Life Kit - Tricks To Improve Your Credit Score

Episode Date: July 8, 2021

A strong credit score can make major purchases and financial transactions much easier. Here's how to make yours better and keep it high. (This episode originally ran in November 2020.)Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is NPR's Life Kit, and I'm Sarah Gonzalez. Usually I'm with a different NPR podcast called Planet Money. We're an economics show, so we tell stories about, like, where credit cards came from, or about the two brothers who basically created the credit score. It was in Brooklyn, New York, in 1874. And today I'm here with Life Kit to talk a little bit more about credit scores. We dig into some practical tips when it comes to our own financial situations, because our credit scores, they're not just something that tells lenders how reliable we are. It's a game. You actually don't have to be as disciplined with credit. You just have to know the rules of the

game and play within them. So when someone says, I'm good at everything else, but my credit is a hot mess. I'm like, whoo-hoo, that's excellent because that's the one that you actually don't have to be Michael Jordan. That is Tiffany Aliche, better known as the budget nista. She teaches people how to be smart with their money. And here's the thing about the game of credit. The rules are not so easy to find. Like, you have probably heard conflicting ideas when it comes to your credit. Like, pay off your credit card in full every month. And then, no, don't pay off your credit card

in full every month. Leave a little balance. They like it. Tiffany says there are all kinds of mixed messages on purpose. It's not in a creditor's best interest for you to know how to play the game, because if you know how to play the game, then they don't make any money. It really is a game of the less you know, the more the person that you owe can earn from you.

But thankfully, Tiffany says the rules aren't that hard to follow once you know what they are. Out of all the basic financial tenants, debt, budgeting, investing, insurance, Tiffany says credit is the easiest to manipulate. There are literally some tips and tricks and hacks that are totally legal that if you employ them, your credit score can jump like Jordan. So let's get those credit scores up people in this episode of Life Kit, the real rules of the credit score game. Hopefully after listening, you'll be able to start boosting your credit score, or at the very least, you'll be able to look at your credit score and know why it's that number. So let's just start at the very beginning. What is a credit score? So your credit score is basically your GPA. Remember high school and college,

your grade point average on your ability to pay someone back that you owe. Just like your GPA, it is an average. People will say, hey, Tiffany, if I pay off this credit card, what's my credit score going to be? And I always say, I don't know, because it's like asking me if I get an A in Spanish, what's my GPA going to be? I don't know, because what did you get in Spanish last year? What did you get in math? What did you get in science? Do you see it's a collection of your financial grades, especially those over the last two years. I got my first credit card when I was 26 years old, very, very late. And I just kept thinking

that I was doing the responsible thing. I was spending the money that I had. I wasn't going over. I wasn't borrowing. I was just like so responsible. And then when I did finally get my first credit card, I very quickly realized the perks of having a credit card and how like not having a credit card for all those years was actually hurting me in a lot of ways. Well, I'll say this. I'd rather someone not take out credit than to severely abuse it because the abuse of it is way more detrimental than, hey, your credit score is a little thin, so we're going to have to have other ways for you to prove you could pay us back than someone who was like, I owe $300,000 in credit card debt. I don't even know what I bought.

Right. Credit is not good or bad. Credit is a tool. Think about what a hammer is able to do, build and destroy. Credit can be used certainly to help to build your financial life, but you can just as easily destroy your financial life with credit. So you didn't really start late. You started when you were meant to. So if you don't have that much credit because you're young, only take out a credit card if you know you won't abuse it because otherwise it can really hurt you long term.

When should you start building your credit though? If you are fortunate that you have, say, a parent that is fairly responsible, you can start as young as 18 years old. A parent, a grandma can put you on as an authorized user. And so that's how I started my credit journey. My dad had a credit card that he paid off every month in full. He added me on as an authorized user. An authorized user just means I am authorizing that my daughter can also use the card. Although he did not issue me the card, which is a good idea. But what it meant was that as he used the card responsibly, it looked like we both used the card responsibly.

But the caveat is if he was irresponsible, then it also looked like we were both irresponsible. Wow. but the caveat is if he was irresponsible, then it also looked like we were both irresponsible. Wow, I didn't realize you could just like inherit your parents' good credit history like that. But yes, you can inherit the good behavior, but you can also inherit the bad. So you wanna make sure that you are an authorized user and someone who pays off every month in full. Wow, this is a hack.

