Using your credit card is often deemed a credit-killing move, but the truth is that you can use them for your advantage. This is because not only bad borrowing behavior, but also good behavior, reflects on your credit score calculation. As such, you should know both the factors that influence your score and the ways you use them to make it higher.
The Dynamics of Your FICO Score
First off, let’s look at how your credit score gets calculated:
35% – Payment history
30% – Outstanding debts
15% – Length of Credit History
10% – Diversity of Accounts
10% – Fresh credit
(This is the standard FICO score algorithm)
Your FICO credit score gets calculated within a range from 300 to 850, but the actual variance depends on the specific rating algorithm that gets used. According to myFICO, credit card companies used as many as seven different FICO score algorithms to determine a borrower’s eligibility.
The algorithm your credit card issuer chooses when they pull your credit score will determine your eligibility and borrowing allowance. This is irrelevant to your credit score improvement; however, each of the calculation variables are indeed relative. You can look at the credit rating breakdown to understand just how much borrowing behavior impacts your score.
What really matters when your credit score gets calculated?
Particularly, your payment history really does make up for 35% of your credit rating calculation.
The best justification for this claim is the severity of a missed payment by a perfect borrower. You could find yourself 30 days late on a credit card payment and then have to watch your FICO score drop from 780 to as low as 670.
Likewise, your outstanding debts plays an important role in your credit score because it directly shows how overextended you are at any given point in time. However, the truth is that no two people are equal — you can still have a great credit rating with a heavy debt load, supposing you do it right.
We will show you just that — but first, you need to pull your credit report!
How to Get Your Credit Report
To get your credit report for free, go to AnnualCreditReport.com — the U.S. government authorizes this, and only this, website to issue the annual free credit reports. You can request one free report from each of the bureau, and you have the freedom to spread them out across the year.
You can look into a credit monitoring services. We often suggest that Americans looking to keep up-to-date on their borrowing status subscribe for LifeLock. This gives them more than just a few credit reports a year; it also includes extensive identity theft protection, which is important considering an identity theft could plague your credit report for years to come.
Even if you have a company monitoring your credit, make sure to do periodical reviews of your credit report to ensure there are not any errors. Sometimes innocent mistakes can hinder your credit rating. A 2013 FTC study found that 1 in 20 credit scores were suppressed by over 25 points, and 1 in 250 had scores short by 100 points or more.
Now, let’s get on with some tips and tricks that will help you boost your credit rating!
Here Are 6 Tricks to Help Increase Your Credit Score!
While no particular actions can guarantee great credit-building results, each of the following pointers will at the very least help you avoid doing all the wrong things.
Without further ado, here are six great tips and tricks to help build up your FICO score!
1) Do not fear multiple credit cards.
You should embrace your ability to qualify for new credit lines, but do be careful about which ones you choose. Credit diversity is important — and we will get to that later — but, credit variety in general is just as meaningful. If you only have one credit card, what’s the point?
You need to prove you can manage multiple borrowing accounts. While doing so, you can further show your reliability by committing to any new debt lines you open.
If you are still a new borrower, focus more on getting approved for the purpose of getting the wheels in motion. Once you have a good credit rating, you can go on a bit of an ‘application spree’ as it comes across as if you are shopping for the best card for you. If you can get approved for multiple cards, then accept them all as it will catapult you to a better average credit age sooner.
2) The ‘Application Spree’ Works Best for Loans
Still not sold on the thought that you can apply for multiple credit cards at once? myFICO cleared the air on that subject, and suggested that loans are protected more by this ‘rate-shopping’ concept.
myFICO claims that old FICO scores allow for 14-day shopping periods, and new scores accommodate 45 days of shopping around. This grace period gives consumers time to find the best rates and terms before finalizing their new credit.
There is nothing wrong with applying to many credit card providers or lenders. But, your score could plummet if you do not get approved for any of those applications — or if you fail to accept at least one. This is because it would be seen as if you cannot qualify, meaning lenders do not deem you as a credible borrower, so it only makes sense for your score to go down.
Learn more about FICO’s stance on credit inquiries on the official myFICO website!
3) Understand how utilization ratio is calculated.
Your utilization ratio is a big variable in your credit score calculation. That said, it also has a lot to do with the amount of credit cards you carry. This is because your utilization ratio is actually the ratio for the amount you owe in comparison to the amount you are permitted to borrow.
This is why you should be in favor of carrying multiple credit accounts. In theory, it will equate to a much greater borrowing ceiling — and each time your rating spikes up, that ceiling would only increase.
Meanwhile, you do need to make sure you are not overextending yourself. Sometimes it’s easy to get approved just because you have a good credit score, or because your household expenses seem miniscule. Yet, the amount you actually afford could be skewed by such data points and falling into the ‘debt trap’ could cause you to have a poor utilization ratio.
If you know you will be responsible with your debts, then look for a credit card that rewards good behavior. There are a select few issuers that offer cards that get reported with notations of ‘good behavior’ and not just the traditional credit report entry.
For example, the Discover Motiva card offers rewards for paying on time. You can earn as much as $75 on your first $3,000 of transactions. After that, you will earn $300 per $1,000 paid on time. Plus, you will receive a an additional reward of 5% of your interest payments for the month.
4) Find out and utilize your balance report date.
Each credit card issue is different, and there is no unanimous approach as to when these companies report to the credit bureaus. Many will report their cardholder’s balances on a monthly basis, while others are less frequent or even sporadic.
