Financial literacy wasn’t a topic in my family home while I was growing up. By my early twenties, my mind was pretty much programmed to believe the financial odds were stacked against me. I never looked into building my credit because I didn’t understand the value of doing so, and after gross mismanagement of my first credit card, I was hesitant to ever get another. My debts at the time were composed of over $9k in student loans from a for-profit college (yes, I fell for one of those) and a $500 interest-gathering balance from my first credit card. In my twenty-one-year-old mind, I had simply too much debt to overcome. However, with education, came wisdom.
Reading books got me physically fit, so I followed the same success tactic to get fiscally fit. Around the time I turned twenty-four, I began reading self-improvement books, starting with Million Dollar Habits by personal success coach Brian Tracy. Soon after, I fell under the Rich Dad Poor Dad spell and temporarily pursued financial freedom through real estate. Although I didn’t become a millionaire or a real estate mogul, these books inspired me to think critically about personal finance and how wealthy people strategically manage debt. So, I kept reading, and selecting books written by financial heavyweights, like Warren Buffett, and financial institutions, like the Financial Industry Regulatory Authority (FINRA).
Within six months of reading my first personal finance book and applying the tips, my credit score surged from a near-stagnant 560-580 points to 650. Below are the steps I took to dramatically raise my credit score, which now sits near 800 points.
The 9 Steps that Raised My Credit Score
1. Know your credit standing
Don’t be afraid to check your credit score. Feeling anxiety is normal the first time you check it (and sometimes every time thereafter). Regardless, you should know what factors are contributing to your score, i.e., your credit age, number of open accounts (credit cards, loans, etc.), debt-to-income ratio, credit card utilization, and other factors. Knowing these metrics will inform you of what areas to improve.
2. Open an account
One of the simplest and within-reach accounts available to the average person is a credit card. Even with a credit score of 580 and an unpaid debt of $500 on my first credit card, I was able to start rebuilding my credit with a low-balance credit card from Navy Federal Credit Union. Credit unions are a sound option for credit lines. Their interest rates can be lower, and payment terms (due dates and grace periods) are more flexible.
3. Pay it ALL off!
Paying off your account(s) is the number one way to increase your credit score! I repeat: paying off your account(s) is the number one way to increase your credit score!
Personal anecdote: I carried a balance on my second card for two years, and although paying it on time aided my credit (I was at 650), paying it off surged my credit score, and the bank raised my balance by thousands and offered me a second card. Less than a year after paying off the card, I was able to walk into a dealer and get approved for any car I was interested in (within reason). Not to mention, two years later, I received an offer for a Black card.
In summary, paying off your cards regularly, every month if possible, spikes your credit score and opens many financial doors for you.
4. Have a healthy mixture of accounts
Discover writes, “Creditors want to know you can responsibly manage a mix of credit types. That’s why your credit mix makes up about 10% of your FICO® Score.” My account mix consists of a few credit cards, a car note, and student loans. Other people might have a mortgage and a more complex account mix. Ultimately, banks and other financial institutions want to see that you can juggle different types of accounts by paying on time, staying below the recommended 30% utilization of total balance, and paying off balances (sooner than later).
5. Be selective with accounts
When working to obtain a healthy credit mix, make yourself aware of the benefits and drawbacks of some account types.
For example, there’s a hierarchy to credit lines: Elite: low-interest, high-balance, with sought-after perks, typically reserved for people with excellent credit and a positive debt-to-income ratio; mid-level mid-to-low interest, perks can be available, mid-level balances; starter cards or department store cards: interest can vary, balances tend to be low, and perks are limited.
Be strategic and only open accounts that benefit you in as many ways as possible. An ideal credit card is high-balance, low-interest, and can be used anywhere. Why does being able to use a card anywhere matter? Because every account is a new line of credit history, and a card that can be used anywhere is one you’ll be more likely to keep open and active, maintaining an active credit history, and a closed-loop department store card. A Lowe’s card you stopped using after one-time home renovation will no longer actively contribute to improving your credit score, and if the creditor closes the account due to inactivity, your credit score can be negatively affected. To save yourself from the initial credit check ding to get a department store card and the possibility of soon having a dead-weight account followed by another credit ding when the account closes, apply for cards that can be used anywhere at the highest balance and lowest interest rate possible for your credit standing.
