It would be an understatement to say Tiffany Aliche had her financial life together — at least before the recession. At 25, she had $40,000 in savings, her own home and a gleaming 802 credit score.
“I had lots of money saved. I bought a condo when I was 25,” Aliche, a preschool teacher turned financial educator, said in a phone interview. “My dad was a CFO and an accountant. I was just doing what he told me to do.”
But when the recession happened, Aliche lost her job. She also amassed about $35,000 in credit card debt after investing her savings in a friend’s project that turned out to be a scam and being forced to live off credit cards. As a result, her home went into foreclosure, and her credit score plummeted from 802 to 507.
“It was really hard times because it wasn’t just a hard time for me, it was hard times for everyone,” she said. “I didn’t want to ask for help because I’d been talking so much about how I knew what I was doing.”
As Aliche got her financial life back together by moving back with her parents, creating a new budget and a plan for getting out of the debt, friends and family started to reach out for help with their own money problems. She began posting her money tips on social media and eventually built up a following, launched a website and podcast and began making keynote appearances and giving speeches for which she collects sometimes more than $10,000 in fees.
And the silver lining? Her credit score is, once again, above 750 — high enough to qualify as “excellent.”
Of course, the key to raising your credit score is to pay your bills in full and on time each month. Missed payments stay on your credit report for a full seven years. So if you’re forgetful, be sure to automate your payments, and try not to carry a balance.
If you need help getting to that point, or think there might be a reporting error dragging down your score, be sure to use Aliche’s five-step guide to raising your credit score:
1. Check your credit score for free.
More than one in five millennials have never checked their credit score before, according to a recent LendEDU study. It’s hard to get serious about improving your credit if you’re too afraid to asses the damage.
To start, check and see if your own bank offers a free credit score, since many do. Otherwise, you can get free scores from Credit Karma or Credit Sesame. Scores typically range from 30 to 850 with a good credit score falling between 700 and 749 and anything over 750 considered excellent. Anything lower and you’re either in the fair or poor zone, which means you’ll pay higher interest rates on loans and may get turned down by landlords when you apply for a rental apartment.
Scores may vary depending on the service you use to check them, because you actually have several credit scores, which are changing all the time. Fortunately, unless you’re applying for a very large loan, the small changes in your day-to-day credit score are unlikely to make that much of a difference.
2. Scan your credit report for errors — and get any mistakes fixed.
You’ll also want to get a free copy of your actual credit report, which lists open accounts and current balances with all your creditors. A good site for this is AnnualCreditReport.com.
Make sure your credit score is accurate by checking your credit report for errors. According to the Federal Trade Commission, about 40 million consumers have at least one error on their credit report, and nearly half of those consumers had errors that were causing a 20 point dip or more.
About 5% of consumers are able to bump their credit score a full credit tier — from poor to fair, for example — simply by reporting these errors. That may not sound like a lot, but moving into a different credit tier can save you thousands of dollars in interest. According to MyFico’s mortgage calculator, a person with a credit score between 680 and 699 will pay about $142,371 in interest on a 30-year $200,000 mortgage. If that same borrower raises their credit score to between 700 and 759, they would save more than $7,000.
To get the error fixed, contact both the credit bureau with the inaccurate report and the organization reporting the error by submitting a letter detailing the error either online or by certified mail, MyFICO advised. The letter should clearly identify each error, explain why you are disputing it and provide supporting documentation such as proof of payment. In most cases, the credit bureau must investigate your claim within 30 days.
3. Tweak your credit utilization ratio.
After paying your balance on time, which is the main factor determining your credit score, the second most important factor is your credit utilization ratio, which is lesser known. More than 40% of young consumers said they thought a high credit utilization ratio was good, according to the LendEdu study, when in fact the opposite is true.
Credit utilization — the percentage of available credit line that you’re using — accounts for nearly a third of your score. That means that even someone who never carries a balance can still fail to qualify for the best rates if they get too close to their limit. If your limit is too low, Aliche said to consider a second credit credit to bump up your score, but only if you can use it sparingly.
“You can trick your utilization by getting a card and not using it,” Aliche said. “But that’s for the big girls.” Another thing you can do is ask mom, dad or grandma to be an authorized user on their credit card in good standing.
Just how much will this tactic help you? It’s hard to say without knowing the specific card, your payment history and what your credit limit is, but one credit card analyst wrote in Business Insider that her score improved 40 points after getting a new credit card.
When you’re an authorized user, your parents’ on-time payments will be recorded as your own, though late payments are not: “You only inherit the good,” Aliche said. “It doesn’t give you a whole lot of points, but it’s a good way to start building your credit life without doing the work. Let Grandma do the work.”
4. Make a budget to help you pay off debt.
If you’re already boasting an above-750 score, then you’re probably doing fine, Aliche said, since that score is usually high enough to qualify for the best loan rates. But if your credit is lower and outstanding debts are to blame, then you’ll need to create a budget.
“First thing’s first is it’s always a budget,” she said. “A budget is just a picture of what your money is doing, but you can’t change the picture if you don’t know what it looks like.”
When you’ve listed out all your expenses, Aliche suggested looking at the smallest item on your budget — like a gym membership or a subscription you don’t often use — and nixing it. Then you can use that money to start paying off any remaining credit card balances you have.
If that’s not enough, start looking at some of your other, larger, expenses for opportunities to save. Lower your entertainment costs by ditching cable, cut out one restaurant meal a week to save $1,058 a year or shop the sales to avoid paying full price for clothes, electronics and other essentials.
5. Create a debt-repayment plan.
If you’re carrying a balance on more than one credit card, you need to prioritize which card you’re going to pay back first. From a strictly mathematical standpoint, this question is pretty easy: Start with the highest balance, highest interest loans first. Eliminating the larger balances earlier will overall lead to fewer interest payments in the long term.
But Aliche recommends going in reverse, and starting with your smallest balances first, something personal finance writers often describe as the snowball method.
“The snowball method allows you to get early success,” she said. “You can either pay off your debt with the highest interest rate first, which technically makes sense. But it doesn’t emotionally make sense, and debt is an emotional affliction.” Some research has suggested that people who employ this method pay off their debt faster, even if they end up paying a little more money in interest on their remaining debt while they do it.
By following these steps, you should be able to raise your credit score and maybe even make it into the 800 club.
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