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Oh man, I HIGHLY need to stress the fact that I AM NOT licensed to give any form of financial advice, but I really need to show some tough love on how y’all use your credit! I know I’ve told you guys this before, but worked in the loan industry in the past so I know a thing or two about credit and how low people let it go.
The way I’d like to structure this is by talking about the factors of once more but more so showing you some tough love about what not to do. If you want an in-depth explanation of the factors, check out my article explaining that here.
Payment history – 35% Very important
So payment history may very well be the single most important part of your credit score and typically the most simple to understand. A consistent history showing payments to your creditors is exactly what future lenders want to see.
Who wants to lend money to someone who has a bad history in paying the creditor back? It’s like your friend who never pays anyone back when they spot him comes to you asking for money. Can’t blame the loan officers for not lending any money to you if you’re “that friend”.
If you’re just starting out in your credit journey, pay everything on time; don’t slip up! That being said, if you’re late a day or two, it’s usually no big deal. I’ve forgotten to make a payment once or twice in the past and the payment ended up being 2 or 3 days late. It happens. DO NOT make it a habit though. Put alarms on your phone, make calendar reminders, write it down on a piece of paper and stick it to your fridge – anything to get you to remember.
If you have a few late payments recorded on your credit score, try and keep making consistent payments so you have mostly good marks on your report. If there is anything in collections, call the collector and see if there is any way you guys are able to work out a deal in which they remove you from collections while you set up a payment plan with them. It’s not guaranteed it will happen but it’s always worth it to ask. Your score may shoot up if that happens.
Credit Usage – 30% Very important
As mentioned in the more in-depth article, your credit utilization ratio is the amount of outstanding debt you have (how much you have to pay) and your total credit limit. The rule-of-thumb here is to have it be equal to or less than 30%; the lower the better for your sake.
This factor is fairly simple as well as we don’t want you maxing out all your credit cards. Live your best life and all, but don’t spend like there’s no tomorrow. Have a budget and try to stick with it. Remember that using credit cards is technically paying with money you haven’t earned yet.
What I would typically do when I was first starting out would be that the moment I pay for something with my credit card, I would try and immediately pay it off with my debit card as soon as the payments cleared. Now that I have a lot more expenses, I just try and make sure that I have enough money to pay off my credit card with what I have in my debit card in case of an emergency.
Just try and keep that ratio low!
Length of credit history – 15% Somewhat important
This is a tricky one because there’s very little you can do about it. You either already have years of credit history or you’re fairly new and starting out. Think of this stage as you planting your seed and it eventually growing into a big tree. Hopefully, you planted it early or else you’re going to be growing a sapling while your creditors are expecting oak trees.
I’m not saying you should copy exactly what I did, mainly in case it goes wrong, but what I did was I started with a Capital One Journey Card. I applied for this card right when I had turned 18 and was working a minimum wage retail job while in college. I was very surprised I was approved for a $300 limit with the condition that if I made payments every month for 5 or 6 months, my limit would be increased to around $3,000. Six months later of consistent payments and sure enough, a nice increase in my limit happened. Flash forward to 2018 and I am now 23 and have a credit history of 5 years with that one card.
Unfortunately, your credit history is taken as an average. For example, in my case, I have 5 years of history with that credit card but have a car loan less than a year old and a personal loan I took out 2 years ago. Averaging out, that leaves me with a credit history of much less than the 5 I was so originally proud of.
Although you don’t have much power in this pretty important factor, you do have a lot of say in what accounts you open. Be smart in doing this. Sure, you can open a lot early on and “plant your seed”, but this can affect your utilization ratio, how many inquiries you have, and some other factors.
Credit mix – 10% Somewhat important
This is also one of the factors that should not be rushed nor should be taken lightly. It does not affect your score all that much but it is important if you want to be seen as being responsible for a variety of accounts.
Be smart about which kinds of accounts you open and let it all happen organically. Maybe you start off with a credit card in college, then you start making payments to your student loans, finance a car, or maybe even save for a home, etc. All these are different kinds of lines of credit and very much help prove your trustworthiness.
