The Ultimate Headache: Credit Scores
Quick, actionable ways to help build your credit and red flags to keep in mind.
Before we jump in — I want to make two things abundantly clear.
I am no credit expert. I just have been around the block and learned from my credit mistakes — so I want to share some potentially money-saving advice with you.
I have zero vested interest in any company mentioned and this is not sponsored in any way, shape, or form. Simply sharing what has worked for me.
As a quick example as to why this subject matter is so important — I recently received a statement showing how much interest I paid on my mortgage in 2021 for tax filing purposes.
I bought a townhome in late-2019 for ~$280K. My interest rate on the mortgage was 3.375%, which at the time was incredibly favorable.
Despite this “low” interest rate, the total was nearly $9,000 in interest charges paid during 2021. As a reminder, this does not go toward paying off my mortgage — it goes directly into the bank’s pocket.
Interest sucks. The #1 way to keep interest rates as low as possible is by having an exceptional credit score.
As guy in his young-20s who had just decent credit — I wish I had known some of the tips below sooner! Since that time, my credit score has thankfully grown from the mid-600’s to 780! While I’m sure many of you have a better score than mine, this post is about what I learned to get over the credit hurdles along the way.
Estimated Read Time: 5 mins
Why Credit Scores Matter:
Despite noise from the “use cash not credit!” crowd — having a good credit score is one of the most important things you can do to set yourself up for financial success.
No need to dive too deep here — there’s plenty of other resources for this. As a quick intro, a credit score is an algorithm’s measurement of how likely you are to pay off your debt or pay back a loan on time.
They’re used to make decisions such as whether to offer you a mortgage, credit card, apartment, or auto loan. As discussed above — credit scores are used to determine the interest rate you receive on a loan or credit card, and the credit limit.
In other words… the lower the credit, the higher the cost.
4 Tips to Improve Your Score:
Things that you should absolutely understand regarding credit.
Paying Off Bills on Time
A big myth is that carrying a balance on your credit card will improve your credit score. The Consumer Financial Protection Bureau (CFPB) dispelled this myth and suggests paying off as much of your credit card’s balance as possible each month.
Your credit utilization ratio. This ratio, expressed as a percentage, shows how much of total available credit you’re using by carrying a balance on your credit cards.
Add together your total credit card balances and divide that by the total credit limit available to you (across all of your cards). Multiply it by 100 (as shown above) and boom! — that’s your credit utilization percentage.
Generally speaking, you want to always keep your credit utilization below 30%.
According to Experian, top credit scores typically keep their utilization in the single digits. Pay off your credit card balances every month to keep your credit utilization as low as possible. This will help your credit score trend higher over time.
Knowing Your Credit Limits
Why not just increase your credit limits so your credit utilization naturally becomes lower?
This certainly makes sense. If the credit limit in the equation pictured above was bigger, the resulting credit utilization value would be smaller.
There’s nothing wrong with this, and if you can obtain higher credit limits — do it. The only thing I’d encourage you to consider is if during this process your lender performs something called a hard inquiry on your credit. By participating in this, your credit score will decrease in the near-term.
When I first opened my Discover It Credit Card out of college, I had a credit limit of $4,000. After about 9 months of responsible usage, I called Discover and asked them for a credit limit increase. After asking me a few questions about my salary as well as how much I pay in rent, I was granted a $12,000 credit limit.
To put this in perspective, if I carried a $2,000 balance on this card before the increase — my credit utilization would have been 50%. Not good. But now after the increase, carrying a $2,000 balance only equates to a 14% credit utilization. This is far below the 30% “magic number.”
Spend responsibly, keep track of your credit limits, and if in a few months time you feel the urge — give your lender a call and ask for an increase. However, make sure you’re not participating in a hard inquiry.
Don’t Let Debt Collection Accounts Build Up
Debt collection account balances can end up on pulling down your credit score without you even being aware of it. Specific businesses like medical offices, utilities companies, and phone services work with debt collectors to hold you accountable.
The problem is that they may not be holding you that accountable. Balances can build up — even on things like library book fines or cafeteria fees for school children — which can harm your credit.
Companies like Credit.com, Credit Karma, and Experian can help you find your outstanding collections.
Keep Old Accounts Open (..Typically)
Another huge misunderstanding is what to do with old credit cards. In short, 15% of your FICO score is made up of how long you’ve been using credit cards. This is directly influenced by the age of your oldest credit card — so it’s generally not a good idea to cancel your first card, even if you don’t use it.
If your first card has an annual fee that you don’t like paying, then it may be something you’d consider doing.
If you have an insane amount of credit cards and simply have to cancel one or two — it’s typically best to cancel ones that have been open for the least amount of time. Keeping tabs on the overall “age” of your credit is easy, but its importance can be easily forgotten.
Rapid Fire — Credit Killers to Avoid:
We could go on forever, but the four topics above serve as a good foundation. Now let’s touch on four quick credit callouts that may help you go one step further.
🚗. Awareness when buying a car: Be careful when you’re in front of the shiny, new cars. If you give a dealership permission to check your credit score, they are performing a hard inquiry — dropping your credit score. Generally, it’s best to not give a dealership this permission unless you’re confident it’s the car you want to buy.
📝 Applying for a credit card: If you’re trying to get a new card and you get denied, it may be best to hold off on applying for another card of the same caliber. Each application also results in a hard inquiry.
📊 Understanding minimum payments: The “minimum payment due” is almost always less than your total balance due. If you pay only the minimum payment, you’re being charged interest on the difference between that and the total. Do not confuse the minimum due as being the “amount to pay without being charged interest.” Credit card companies may be sneaky with charging you the interest, but I promise — they can and will.
🏦 Knowing your interest rates: If you cannot pay off your debt and need to carry balances — first relax, we all have had to do this. Second, be sure to check which of your cards carry the highest interest charges for unpaid balances. It may be wise to pay off that card first.
Helpful Apps and Products:
Again, not sponsored in any way. These are just some apps / products that may help you with your credit journey.
Cred.ai || Credit Karma || Experian Boost || myFICO || Self || The Points Guy
Like you — I’m still learning as I go here. Feel free to shoot me a message or reply to this email with other credit callouts!
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.