How a perfect credit score can improve your life — and the only 3 things you need to know to get it
You’ve got big goals in 2018: Find a new job, get a bigger place, replace that old car that keeps breaking down. Of course, that job might be better, that home a little bigger and car easier to afford if you improve your credit score and record first. Credit, a proxy for trustworthiness, is used by landlords, lenders and even hiring managers to decide if you’re worth betting on.
What are credit scores, exactly? People have borrowed and lended money for thousands of years, as economic anthropologist David Graeber noted in Debt: The First 5,000 Years. A challenge for lenders has been — beyond relying on their gut or word of mouth — predicting whether they’d get paid back.
In the mid-1950s, engineer Bill Fair and mathematician Earl Isaac decided to come up with a new system for assessing personal lending risk. The score they invented eventually became known as FICO (originally Fair, Isaac and Company) scores, which are far and away the most commonly used today.
The Consumer Financial Protection Bureau estimated in 2011 that 9 of out every 10 credit scores sold in the U.S. are some form of FICO score, ranging from 300 to 850. The higher your score, the better your credit: A score above 700 is generally seen as “good” and is also about the national average. To qualify for the best loans and credit cards, you’ll likely need an “excellent” credit score of 750 or higher.
2018 is a great year to get ahead of the curve by improving your credit. In November, Americans surpassed $1 trillion in (credit score-destroying) card debt for the first time since the recession, according to recent figures from Federal Reserve. Carrying a balance on your credit card is also expected to get more expensive this year, meaning that the consequences of being in the dark about your credit are only going to get more expensive as the year goes on.
Here are three foolproof ways to boost your score — whether you’re a power user close to cracking 800, or someone who doesn’t have credit history at all.
1. Your utilization ratio
When it comes to credit, a lot of people seem to think what they don’t know won’t hurt them. Nearly 30% of consumers said they didn’t even know their credit score, according to one recent survey. But it’s difficult, if not impossible, to be your own financial advocate if you don’t know the most important facts.
Because of how your personal credit information affects your life, all consumers are actually entitled to receive three free credit reports each year. These reports don’t technically tell you your score — which you can typically find through your bank or a service like Credit Karma — but they do contain the history and payment records that are used to determine that score.
Importantly, the reports sometimes contain mistakes: The Federal Trade Commission estimates that nearly 20 million Americans have an error on their report worth 20 points or more. For a small number of those consumers — about 5% — that’s enough of a difference to bump them into a whole other credit tier. To see if you’ve got those 20 points coming to you, you can request your free credit reports through annualcreditreport.com (nonofficial, free credit report sites abound, but that’s the only one supported by all three bureaus).
If you do find an error on one, you will have to write to the offending bureau to correct it, which you can do using an FTC template.
But there’s actually another number that’s almost as important — and more directly under your control — as the score itself: the ratio of how much credit you use each month to how much you have to use, aka your limit. The industry term for this ratio is “credit utilization,” which is basically a fancy way of describing how close you tend to get to your credit limit.
Credit utilization counts for about a third of your score, making it the second-most important factor after your record of on-time payments. If your limit is on the low side, you might consider making multiple payments each month, since credit bureaus like to see a credit utilization below 30%.
You might also be able to “juice” your credit score by asking your issuer for higher credit card limit — ideally when you get a raise, NerdWallet notes, since you may have to provide a reason for the change.
2. A couple “outside the box” tricks to juice your score faster
Paying your bills on time and keeping your credit utilization low should be sufficient to improve your credit over time — combined, those two factors account for about two-thirds of the overall picture. But maybe “sufficient” is not enough for you? The good news is that you have several simple, even mindless, ways to improve your credit faster.
One easy move is brushing up on the finer arts of saying “no,” whether it’s by canceling those recurring subscriptions or calling in the debts from that friend who never pays you back. Your credit will thank you.
You might need to fight your instincts a little: especially if you are naturally easygoing, according to one study that found that rude, aggressive people tend to have higher credit scores. There’s a few theories why that is. More easygoing people are more likely to cosign their friends’ loans, perhaps, or to okay that ridiculous surge price. Still, negotiating that credit limit, which affects your utilization ratio, is often a matter of persuading a credit card representative on the phone — and that requires tact.
If your budget is already trimmed, and your credit is still too low to get a higher limit or a new card — it might be time to start thinking outside of the box. Your credit, after all, is meant to be an illustration of your trustworthiness, and there are other ways to show off that you’re a safe bet without using a credit card.
For example, if you rent your home — you can probably have your record of on-time payments reported to the credit bureaus for free if your landlord uses a service like ClearNow or RentTrack. Other services will report on-time payments for a small fee. If you’ve got a little cash on hand, you might consider taking out a credit builder loan through a credit union or by using a site like SelfLender. With a credit building loan, you essentially borrow a little money from yourself, and then you put it into a certificate of deposit, which gets held by someone else as collateral. As you pay down the loan, your credit history will improve and once the loan is paid off, your CD will be given back to you plus interest.
If you have trouble accessing more traditional financial institutions, you might consider joining a lending circle. In these once-informal arrangements, a group of people pay a small amount of money each month, and then take turns receiving the pot every month. So, if you were in a lending circle with 11 other people, each paying $100 a month, once a year you’d get to take the $1,200. Groups like the Mission Asset Fund can help report that activity to the credit bureaus as well, which one study found helped raise credit scores by an average of 168 points.
3. The simple fact that patience pays
The most sure-fire way to build perfect credit is to do the little things right for a very long time: 15% of your credit score stems from the length of your history alone. That’s not to say that you should be applying for new credit cards left and right — but it does create a case for keeping old accounts open even once you start graduating to better credit cards with better perks.
Indeed, while it’s seen as considerably less important than your payment record or your credit utilization, having a healthy mix of loan types can boost your score if used responsibly, according to FICO. While it’s never a good idea to take out loans you don’t need, if you’re already planning to make a big purchase, there might be a good case for using an installment loan — like a low-interest personal loan — instead of one of your existing credit cards to buy your next car. If you pay off the loans on time, that will show the credit bureaus you can manage multiple kinds of debt.
No matter what, don’t rush your decisions, nor make them in a vacuum. Ask for some help if you need it: You don’t need to have wealthy parents or a kind boss to get help, either — nonprofit credit counseling services exist, which can help you negotiate with creditors, create a payment plan and make a more responsible budget. (Some lending businesses can be predatory, which is why it’s typically a little safer to find an operation that’s nonprofit.)
Local universities, housing authorities, credit unions or military bases are all good places to look, according to the FTC. If you are considering a for-profit operation, be sure to check the company thoroughly with your state’s attorney general and organizations like the Better Business Bureau for complaints.
Finally, if your credit or debt are causing you stress, there are easy ways to train yourself into being more patient. For one, lay off social media, which multiple studies have linked to reduced impulse control both on and offline.
A last trick that can boost your patience and motivation? Find ways to give yourself small wins in the meanwhile. Bear in mind that the higher your credit score gets, the harder it’s going to be to move the needle — so regard even a new point or two as encouraging signs along the way.
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