Hi there! I’m going to go ahead and assume that you clicked on this post for a number of reasons, with the biggest one probably being, “How can I improve my credit?” To which I have a number of answers for you!
My name is Alex. I’m 21; a wife to my High School Sweetheart; Mama to two amazing little boys; craft enthusiast; and unsolicited advice giver – oops. #sorrynotsorry
Today, I’m going to walk you through the steps that we all should be taking to have amazing credit, because frankly, EVERYTHING has an effect on your current credit score, and how much money you will be approved for if you need a loan, and what your APY (Annual Percentage Yield) will look like. Things like:
- How long you’ve been with your current employer.
- How much money you make (how quickly will you be able to repay your debits?).
- How long you’ve had a credit history.
- How many lines of credit you have open (Hint: it’s more than you think!)
- How much money you’re asking for.
- How often you pay your debits (more on this in a minute.)
- And a few other things.
Now that we’ve got that out of the way, let’s dive into what these things mean, how they have an impact on your credit, and what you can do to make that impact a positive one. Remember: if a little teenager like me could do these things, SO CAN YOU!
How long you’ve been with your current employer.
“Wait. Alex, you lost me. What does that have to do with my credit score? I’m getting money from my job, not the other way around..”
Yes and no. Let me explain through an example: Let’s say you borrowed a measly $20 from me, and said you’d give it back to me within 30 days. Great! It’s only $20, easy peasy! But 10 days into that 30 day cycle, you quit your job, where you were making $10/hour. Now I’ve gone from being confident in my decision to let you borrow $20 of mine, in exchange for 2 hours of your work, to being unsure if you’ll be able to pay me back without any source of income. Along with that, since you have yet to pay me back, you now not only have 20 days to pay me back, but 20 days to pay the interest that’s accrued, as well as to find a way to have an income so that you can pay me. This is part of why credit card companies, and loans in general have interest – so that if it takes you longer than the 30 days to pay it back like you said it would, they aren’t losing out on their money. So, the better credit score you have, the better interest rate (APY) you’ll get. This is why when you apply for any type of loan, they ask for at least 2 years of your employment history: If you can’t prove that you’re good at earning money, how can they expect you to be good at paying money back?
When I was 18, I applied for my first credit card. It was through my bank, and it was 12 months interest free, with an allowance of $1000. I then got a new job that payed $2 more an hour. 6 months later, the bank upped my allowance to $1800, based on my new, higher income, and my on-time payments. Although my employment history changed, it came with a higher income level, so it had a positive impact on my credit.
Getting a higher allowance through my credit card solely based on my on-time payments and income level was HUGE for only being 18. The trick to that is making them think you’ve had your line of credit for longer than you have. No, we’re not hacking into their system and changing numbers, we’re creating a simple formula for ourselves. Ready?
Let’s use my example of a $1,000 credit allowance. The oldest trick in the book is to only use 30% or less of what your allowed credit is, which means that although I had $1000 to use, I was always under a $300 balance. (1000 x .3 = 300) So now, instead of having $1000 to pay off, I only have $300. With that $300, I need to prove that I’m responsible, and can make timely payments. This is when we move to our calendar.
Let’s say today is Wednesday, January 13th, we have a statement balance of $200 on our credit card, and our statement balance due date is Monday January 25th, with a billing close date of Friday the 29th.
Before we get ahead of ourselves, let’s discuss the difference between a Statement Due Date, and a Closing Date.
According to cheatsheet.com, “The due date and statement closing date are not the same. Your due date is when the payment is due on your statement balance. This date is when payment is due for charges made from the previous billing cycle. The closing date, as stated earlier, is the last day of the billing cycle and the point at which finances charges are calculated and added.” Seeing that in this example, we have zero financial charges (0% APY for 12 months), this should be a relatively easy concept.
“Okay lady, I know how a credit card works. I need to pay them by the due date blah blah blah..”
You’re absolutely right! But also, you’re wrong. Here’s how:
Let’s go back to our example, but this time we’re going to have a 27% APY – ouch.