For the most part, credit card issuers will report on your final statement date. This means you can influence a greater score calculation by paying off your cards before that day. Except, you want to leave a small amount (say, 1% to 10% of your available credit) to show you are actively using the cards.
If you have multiple credit cards and the dates they report are spread out, it is possible to take advantage of that. Say you have a credit card that gets reported to the bureaus every three months, and then a few others that report monthly. You would want to get the highest available credit possible for that tri-monthly card, and then you could balance transfer from the others to lower their usage.
If you are uncertain, just ask the credit card issuer when the borrower’s account is reported to the bureaus to find out.
5) Get a secured credit card if nothing else.
The biggest mistake anyone can make is not building any credit at all. The only way you can get a good credit score is by having a borrowing profile. Whether you are a young adult or you just went bankrupt, you should jump on new credit options as soon as you can.
A secured credit card is an acceptable starting place. Many of these cards will even convert to unsecured cards after a year’s time. This could shut off the original card, ending it’s reporting age for your credit file, so you might want to shop the market for other cards first. Either way, a secured card typically comes with higher fees and you might prefer to just use it as a way to get trusted for traditional credit.
When searching for a secured credit card, make sure you only apply for the ones that report to the credit bureaus. There are some secured cards that are really just fully functional prepaid credit cards. Also, consider placing the highest amount in the security funds that you can. This will trigger a higher borrowing limit, meanwhile your utilization ratio will almost always be perfect.
6) Store-based credit cards are perfectly fine.
Some store-based credit cards come with amazing rewards — especially those that offer cash-back both in and out of their own store. The larger department, electronics and home improvement shops all tend to have their own types of rewards cards. However, there is a big difference between a credit card and a loan.
When you see a no-interest offer for a store-based credit card, you must take extra precautions as it could actually be a loan. For example, Future Shop recently switched from a traditional credit card to one that operates under Accord D financing (through Desjardins).
These credit card users can purchase high-value items and get no-interest for an extended period of time. But, this debt will report as the entire purchase amount and it will not run till $0 until it’s paid off and the ‘credit card’ account is considered closed.
Time Your Credit Limit Increase Requests Carefully
Something else to consider would be how frequently you are requesting increases to your credit limits. This is an acceptable action when done by a borrower with a respectable credit rating, sufficient income and no major outstanding debts or expenses. It is not a good idea to request a credit limit increase every time you find yourself financially stuck.
So, say you have a $1,000 credit limit. Keep your balance to no more than $100 for a while (about 12 months) before asking for a credit limit increase. That way, you are showing stability in your financial life and thus it makes it easier to get approved. You want to get approved as it builds up your credit rating in the long run.
You also have the freedom to increase your available credit through multiple loans, which you can request all at once. This reads more like a single inquiry on your credit report, because you are looking for a lender to qualify you and essentially shopping for the best rates. With credit cards, a FICO score could lose as many as five points per processed application.
Accepting the limit increase, once approved or if offered, can only drop your FICO score in the near term if you are a responsible cardholder. The same is true for inquiries, as lenders see them as something to consider but not a deal-breaker.
How is that not too many inquiries, and too much credit?
There are many nay-sayers to this logic that will tell you opening new credit is a big no-no.
Credit card issuers extend more trust over a gradual period, it is not a logarithmic climb. If you show you are a worthy borrower, chances are your financial life is scaling also — meaning, your income is probably greater and your expenses are more manageable.
Thus, it’s only appropriate for your credit limit to get recalculated as your borrowing strength has increased. This is why many credit card companies will offer limit increases freely, and it’s also why inquiring on your own is perfectly acceptable borrowing behavior.
Other Cards That Help Your Credit Score
The pay-on-time rewards card from Discover is a great example of a score-boosting credit card, but it is not the only one that exists. You should take the time to look for credit cards with features that are guaranteed to benefit your credit score.
Here’s a thought to ponder …
Is it really a good idea to get a cash-back rewards card? These are set up with an incentive to create a balance. While this does not guarantee the borrower’s score will be worsened, it certainly cannot help.
The more incentive there is to create a balance, the more incentive there is to carry one also — by doing so, you are indirectly causing a weaker utilization ratio.
Some alternative types of credit cards that could help better your score include:
- Free balance transfer cards to help lower total debts,
- Department store credit cards for self-employed expenses,
- 0% interest during the first months or years, to consolidate debt, or,
- A secured credit card if you are a new borrower or have bad credit.
In reality, the type of card that will benefit you the most comes down to your situation. Someone with an excellent credit rating could qualify for a 0% interest credit card that also offers free balance transfers. Meanwhile, an individual with poor credit should be happy to pull a store-based credit card.
Regardless, all that matters is that progress is made towards building up your credit rating. But, you have to remember that is a type of dynamic change, which can only happen over a gradual period of time as you show good borrowing behavior.
You Are Your Credit Score
Think what you want and do what you will, but you cannot change the fate of your credit score. It is purely determined by whether you are seen as a qualified borrower; depending on certain variables, this algorithmic statement can also dictate to what extent a creditor can trust you.
That’s the nature of the machine — you cannot change it. Instead of trying to re-invest the wheel, you just need to stop and think: what would a good, responsible borrower do?
Elite Personal Finance cannot give you that answer, and neither can anyone else. But, we would like to think that a responsible borrower would follow these three rules:
- Avoid asking for credit limit increases until debt load is low, stable,
- Use cards for emergencies and score-building, not as a long-term loan, and,
- Always, no matter what, avoid borrowing more than you can pay.