
- No dice on option one or two, consider the secured credit card. You’ll likely need to put down a deposit but it’ll get your credit history going.
- Buying a vehicle? If you have someone with a decent/semi-decent/better than your credit score that can co-sign with you it will allow you an interest rate that isn’t astronomical while establishing your credit history. Most major car dealerships like to work with us military folk because they know we have steady income and they’ll call our leadership if we start missing payments.
Patience and a solid gameplan (budget, credit payoff/paydown, tackle collections, etc) are key when trying to (re)build your credit score. Simply get your credit going and then use it RESPONSIBLY! Make your at least your minimum payments every month but try to avoid charging items that can’t be paid off within 30 days so you don’t have to pay interest. If there are credit accounts you don’t use that are paid off, consider keeping them open and unused as that extra available but unused debt will help your credit utilization ratio. Consistency will pay off!
When you graduate to advanced adulting (i.e. buying a house, applying for that AmEx Platinum card (which waives it’s $550 annual fee for military!) or getting a prestigious job) your credit score may be vitally important. Like it or not, unless you’re a hipster planning to build a tiny house in BFE nowhere and move off the grid ASAP, you’re credit score will be critical in giving you the ability to do certain things and make certain purchases that you want to in life. Remember, Rome wasn’t built in a night and, likewise, your credit score will take some time (possibly years) to (re)build. STAY THE COURSE!
Most of the links in this post will take you to The Balance, an outstanding site on personal finance with a wealth of information on all aspects of credit building and credit repair. If you think this post didn’t suck and it could be of use to someone you know, please share it with them. Also, please let me know what topics you’d like covered in the future so that I can best help you in your journey to securing your financial future.