So, today is Wednesday, January 13th, we have a statement balance of $200 on our credit card, and our statement balance due date is Monday January 25th, with a billing close date of Friday the 29th. $20 of that $200 was rolled over from last month, because we didn’t pay the entire balance. That $20 now has become $25.40 thanks to that 27% APY (20 x .27 = 5.4 & 20 + 5.40 = 25.40). So, of the $200 we owe, $25.40 of it is from December, and the remainder (200 – 25.40 = 174.60) is from January. This is important because as long as we have all $200 paid, we are only paying interest once on December’s remaining balance that we rolled over.
So, we for sure want that $25.40 paid before we accrue interest in top of interest (ew!), but we luckily have $300 in our checking account right now. Let’s pay bills!
What you could do is simply pay all $200 Before your statement balance due date. But, we have a few extra dollars, and we’d like to raise our credit. So we’re not going to pay the $200. Instead, we are going to pay the Minimum balance payment on or before January 25th. Some people prefer to do half, so for this example let’s do just that. It also covers our behind for our rolled over balance from December. So, between today (the 13th) and our statement due date (the 25th) we need to make a payment of $100.
Now, it’s January 26th. We’ve paid $100 on our credit card, and the billing cycle won’t be complete until Friday the 29th. We now have 3 days to pay the remaining $100, which will have the APY of 27% added (100 x .27 = 27) making our second payment $127.
I know, I hear you! “Why the @&c! are you telling me to waste away $27 when I could have paid off the entire balance before the due date????” Well, that’s because the credit card company is going to take the balance that is reported on Friday, the 29th and send it to the credit bureau. Meaning that if we pay half before the Statement Due Date, and half before the end of the Billing Cycle, not only will the Credit Bureau see a balance of $0 (which is AWESOME!) but because we now paid interest on a remaining balance, they also will see that we made double payments. You don’t have to do this method forever or with that large of a balance, but just a few months of this will make your credit score sky rocket!
“Okay, I kind of get it. But how is my one credit card going to make my credit go up so quickly? Do I need to apply for more?”
first things first, look into a thing called Debt-To-Income-Ratio. You don’t want a ton of credit cards, nor do you want to open more than 1 account within a six month period if you can help it. We can talk about this at a later date, but the idea is that you don’t want to owe more money than what you make.
The way you can make your credit go up is realizing what else is a “credit.”
your phone bill? Credit. Your Netflix subscription? Credit. Your forgotten iCloud added storage membership? Credit.
While not all credits are the same, nor do they hold the same weight when it comes to your credit score, all credits do ultimately help you reach your end goal. This is when you need to sit down and have a serious talk with yourself, and realize that it’s better to let’s say, cancel your Netflix for a few months, than to miss a payment. On the other hand, you can NOT and should NOT do this with a credit card. Even if your balance is zero, closing a line of credit has a negative impact on your score for roughly 6 months. It usually only changes your score by about 20 points, but those 20 points could be bringing you past that 700 mark, so it’s really important to watch your credit closely. This is the difference between a credit account, and a line of credit. Closing your Netflix won’t have a negative impact on your credit thanks to it not requiring your social security number like a line of credit does, but a few missed payments on your name won’t look very appealing either.
lastly, take a look at how much money you’re asking for. Are you maxing out your credit cards every month, or are you staying below that 30%? Maxing them, when able to pay them in full before your statement due date, is a great (but extremely risky) way to make your credit score go up, and I wouldn’t suggest this at all unless you have a few thousand sitting away that you’re willing to barter in the name of higher credit. As an average, middle class citizen like myself, I’d highly suggest staying under that 30% and making double payments, instead.
a final tidbit that I have for you, is if you’re in too deep, have bills piled to the ceiling, and have maxed upon maxed credit cards: go to your local credit union. They won’t judge you, and will actually LOVE to have your business. They have plenty of programs in place, whether it be personal loans, credit card consolidation, or loan transfers. All of these can be great, effective options that help you take your 2+ lines of credit and turn them into one, bigger loan with a lower APY. Personally, my Credit card I have right now has an APY of 27.99%, but my personal loan has an APY of 7.6%. Even if you aren’t a math nerd, I’m sure you can easily decide which one of those is a better financial decision, especially if you’re going to be making monthly payments. (Which yes, you can do the same concept with your personal loan, making a payment before your statement balance due date, and another payment directly towards principle before your billing due date!)
hopefully this helps you better understand your credit health, and aids you in making better financial decisions for you and your family.
let me know in the comments – do you make double payments?