Yes, so we're using it in a hacky way, but really the point of an authorized user was to give kind of like younger folks access to a card that they would not normally have access to. But we're not using it like that. We're just using it to boost their credit score. So you could give them a card. But like I said, I don't suggest that. I mean, this is a way to just like hand it down. I'm gonna add a bunch of people to my credit cards. Just be mindful. Okay, so this brings us to another good question, which is just like, what is the best way

to build your credit? If you are young and you're trying to build your credit, are there like one or two things that you should absolutely do or not do? Like what is the best way to build your credit?

I'll say this. One, let's focus on your FICO score. There are so many scores. It's like the Vantage score, the Disc score. But if you have a decent FICO score, which is the typical score most lenders use, then your scores will probably be good no matter what credit score system someone's using. FICO score ranges from 300, which is an F minus, minus, minus, to 850, which is a plus, plus, plus, plus. And there are five components to your FICO score. Payment history is the biggest component,

and that's 35%. Your payment history is, do you pay the people what they owe? Do you pay the minimum or more? So when you're paying off in full every single month, your credit history is really getting a boost. And is that just like a rule, like always, is it never good to keep a small balance? Do credit cards or credit bureaus not like that? I remember, I feel like I was taught that the credit bureaus like you to have a small balance. You know who likes you to have a small balance and who put that out there? They're so good at marketing. The credit card companies, they're like, oh, Sarah, just keep a little balance. Why? Because they want you to pay interest. It literally does not help to have a balance. If you can pay off

your credit card in full every month, that's magical and amazing. Only the credit card companies want you to keep a balance because if you don't keep a balance, what are they going to charge you? There's no fees when you pay off in full. Wow. Did they pull one over on us? Okay. So payment, history, that's one component of your credit score. It's 35% of it. Back to the other components. Another 10% of your credit score is credit mix. That just means that you have some revolving debt, some installment loans. I just like to see that you have a mix. You don't need to do anything for that component because it's only 10%. It's just the longer you live, the more of a mixture you'll have naturally. 15% of your score is a

length of credit history. I tell people, look, if you have a credit card that you've been paying off, especially every month in full, keep your oldest credit card open. The longer you've had credit, the stronger this part of your credit score will be because they just like to see that you've had some history behind you. So that's 15%. 10% new credit. That means every time you open up or you apply for a loan or a new credit card, that's 10% of your score is affected. You can lose points just by applying. You will almost likely lose points if you apply, even if you get denied. So you want to save those losing points opportunity for times when you really need the thing. You really need a car. You really want to get that house. You really want to, I don't know, get that apartment.

They have to run your credit score. Understandable. And here's the last big component of your credit score. 30% is amounts owed. That's something called utilization. So what is your limit versus what is your balance? You never want your balance to be more than 30% of your limit. So if you have a $100 limit on your card, you don't want to swipe more than $30. You don't want to have a balance of more than $30 on that card. So utilization is your credit cards collectively, but also individually. Okay, spending limits is a big one. This is basically like even though your credit card company is saying, here, your spending limit is $100.

That's how much you can spend and can have and can borrow. You actually shouldn't borrow that full amount. You shouldn't get even close to the limit. You should borrow much less, 30%, as you said, because if you do spend close to your limit, if you spend 90 or 100, that hurts your credit. Why? Like, why do they do this to us? Why do they say, here's your limit, but don't get anywhere near it?

Credit card companies have like this internal mechanism when they're like, ooh, Sarah over here, she got 90% used on this card, another 90% here. They have this little trigger that says, beep, beep, danger, danger, danger. She's using too much of her card. She must be in financial trauma and turmoil. And so that's why they punish you by bringing down your score. Because if your score is low, guess what? You can't qualify for more debt. You see, they're literally slowing you down. It's the emergency break for credit card and companies and lenders.

