Now that you know how credit works, you probably want to know how to make it work better. While nothing is better for your credit than paying your bills in full and on time, there are ways to give it a boost.
Like it or not, credit matters. It’s also complicated. In our “Everything You Need to Know About Credit” series, we’re breaking down the basics.
When a lender or landlord looks at your credit, they’re not just looking for a three digit number, they want to know how you actually handle credit. That’s why your credit report is more important than your score. That said, your score matters, too, and the good news is, there are shortcuts for boosting it in a relatively short amount of time. And if you don’t have credit at all — let’s say you’re a teenager about to start college — your biggest focus should be on building up a credit history. That way you can apply for student loans, apartments, and make sure you aren’t gouged on bills. Here are some options for building or rebuilding your credit.
How Your Credit Score Is Determined
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Don’t Close Old Cards
It seems illogical that having multiple cards open could help your credit, but a concept called credit utilization makes it easy to hack your score this way*. Credit utilization is a scoring factor that considers the amount of credit you have available, compared to how much you’re actually using. The more unused credit you have, the better, which is why it can help to have multiple lines of credit open at once. (Provided you’re not charging anything to those cards, that is.)
For this reason, if you have a card you no longer use, it’s probably best to keep it open rather than close it because of the utilization. Especially if it’s an old card, that history looks good on your credit report, and it’s good for your score.
Some credit repair sites and companies will also try to convince you to open many credit cards at once to boost your score (because of the utilization factor). Yes, you’ll get a boost, but remember: good money habits are better than a good credit score and in the long run, good money habits will also pay off more than anything else. So try that hack at your own risk — if you think you might be tempted to spend or you might lose the card and forget about it, it’s probably better to play it safe.
*This is true for FICO, the most widely used credit score, but VantageScore is changing its model to penalize excessive credit limits.
Maintain Three Credit Cards
All of that said, having just a few cards on hand might be a smart credit move, especially if you have a high balance that you’re trying to pay off. Former Lifehacker writer Adam Dachis explained:
“A friend of mine recently applied for a loan, and due to a number of complicated circumstances, her credit score is about average. Banks want a score over 700 in order to offer a better rate, so one kind banker offered my friend some interesting advice. She suggested using three credits cards instead of one to keep a lower balance.
Credit bureaus consider a high balance to be anything over 30%. If you spread your debt out over three cards, you can still spend what you need to spend in a given month without concerning the credit bureaus. Additionally, three low-balanced cards make you look more responsible than one card with a higher balance.”
The idea is, by spreading out your debt, you look like you’re maintaining multiple lines of credit while still paying your bills on time, which makes you a more attractive prospect for loans. The same caveat applies here, though: make sure your smart credit moves are also smart financial moves. In this case, you may have to initiate a balance transfer for the trick to work, and that’s not a move to make without doing your research.
Should I Take Advantage of Credit Card Balance Transfer Offers?
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Report Your Rent Payments
Not long ago, credit bureaus Experian and TransUnion started allowing rental payment data into credit score calculations. This was good news for people who paid their rent on time. Since negative account info typically stays on your report for seven years, you could be haunted by bad financial habits from almost a decade ago! A good history of timely rent payments can counteract that.
There’s just one problem: many landlords don’t report your rent payments to Experian or TransUnion. You can ask your landlord if they do report these payments, and if they don’t, then sign up for a rent reporting service, suggests Experian. Of course, that costs money, so here’s another option, via ReadyForZero:
It’s unlikely that your landlord or property management company will notify you if they report your rent payments to the credit reporting bureaus. So what should you do? Ask them to! Single property owners might be hesitant to take on the extra work, but you can try to negotiate with them by doing things such as signing a longer lease. Pretty big news in the world of credit reporting. If you’ve got a decent rental history, and you want it considered in your score, it’s definitely worth asking. For more tips on improving your score, check out the full post.
It can’t hurt to ask, and if you pay your bills on time, it could be worth it.
Sign on as an Authorized User
If your parents or partner has a solid history with their credit card, they cansign you up as an authorized user, and you’ll reap the benefits of their history. It’s called “piggybacking,” and it basically means the history of that particular line of credit will now show up on your report.
This isn’t a move to make lightly, though. If the primary cardholder has a poor history with that card, you certainly don’t want that history on your report. And if they end up charging a bunch of stuff without paying it off, that could negatively affect your credit, too. Here’s what Credit Sesame recommends:
“You’re going to want to have your name added to a credit card account that is old, has a low balance relative to the credit limit, and has always been paid on time. These aspects of the account are very helpful to your credit scores. In fact, you could see your credit scores improve considerably, depending on your individual scenario.”
If you’re thinking of adding someone as an authorized user, know that you’re not liable for their unrelated past debt simply by adding them. Only their activity with that card (and yours) will show up on your report. The same is true for the authorized user: you won’t inherit the primary cardholder’s full credit history, just their history with that card.
Finally, understand that the primary card holder holds all responsibility. The authorized user can get a card with their name on it and make purchases, but legally, it’s the primary cardholder who’s on the hook for those purchases. They can have the authorized user pay them directly or give them online access to the account, but, ultimately, the account balance and total responsibility of the card lies with the primary holder.
What Happens If I Add an Authorized User on My Credit Card?
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Get a Low-Limit or Secured Credit Card
This tip is often recommended for college students looking to build credit: get a low-limit credit card. For parents, Forbes suggests:
“Have your child open a credit card—but have the bill sent to your house….You can help them by monitoring their credit card usage. Start with a low-limit card that can also earn them reward points and be sure to pay it off in full to avoid those high-interest charges.”
You don’t want to tempt your kid to buy stuff they can’t afford, so you can even just hold onto the card while it’s in their name. This way, they’re not tempted to use it without telling you, but they can still build credit just by having a card open. In other words, you can help your child build credit without actually using a card. Eventually, they should learn to use credit responsibly, but this is an easy option when they’re just starting out.
Build Your Credit Score Without Credit Cards
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A secured card might be another good option. A secured credit card works just like any other credit card with one exception—the credit card company requires you to put down a security deposit, typically $300 to $500. This secured deposit serves as collateral to let creditors know that you’ll pay back the money you borrow. In fact, the credit limit on your secured credit card is often the same amount of your deposit.
It sounds like a debit card, but banks don’t report debit card usage to the credit bureaus. After all, your debit card is attached to money in your bank account—it’s not actually a line of credit.
Just like any other credit card, you have to pay your secured credit card bill in full and on time to get the full credit boost. If you don’t, it could have the opposite effect and hurt your credit instead.
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