Most of us know that good credit management is important, but few of us know what that holistically requires. Last year Experian reported that the average American credit score was 703. That’s 57 points below the excellent rating - 760 to 850. While that may not seem that big of a distance to cover in a few months, the reality is that most Americans who have low credit scores don’t have the financial capacity to cover it. Substantially increasing your credit score usually requires a dramatic change in behavior - whether that be improving your payment habits or allocating more towards paying off your debt - and the truth is that many people in the lower and middle class don’t have these capabilities. For those who can't spend a little extra on their debt, here's a guide to improving your credit score in other ways.

Understanding Your Credit Score

First things first, we have to understand what makes up our credit score. Here are the most important factors.

Payment History (35% importance)

Credit Utilization (30% importance)

Credit History Length (15%)

Credit Mix (10%)

New Credit (10%)

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Balancing These Factors

Creating good chemistry between these factors and maximizing your credit requires that you have a clear picture of your cash flows and your balance sheet.

1. Your cash flows are your income and your expenses
2. Your balance sheet is a snapshot of how much money you have and how much money you owe.
   

To better understand these things, I would recommend downloading one of the many budgeting apps available. I recommend Truebill or Simplifi. An alternative would be to keep track of these on an Excel spreadsheet or on a notepad. Then,

1. Figure out how much cash you have right now - this includes all the spare change in your piggy bank, jean pockets, uncollected IOUs, etc.
2. Figure out how much you owe - this includes all credit cards, loans, and informal agreements.
3. Figure out how much you’ll have to spend in the next three months - only include necessary expenses and monthly payments on your debt
4. Take what you have left over and allocate it towards your highest interest debt‍
5. Specifically note how much you’re paying in interest and non-necessary expenses
6. Spend all your surplus cash on your highest interest debt. If you have capacity on a credit card, you shouldn’t have cash laying around. Don’t worry about saving or investing your money if you have a balance on a high interest loan or credit card. Pay those off as soon as possible.
7. Do your homework. Do some research on all the different ways you can improve your credit score, lower your bills, and facilitate your debt management. We hope this will be a good start.

Improve Your Score

These are all the things you should do to improve your score. In order to see consistent, long lasting effects you’ll need to use these tips for a few months.

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1. Allocate as much extra money towards your highest interest debt as possible

First, you should figure out what your highest interest debt is. Log into your credit card/loan account portals. Inside one of your monthly statements you’ll find your APR (Command + F to find it quickly) - this is the estimated interest rate you pay on that debt’s balance over the course of a year.

It’s important that you redirect all your loose cash to only paying off your highest interest debt. Sticking to this is the best way to maximize your interest savings.

If you need to reduce your bills in order to afford higher credit card payments, we recommend using Truebill or Billshark. They negotiate your bills on your behalf and report to have over a 90% success rate.

2. Increase your credit limit

The first option is to request a credit limit increase from your bank. The other, more recommended option is to open a new credit card. This also requires a hard credit inquiry, but it usually results in higher credit availability that and has added introductory/rewards bonuses.

If you’re the kind of borrower who keeps a balance on their credit cards and pays it off over a large period of time, consider getting a 0% balance transfer card. This has the added benefit of increasing your spending limit, consequently lowering your credit utilization, and allowing you to forgo interest on another credit card by transferring that balance for the introductory period. While this new account will temporarily decrease your score, the longer term benefits greatly outweigh the temporary point drop.

I did this about a year ago and saved over $1500 in interest - I had $4,896 on a Chase credit card paying a 24.99% APR. I transferred it to a 15 month zero percent interest card, paying only $245 in transfer fees, I saved a little over $1,240 in interest. I was able to scrape up the $4,900 to pay off the card at the end of the 15 months and now I have an extra credit card with $7K in spending limit. This was one of the main reasons my credit score increased over 100 points in the past year - from a 620 to 758.

3. Check your credit report for incorrect or fraudulent information.

Use any of the many free credit reporting applications and websites to get an overview of your credit portfolio. We recommend getting an official credit report from one of the three bureaus - Experian, Transunion, or Equifax. Any one of these errors can result in large decreases in your credit score.

Check that your hard inquiries, open accounts, and payment history are accurate.

If you find a mistake, don’t panic, simply contact your bank and one of the credit bureaus and ask how to proceed. Removing false information is a fairly simple process, so you should be back to normal in a few months tops.

If you want an extra layer of fraud protection, consider getting a premium credit reporting service that includes fraud alerts and dark web monitoring. This extra layer of protection might give you extra peace of mind and help you prevent future cases of identity theft and information misuse.

4. Get your bills added to your payment history

Experian offers a service called Boost, which allows users to add their phone and utility bills to their payment history for credit reporting purposes. It’s a free service and has resulted in over 22 million points boosted across a million people. It will however only increase your Experian credit score.

There are other services, such as Zingo and Esusu, which allow the aggregation of rent payments to your credit history. Some of these are free as well.

5. Get added to to an account as an authorized user

If you have a relative or a close friend who has an old account with a positive payment history, consider asking them to add you on their account. Once you become an authorized user on their account, you’ll absorb that account’s history and it’ll be added to your account. That’s why it’s important that this person is financially responsible. His/her mishaps will have a direct affect on your credit - and vise versa.

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If you do a few or all of these things over a prolonged period of time, you’re bound to see positive results. Once you establish excellent credit, your financial world is going to open up in a beautiful way and you’re going to be able to enjoy the lowest interest rates and the most lucrative rewards offerings.

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Photo by Lukas from Pexels

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