6. Increase your credit limits + lower your interest rates
Raising your credit limit increases the size of your 30% utilization ratio. Don’t take a higher credit limit as an opportunity to spend more. Instead, use that metric to keep your overall utilization down; 10% is better than 30%. Once your credit score hits the high 600s, you can begin requesting higher credit limits on cards you have been managing steadily for some time. Managing a new account for six months to a year is often enough time to make this request.
As with increasing your credit limit, lowering your interest rates equals more money in your pocket. We all know that high-interest credit cards can cost a lot of money to pay off, sometimes more than what you purchased with the card. Make obtaining low-interest rates a priority in your financial life. Again, as with interest rates, once your credit score hits the high 600s, banks and other institutions may be more willing to lower your interest rates.
7. Don’t go balance transfer crazy
Balance transfers can be an excellent financial tool when you’re in a bind trying to pay off a card with, for example, a high balance or high interest. But be aware: fees often factor in, and each transfer comes with a credit inquiry.
Personal anecdote: In my late twenties, I once transferred a balance on impulse when I saw my credit union was having a promotion. Unfortunately, I forgot I already transferred a balance a year prior from a second account and had not fully paid it off. A year later, I was paying two balance transfer fees plus monthly interest: three fees on top of my normal balance.
Be strategic with balance transfers. Read fine print, stay on top of promotional deadlines, and follow step 3: Pay it ALL off!
8. Be in control
Check all your accounts often, daily is most prudent, and check your credit score at least once per month. Keeping a steady eye on your accounts and credit score is also a good form of identity awareness because you can spot abnormal activity sooner and report it quickly. A regular, watchful eye on your accounts also reveals your spending habits, giving you an opportunity to review what proclivities to improve on.
Where to check your credit score
Aside from annualcreditreport.com, you can check your credit score at sites like creditsesame.com, and creditkarma.com, but my favorite places to check are with my bank and credit card companies: Navy Federal Credit Union and Discover, which, according to one of my loan advisors, provides accurate credit ratings. These institutions already have my financial information, saving me from giving up that sensitive data to another website.
9. Keep your eyes on the ball
Don’t overspend. Examine your debt-to-income ratio and ask yourself what you can actually afford to charge to your accounts. Don’t rely on financial institutions to tell you whether you truly qualify for financial products. It’s not uncommon for banks to promote new credit lines and loans to people with sketchy debt-to-income ratios – it happened to me throughout my college career, when I was working 20 hours per week and making only $25k per year.
Websites like personalcapital.com monitor your net worth, making staying on top of your debt-to-income ratio easy. But, again, Personal Capital is a third-party site that requires access to your sensitive financial data. Ask yourself whether you really need to hand over those details when a self-made Excel spreadsheet can suffice.
To keep your hands on as much of your money as possible, don’t let your financial life to revolve around juggling payments to financial institutions. Instead, use financial products strategically to positively manipulate your credit score, so in the future you can qualify for more and better things that you really need or want, such as a new car, a home, and family vacations free of money concerns.
Books that got me in financial shape:
Million Dollar Habits by Brian Tracy
Unfair Advantage by Robert T. Kiyosaki
How to Invest $50-$5,000 by Nancy Dunnan
The New Buffettology by Mary Buffett and David Clark
Podcasts + Radio Shows
As an athlete for over 19 years and a broke single mom for most of that time, I created brokesinglemomfitness.com, now LLAFIT.com, to aid anyone who believes the road to fitness requires a lot of cash or time. In reality, the way to fitness is paved with knowledge and firm principles; teaching readers how to master both is the goal of this site. LLAFIT – Lifelong Affordable Fitness