Salutations, wonderful readers of the KSSU Blog. This is the second installment of our ‘How to Adult’ Series. In the last article, we explored how to build up a credit score if you didn’t have one. This time we are going to dive into how to improve a score. Improving a credit score is not always about having defaulted on loans back when you were 18 and now having to crawl out of a hole…there are many reasons to improve the magic number from purchasing your first home to getting that dream job. We talked before about how your credit score is—almost regrettably—extremely important part of becoming an adult because it is being used with increasing frequency in all aspects of adult life. If you want cable and internet…AT&T is going to check your score, renting a house…only if you have good credit, how about if you want power for the super swag pad you rented…SMUD is going to pull a credit report. Now for the kicker: that super kush job you spent 5 long years in college preparing for…yes, they are going to ask for permission to pull a credit report on you. You see, that annoyingly ubiquitous number is going to follow you into every facet of life whether you like it or not so improving that number is like improving yourself (as depressing as that is to say, it doesn’t make it any less real). But since you are reading this you are in LUCK! Let’s dive into some easy ways to improve your score no matter the circumstances you find yourself in.
- Be aware of your credit card balances: There are different categories of debt on your report, one of them being ‘revolving’ which means credit that is always available to you like a credit card. In other words when you use revolving debt you owe that amount back, but when you pay that debt you now have that credit available there for you to use again. A common factor holding down a credit score is improper use of that revolving line of credit, in fact there are recommended thresholds to this type of debt that really hurt you if you exceed them. Bankrate.com tells us that the optimum percentage of use is 30% meaning if you only have one credit card with a $1000 limit then you can only carry a $300 balance on it consistently without negatively effecting your score. I work for a small credit union and have this conversation with people all day, if you max out your credit and then only make the minimum payment it’s going to hurt you in the long run. I usually have two recommendations when I have this conversation to improve the amount of credit you are using, one being better than the other.
- The better choice: budget a three month plan to pay off existing debt while committing to not using the credit card. That is the ideal option obviously but if you are a starving college student like I am and cannot stretch the budget any further there is a second option
- A person can (again this is not the ideal solution) apply for new credit and not use it. How this works: you have a credit card for $1000 and you have totally maxed it out, this is 100% usage—70% over the desired 30%–but if you got another credit card for $1000 and never used it, you now have a total amount of $2000 available to you which reduces the ratio of use from being 100% to 50% since you have doubled the total credit allowed to you that reduces that ratio of how much you have used
- Do not close old accounts, even if you don’t use them anymore. Remember that Victoria Secret or Best Buy card you got when you first turned 18 and you were SO excited but now you never use the thing? That is a good thing, do not—I repeat do not close that line of credit. The reason for this is twofold:
- When analyzing your score the credit bureau is likely to look at how long—the tenure—of your credit. If you have had that one credit card for five years that means the bureau has five years’ worth of credit to rate. In this case more is so much better than less because it shows you can be responsible over time. If you close those account it limits the amount of history available to rate.
- That old credit card you are not using is improving that use ratio we talked about earlier. If you close it then we move in the opposite direction on that ratio e.g. you have $2000 total in credit card limits and you are only using $500 of that credit (25% of available credit is being used) but then you close that old credit card with a $1000 limit…you are going backwards with a new total limit of $1000 and that $500 balance becomes 50% usage.
That is as far as we’ll go today, it is a lot to take in. There are so many more ways to explore improving your score but I do believe these are the two most applicable to college students. I hope you found this more helpful than confusing! Check out our next installment: ‘How to Adult-Improving interview skills’.