More Ways to a Better Credit Score

Since my last post on “Working Toward a Better Credit Score” I have found a few more good tips to share. Most of the tips in this post are about using credit cards correctly to help build your FICO score at the three credit reporting agencies. If you know what makes up your FICO score, you can focus your credit building actions on how to best impact your own credit report.

The average American family has eight credit cards. General-purpose credit cards include Visa, Mastercard, American Express and Discover. Other types of credit cards include retailer-specific store cards, gas cards and  travel rewards cards. The total of all the different credit limits and how much you owe on each one in relation to the limit is calculated into a number called your “credit utilization ratio.” A good ratio is about 7%. According to industry experts, up to 20% is OK, but over that will negatively affect your FICO score.

First tip is: Don’t apply for too much credit. Eight credit cards are more than plenty for the average household. I personally only keep two general purpose cards, two retailer cards and one gas card. Not only is every card recorded on your credit report, but every time you apply for a new card is recorded as well. If you suddenly start applying for several more credit cards, you get flagged for being “credit hungry” and can be a reason for your next application to be denied or your existing cards might increase your interest rate and minimum payment amounts. About 10% of your FICO score comes from new accounts.

On the opposite side, you don’t want to suddenly close credit card accounts. If you decide to close an account, choose one of the newer accounts and pay off the balance in full – don’t just transfer the balance to a different card. The older your account, the better. Up to 15% of your FICO score is based on:

  1. The length of time each account has been open.
  2. The length of time since each account’s last activity.

My last tip is probably the most important: pay more than the minimum amount due every month and get the balance on each credit account down to just 35% or less of the credit limit for that account. This “credit utilization” is 30% of your FICO score.

Working Toward a Better Credit Score

This next year might offer me some exciting opportunities to relocate, so I am going to be working toward a better credit score. I want to be ready to buy either a house or property suitable for a custom home, and I’ll need to get a mortgage to help make that happen.

I have been searching for good tips on how to improve my credit score, which is a big challenge. I have been the victim of identity theft the past four years, and when people tell you that is a nightmare to fix – believe them! I still get blindsided with notices from all kinds of creditors for things that I did not do. So, I check my credit report every month to catch the things that are not mine and am working to build a better credit score with things that I can do and can prove that I’ve done.

Besides needing a good credit score for a mortgage, there are other ways that credit scores can affect you. If you want to borrow money for any reason, such as buying a new car or wanting a new credit card, you need a good score. Your credit score determines not only if you can get a loan at all, but also how much you can borrow or charge, and what interest rate you will have to pay. So, it is important to stay on top of your credit reports.

First thing you have to do is get copies of your credit reports from all three of the reporting agencies. You can request them online, the fastest and easiest way. The three companies are:

  • Experian
  • Equifax
  • Transunion

For a free copy once each year, go to Federal law says that you are entitled to this information once every 12 months at no charge. If you want copies more often, you might have to pay each company a small fee, or you can check with your credit card company to see if they make your credit score available as part of your account benefits.

Once you get the reports, go over them carefully and make sure that everything is correct. If you find any errors, take steps to get them corrected. There are links on each credit reporting company’s web site that tell you how to dispute any mistakes.

The next step is to find out what your FICO score is and that should be shown on the free report, too. The FICO scores range from 300 (not good) to 850 (the best you can get). The best interest rates are usually offered to people with a FICO score of 720 or higher. Scores under 500 make it very difficult to get a loan at all.

To get a better FICO score there are a few things anyone can do, but they take time and dedication, and maybe a little sacrifice of things you want but have to wait on.

Pay your bills on time! All of your bills are important parts of building good credit. They tell a potential lender or employer that you are responsible, make good decisions, and have integrity.

Pay your mortgage or rent on time. Not only are the late fees killer, but every late or missed payment is put on your record at each of the three reporting agencies as a red flag and hurts your FICO score for several years. This is usually the biggest chunk of the average household expenses and it is the most important. Although most lenders and landlords allow up to 33% of you income to go toward your mortgage or rent, it is more prudent to keep this expense below 25% of your monthly income.

If you have credit cards, make sure you pay AT LEAST the minimum payment every month, on time, no excuses. Even better, keep the balances on your cards below 35% of your credit line. Don’t ever skip a payment and NEVER go over your credit limit – that will hurt your FICO score for a long time. But balances that consistently stay under 35% of your limit give you bonus points for your FICO score. This is completely within your control – do not charge more than you can pay off when the next monthly statement comes.

If you have a bank or credit union that offers automatic bill pay, sign up for that and make sure you keep enough money in your account to cover them. This helps make sure your bills are paid on time, especially helpful if you travel a lot or have a hectic lifestyle and tend to forget paying the bills. Plus, you don’t have to worry about any delays in the mail delivery or in the company processing your payment.

About one third of your FICO score comes from your track record for paying your bills on time. This is probably the single most important thing you can do to get and keep a good FICO score.

Debit Card Holds

A lot of the gas stations are putting a hold on your bank account for a high dollar amount when you use a debit card to pay for gas. Most of the time it is for a set amount, such as $75, which is much more money than what most people actually spend at the pump.I believe the average purchase at the pump is now averaging about $40-$45. The hold remains on your account making the excess amount unavailable to you until the hold is released – sometimes several days later.

Its not a scam but its a problem for a lot of people who keep low balances. The hold can be left on the account for several days, depending on which day of the week you buy the gas. If you buy gas on a Friday afternoon, it can be Tuesday midnight before the bank processes the batch orders to make your funds available.

The way to avoid this is to pay cash for gas or to put it on a credit card if you are good about paying the whole balance each month and not letting the charges carry over with interest added to it.

A lot of gas stations have ATMS inside their stores with no fees for using their ATM, like the Thorntons chain in Nashville. You can withdraw the cash and pay for your gas with no problems about fees or holds on your account. I pay cash whenever possible.

Exploring New Ways to Earn a Living

One of my friends has been a manager of a local gas station and convenience store for several. We chat for a few minutes here and there when I stop in to buy gas or a soda, or every once in a while a lottery ticket. He was telling me that his days managing this store are numbered because, ironically, he can’t afford the high cost of gas to get back and forth to work from his home, about 40 miles away.

The corporate office says there isn’t a store closer to his home that he can manage, so he is facing losing his job if the cost of gas continues to go up. So we’ve been exploring ways for him to either supplement his income as store manager or to replace that income with something else. He is currently exploring ways to make money from the internet, and he sent away for a starter package of information on how to start an e-commerce site.

Third Week Money

Thankfully my company gives out paychecks every week. I’ve gotten used to just every other week or even just twice a month pay periods, so it was a nice surprise to learn that we get paid every single Friday here. It probably sounds silly, but I feel like I have more money when I get a check every week.

The first two paychecks of each month go to the house payment, utilities, and other household bills. The third week’s check is my spending money. That’s what goes toward clothing, sports, trips, concert tickets, books, etc. The fourth week’s check goes into my savings and investments.