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Do you have your coffee poured? Because time to learn today! One of the most requested topics way back when we did a Reader Survey was for “adulting” type posts and content around finances to help us all blossom through the realities of being a 20-something or 30-something nowadays. So, I have a few posts up my sleeve for the next few months that should hopefully help with just that! First up: credit. We want it, we need it…we might not have a clue how to improve it. And that’s OK! I was talking to J about this just the other day because we’re in the market for a new credit card or two. Personally, I have my business card and then my Nordstrom card – but I’m considering adding a credit card with some sort of travel perk to the lineup. J is a lot more experienced with choosing credit cards + managing credit, but he’s still looking to spring clean his credit and consolidate where possible, to maybe add something more worthwhile to his wallet.
I wanted to put together this post after falling into my own rabbit hole of research around credit. Credit seems like this magical unicorn that we can somehow acquire to help make the big ticket purchases in life. I mean, who the heck is whipping out stacks of Benjamins to buy houses, or dropping $40,000 in cash on a brand new car on a Tuesday? Chances are, credit comes into play. So I’m excited to team up with my friends at Lexington Law, the leaders in credit repair, to bring you some useful tips + tricks to up your own credit game. (Seriously, make sure you check out their website as a resource on all things credit, too – it’s FULL of resources!).
What is credit:
Essentially, credit gives you the ability to loan money now that you’ll pay back later. And your credit score indicates to potential loaners how likely you are to pay back that debt – since until you pay it back, anything you take out on credit is considered a debt/liability. So it’s telling businesses whether or not you’re a reliable, trustworthy person to give credit to in the first place! Not all credit is created equal; loans with fixed payments and repayment schedules (like mortgages, car loans, etc) are different than what’s considered revolving credit, where you’re borrowing a certain amount and paying back varying amounts as you go.
Why you need credit:
Credit is important because it’s needed by most lenders to prove that you’re reliable + trustworthy enough to receive a loan. If you have a good credit score, you could be approved for more money from lenders to cover the bigger ticket items in life (like a car or house). It’s also needed for things like credit cards (obviously), but also for things like a landlord’s approval, utility services, or even potential employers! The higher your credit score, the more you can borrow, and the less you’d likely need for a loan.
It will also affect things like interest rates, for things like loans or credit cards. Too high of an interest rate means you’re essentially just throwing away money, so having a better credit score could mean saving hundreds if not thousands of thousands of dollars in the long run!
How to get credit:
- Get a credit card. Start your credit-building process here! But if you’re too young slash can’t for whatever reason just yet, you can also…
- Be an authorized user on someone ELSE’S credit card. The length of time that you’ve had credit for helps your score tremendously. So this option can be *great* to get a head start! I did this in college – my dad had a card that he let me be an authorized user on, so that I could start building my score without doing anything dumb. Then, I’d just pay him back for any purchases I made on it, but it was risk-free in that it was teaching me about responsible credit usage without risk of huge, costly penalty if I made a dumb mistake while learning all about it.
- Pay off your bill every month. Never keep a balance, if possible! You sometimes have to pay a fee if you keep recurring balances depending on the nature of your specific credit card, so always strive to just pay that sucker off ASAP. Do whatever you have to do to pay off your bill ON TIME, too. Many credit cards may have an option to automatically pay your minimum payment requirement at the same time every month so that you avoid any fees – DO THAT! I’d also recommend, though, just setting a calendar reminder or a phone alarm if you have to go in and pay off the full amount when you’re able.
- Apply for a credit-builder loan. I had NO CLUE what these were before learning about them from Lexington Law, so check it out! Credit-builder loans are a great option if you don’t have slash don’t want a credit card just yet, but want to get a head start on building credit because you’re a smart cookie. They say, “These loans are occasionally offered by banks and credit unions and usually have low interest rates. People who take out credit-builder loans typically borrow a relatively small amount, often a $1,000 or less on the loan, and they pay it off in 12–24 months.”
- Get a (responsible) co-signer. The loan will show on BOTH of your credit reports, so it can help you build credit to capitalize on the good credit + timely payments of your co-signer. Just make sure they’re super responsible themselves! 😉
What’s a good credit score?
It’s a myth that checking your own score hurts your credit, so always be on top of your business. Lexington Law says anything under 560 on the FICO credit scoring system is considered “bad” credit. Anything under 620 is “high risk”. 700+ is considered “good,” 800+ is considered “excellent,” and the average for all is typically between 600-750. Bankruptcy, late payments, referrals to collection, and even too many hard inquiries to get more credit all count against you. Any sort of “delinquency,” like late payments, stay on your credit report for seven years. Bankruptcies could stick around for ten, and the inquiries for two.
Remember what I said happened to J? It stuck around for YEARS, over a silly iTunes delinquency. There are tons of free apps + services out there to check your credit, so stay on top of it!
How to improve your credit:
- Always use less than you have. If your credit limit is $5,000…don’t actually spend $5,000. The lower your “credit utilization rate,” the better. And that rate is the percentage of your credit limit that you’re actually spending. Obviously, maxing out your cards and spending $5,000/$5,000 is a 100% usage rate, which could really negatively impact your score. If anything, treat your credit like you treat your debit. If you don’t actually HAVE the cash to pay it back…don’t spend it. Because it counts to…
- Pay back on time! A huge piece of your credit score comes just from making on-time payments. One of the best ways to ensure you’re always on time with your payments is to never spend more than you can actually pay back on time. May sound simple, but it’s what catches so many folks up and hurts their score unnecessarily! If you have minimum required payments set to pay automatically from your account, that’s a great start to ensure you don’t run into any trouble with late payments and hurt credit scores.
- Request a credit limit increase. This will help better your credit utilization ratio! For example, if you have a $5,000 credit limit and spend $1,000, your credit utilization ratio is 20%. If you can get your limit increased to $7500, though, and you’re still spending only $1,000 – your ratio just became 13.3%. And using less credit always looks better to lenders, so you just earned yourself a credit win!
- Pay regular bills with credit. If you’re always on time with your utilities, rent, electric, cable, WHATEVER – pay with a credit card to build credit every month.
- Don’t open multiple credit cards in a short period of time. Every time you apply for credit, it puts a “hard inquiry” on your credit report, which could negatively impact your credit score. (The inquiries stick around on your report for two years, so it isn’t forever – but it’s something!).
- Check your different credit accounts for errors. Lexington Law says, “as many as 25% of all credit reports contain errors serious enough to cause denial on a credit application.” I mean…that’s a big deal!
- Fix any errors ASAP! The good news: If there are errors, they aren’t permanent, and they don’t have to ruin you or your credit score. Lexington Law are the leaders here. Just one negative item on your credit report could hurt your score by as much as 110 points. 110 points!!!! Removing it won’t help to raise your score back overnight, but Lexington Law’s team can work to help remove items on your credit report that may be unfair, unverified, and/or inaccurate, so that your credit score is truly reflective of your responsibility + trustworthiness to potential lenders. (Fun fact: You can get a totally free 1:1 consultation with Lexington Law to chat about your own credit score and see if there’s anything you could/should be doing differently to improve your credit! Of course, individual results always vary and can’t be guaranteed.).
How comfortable do you feel re: credit? And have you ever used Lexington Law?
Do you know your credit score? Have you had to deal with credit in the past with credit cards, or loans? I’d love to hear about your own credit experience – if you have any questions for an expert, leave them in a comment below for the leaders at Lexington Law to tackle!
*Thanks to Lexington Law, a brand I love, for sponsoring this post. As always, all opinions + thoughts presented are entirely my own. Thank YOU for supporting the brands that support Coming Up Roses!