10 Feb 7 Steps to Mastering Your Credit
Master your credit in these seven, plain-English tips.
Mastering your credit seems like something you’re just supposed to know how to do. Like so many other things, people assume that common knowledge they get from friends or family must be right. Some of it seems legit! Like, “Pay your bills on time.” Everyone knows that, right? But if you think that’s all there is to good credit, you’re very mistaken. As are a lot of people.
Worse, many common-knowledge credit tips are actually false and harmful. Were you ever told to keep a “rainy day” credit card? One you don’t use until an emergency? Keeping a zero-balance credit card actually hampers your credit scores! Credit scores are based on complex models that take a lot of time and research to understand.
Fortunately, you have credit experts on your side here at Honore. And we want to help! For free! Want to master your credit in just a few, fairly easy steps? Then read on and let us share our credit expertise with you. You can start improving your credit today!
1: Keep Lots of Credit Cards… But Be Smart
One way to master your credit that isn’t common knowledge is to keep multiple credit cards. Even open accounts you don’t need! This advice is actually a bit controversial, too. But it’s based on an important fact about building your credit history: There’s no such thing as having too many tradelines!
The important thing to remember is that credit is not a replacement for your income, or even extra income. Credit is about establishing yourself as trustworthy to lenders. Use it strategically to build your credit history and profile.
The controversy is that some experts recommend the exact opposite. Dave Ramsey is a prime example. Experts like him say to err on the side of caution by not tempting yourself with thousands of dollars of credit you “can” use. Wise advice for shopaholics!
But that also limits your ability to build credit. The more tradelines you have, the longer and bigger your history of timely payments and the larger your total credit limits (see below). You also have the advantage of being able to spread your debt out across multiple cards as needed. So consider both the benefits and the risks!
2: Be careful about balances!
The first risk of credit cards and a big block to mastering your credit? Spending too much! Again, use credit cards smartly to build your credit. This is one of the examples where common knowledge is actually right.
A good rule of thumb? Only put on credit what you can already pay for! This doesn’t mean you should pay down your credit to zero every month. That’s actually bad for your credit! But the best way to prevent problems is to put no more on credit than you can set aside to pay off your debts if needed.
Your target is between 1-9% of your credit limit on each card. FICO considers less than 10% “Grade A”. If you have to use more, do your best to keep your usage under 30% at most. But less than 10% is what you want to maintain. So pay down extra debt as quickly as possible to keep it from affecting your credit scores long term!
Pro Tip: Need to pay a large bill or put a big charge on your credit card? Call them first and ask for a credit limit increase!
3: Prevent Late Payments from Reporting (One Way or Another)
Another example of old-fashioned advice that actually does work: pay your bills on time! That is a key component of credit mastery. It isn’t sexy or secret. It’s just plain, ol’ practical wisdom. And it’s still the backbone of credit! Any advice that says you can avoid paying your bills is dangerous. Stacking up multiple late payments is an easy, quick way to ruin your credit!
On the other hand, there are times when a bill gets missed. Or you simply run out of money. It happens to almost everyone. And this is where a bit of strategic thinking can prevent some serious credit problems.
The Number 1 thing to remember? Your late payment starts reporting 30 days after it was due. This is your maximum “grace period”. It is not a way to “beat the system” or permission to pay late! It’s just something to keep in mind in case of financial emergency.
Factor in weekends, mailing, processing, holidays, etc, and you really don’t want to be more than two weeks late paying any bill. Maybe you’re waiting for your next paycheck or tax return, for example. Then those “extra” two weeks can be crucial! Need even more time? Then try to overlap delay across different bills that are due 1-2 weeks apart. And then go back to paying on time ASAP!
It’s also a good idea to know your potential penalties when selecting which bills to hold! Also, if possible, call ahead and arrange a late payment (usually an option with utilities). But, again, planning late payments is a risky, last-ditch strategy just for controlling damage to your credit! It’s not guaranteed to work. And it’s definitely no Get Out of Jail Free card!