Inquiries/New Credit – 10% Less important/Somewhat important
I’d like to recap and explain again what inquiries are and the two types of inquiries you can expect to see. An inquiry occurs any time your credit score is viewed for any reason. There are hard inquiries and soft inquiries. Hard inquiries occur when a lender pulls your credit report in order to evaluate you as a potential borrower – can be a credit card company or a bank. These appear on your credit report and act negatively towards your score. Soft inquiries, on the other hand, occur when someone who isn’t a lender checks your credit report such as employers for a background check or checking your own score on credit monitoring sites. These do not count negatively towards your score and will not show up on your credit report. Hard inquiries are the ones you should keep an eye out for.
This is probably the one I have the most “beef” with mainly because I see people applying to things willy-nilly. I know it’s the Target and JC Penny employee’s job to ask for you to apply for a credit card in order to save 5% or whatever but many times young people who don’t know any better fall for this trick and get dinged on their credit score before they even know what it is.
I’ll admit it, it happened to me. I had just turned 18 and had a lot of anxiety saying “no” to those people so I applied for a Kohl’s credit card. I didn’t even have a job so I instantly got denied, duh! But how was I supposed to know? I didn’t even know what credit was. If you’re reading this, don’t apply to ANYTHING unless you really really want whatever it is they’re offering. Just be smart and don’t apply for a Kohl’s credit card, and a Target one, and a JC Penny one, and an Ulta one, etc. Keep in mind that many of those kinds of credit cards are considered “closed-loop cards” meaning they can ONLY be used that their respective store. Again, don’t sue me for giving probably unwanted advice, but I’d personally get a normal credit card that you can use anywhere.
“Financing” is another word for “getting a loan”. Don’t do this unless you can afford to see it on your credit report. Don’t let those salesmen pressure you to apply for something that will lower your score like financing for a phone you don’t need, a department store credit card that will only end up saving you 5% on purchases, or making installment payments for a flat screen TV somewhere. Please be smarter than the people I helped while working in the loan industry.
Miscellaneous
Opening and closing accounts:
You don’t want to constantly be opening and closing accounts mainly because of the length of credit history and inquiries sections.
Close old credit cards:
The reason for doing this stems a little bit from the length of credit history section and a closed credit card may appear in your credit report for up to 10 years. Cases in which you may want to close it include instances in which there are annual fees involved or you have a spending problem. There are ways you can safely close a credit card. This article from creditcard.com shows you how to do it in 7 easy steps.
Having a high credit limit:
Much like the length of credit history factor, this is a little difficult for many to influence. The credit monitoring website I use tells me a credit limit of $0 – $2.5k is “below average” whereas having a limit of $50k is considered “excellent”. I don’t know about y’all, but I’m perfectly happy not being in the “excellent” category.
Paying a balance in collections:
When going through your report, you might find out you have a small amount owed in collections and your first response is “I thought I paid that off! I have enough to pay that right now. Let me call them and get it out of my credit report”. Well, I’ve got bad news for you, that may not work exactly as you hoped. Once it’s in the credit report, it’s very likely that it will stay there.
What I would do is contact the collector and ask if you can settle things out with a payment plan or to pay it off right then and there. Let the representative know that in order to do this, you would like for them to contact the credit bureaus and remove your collection amount from the credit report upon receipt of the payment. If they agree, ask for them to send this statement in writing or email! That way you have proof.
There’s no guarantee they will agree with this, but it’s worth a shot. Don’t want you getting your hopes up that the collections amount will be removed from your credit score. Chances are it wouldn’t do that simply by paying off the amount in collections.
I would recommend you use CreditKarma to check out your credit score. They’re not paying me a cent to post that, I just really like using them and it’s 100% free. I didn’t have to put my credit card info or anything. Neither is Capital One for the mention of their Journey Card. I’m honestly very happy with that card and the rewards it has given me.
If you read all the way down here, I’m actually very surprised and honestly a little impressed. Be sure to read how you can begin building your credit if you’re just now starting out.