4: Maximize Credit Limits
Here’s another skill credit masters practice and perfect. Call and ask for limit increases on a consistent basis. Not just when you need them! Every time you increase your credit limit, it goes to your total credit vs your total balances. That is what FICO looks at! The higher your scores, the more likely you are to be granted an increase.
The best practice is to ask for a credit limit increase every six months. Put it on your calendar! Use apps like Google Calendar reminders. Whatever it takes, make this habit! Remember, you’re the customer, and they want your business. Be firm and insistent, but not rude. You can always transfer your balance and cancel your card, and your creditor knows that. (There’s another advantage of having many accounts! More leverage.)
With every increase, make sure to readjust your usage. On your cards with the highest interest, keep your monthly debt at 1-2%. On the best cards, you can go as high as 9% and still be optimum. This is why it’s best to keep a log of all your accounts and their limits and interest rates. But remember: a higher credit limit is not an increase in income!
5: Keep Your Old Cards Open AND Active
Two things credit masters know about credit history: 1. The longer your history, the better. 2. Keep your cards active to keep them reporting!
Many people think that the best or natural thing to do when they stop using a card or get another account is to close their old card. All this accomplishes is reducing: (a) your number of active accounts, (b) your history of timely payments, and (c) your total credit limits. All of those are bad!
Remember, you only need to use 1% of your available credit to keep a card active and its credit limit counting toward your credit scores. You can keep your credit working for you with just a trip the to grocery store or gas station!
Over time, this can mean the difference of having 2-3 active cards that only go back a couple of years and having 10 active accounts, the oldest going back a decade or more. Which profile would you pick if you were a lender?
6: Beware of Inquires
An often overlooked factor of your credit scores is inquiries. In fact, inquiries make up 10% of your FICO score! Any credit master has to take inquiries into account.
Many people get their credit report and are shocked at the number of inquiries. They think that having so many must be driving down their credit scores. Maybe, but maybe not. Every time anyone pulls your credit report or checks your credit scores, that will register as a “soft” inquiry. These have little or no effect on your credit scores.
But, whenever you apply for new credit or a loan, that will count as a “hard” inquiry and will ding your credit by a few points. The more, the worse! Especially right before you apply for a loan.
This is one of the reasons you should never apply for credit based solely on an enticing offer. Read the terms, know what you’re getting into. Apply only for the accounts you want to keep and believe you’ll be approved for!
Also, it’s best not to apply too often. Once or twice in a year is advisable. What you need to keep in mind about inquiries is that they only affect your credit scores for one year. After 2-3 years, they’ll fall off your credit report altogether. So ask yourself if that 1% cash-back or those extra frequent flyer miles are really worth it!
7: Check for Errors on Your Credit Reports and Dispute Them
We saved the best and most important for last. This step truly separates the ignorant consumer from the credit master. Monitor your credit for errors! The entire credit repair industry exists because credit report errors on are so common and so damaging.
At the least, you need to order your credit report every year. You can do this for free at AnnualCreditReport.com. This is the website that the “big three” credit bureaus (Equifax, Experian, and TransUnion) keep to comply with Federal laws. If you find an error on your report, you’re entitled to dispute it, and the credit bureau must then send you another free report after they investigate.
What the free report won’t show you are your credit scores. Want the assurance of monitoring your credit scores and updated reports every month? With live updates for any changes such as fraud or mistakes? We recommend IdentityIQ.
A word of caution:
Disputes are serious. Never dispute negative items that you’re sure are completely accurate. That’s fraud and it can get you in serious trouble!
Moreover, disputing inaccurate accounts with the wrong language or tactic can cost you your chance to get them removed or corrected. The bureaus aren’t obliged to investigate disputes endlessly! So be careful and do your homework before writing any disputes.
If you think there could be errors on your credit report and don’t know what to do about them, just contact us! The call is free and we’ll answer any questions you have about the credit dispute and repair process.
Image credit: MyFICO.com.