30% is a new 100% if you want to just maintain, like my credit score is in the 800s, so I can hover around 30 and be good. If you want to increase your score, you actually have to use less than 30%. You're looking at losing like 20%, 15%, 10%. Wow. So if you want to maintain your current decent credit score, you can use 30% of your credit

card limit. If you want to try to get that number to go up, you want to use 20%, 10%, 15%, something like that. So $15 of your $100 spending limit. I know. And so there's some hacks to that. So let's just say like you're buying a couch and you're like, I know I'm going to have, I get paid next week and I'm going to put this $300 couch on my $500 card. Fine. Pay off that couch in full before the statement date. The statement date is the date that they tell the credit bureaus, hey, Sarah used her card.

So if you can beat them to the punch and pay off the card before it's reported being used, then you can certainly use more than the 30%. Do you understand? Okay, what if you have your $100 spending limit and you use that full $100, but you pay off the full balance before your payment is due. Then it doesn't affect your credit score? No, not necessarily, because if you just wait to the due date, the due date and the statement date are two separate

dates. The due date is when your payment is due. The statement date is the day that they told the credit bureaus, basically, Sarah used her card. So your due date might be, say, the 20th, but the statement date might be, say, the 11th. So, yes. I had no idea that these dates were different. Yes. Okay. So statement date is the date that they are acknowledging you used your card.

So if you can pay it off before the statement date, then they won't even know you used your card. So if you can pay it off before the statement date, then they won't even know you used your card. It doesn't hurt you, but it also doesn't necessarily reward you either. Exactly. It will show, because I remember that I was trying to show, look at me, I'm so good at paying off my card. So I put my Netflix on it and then I paid it off. Netflix would charge me, say, the 15th and I would pay it off on the 16th. And I remember my score wasn't moving. And I called, I was like, how come my score is not moving? She's like, cause you're paying it off so quickly that we never got a chance to say you used your card. I was like, oh, so I found out, let me pay. Netflix charges my card on the 15th. My statement date is the 20th. So I started paying it off on the 21st. So it's like, tell the people I used my card

that I paid it off. You see? So if you don't want them to know, pay it off before. If you do want them to know, pay it off after the statement date. But always, always, always buy the due date. Oh, okay, okay, okay.

So if you don't want the credit bureau to know that you swiped your credit card, then you buy whatever you want to buy. You stay within your limit or you like hit your limit. You pay it off before your statement date. Correct. But if you want to try to increase your credit score, you need to wait until at least a day after your statement date. Yes. Because paying off a debt in full every single month is like fairy dust on your credit score. It's like you paid off a mortgage. It's like you paid off a car note. Even though it was only 25 bucks, the amount didn't matter. It's the habit. Okay. I mean,

can we talk about how unfair the credit score system is and can be? I mean, basically, a credit score is supposed to determine how trustworthy you are. But there's a long history of factoring in gender and race in a way that hurts people of color, Black people. Also, it's just like, you know, if you had parents who put you on to their credit card so that you could start establishing your credit history when you're 18 and 19 and 20 versus if you didn't. Yes. In so many neighborhoods that adhere to people of color, you will see instead of banks, check cashing places, and there is not this emphasis on credit, you know, or on building good credit. And there are predatory companies like Rent-A-Center. I remember they were sued because of their predatory practices against people of color

in the neighborhoods that they lived in. I think people think, well, if you just would work harder, that's, sorry for my language, but not sorry. It's not just about working harder because we know that women are paid less. How much harder do women have to work? Right. What about asking for a credit limit increase? Is it good? Is it bad?

Does it hurt you? Does it help you to ask to increase your credit card limit? So when you ask for a credit card increase, it can be a hard inquiry. A hard inquiry is when you give someone permission to look at your credit to see if you're worthy, credit worthy to be lent to. You want to ask that beforehand. I want to inquire about getting a credit card increase. Is this a hard inquiry? It's not a hard inquiry for everyone.

And so many times it is. And so you have to ask yourself, is it worth the potential score hit? Now, here's the thing. They get to decide how much the increase is going to be. You can certainly request. And there's no way to know for certain that you're going to get a yes if your credit score is decent. And the beginning of perfect credit is 740. So 740 or better, and you're likely to get a yes on most things that you ask for when it comes to your credit. How many lines of credit should you have? Is there a sweet spot? Can you have too many credit cards? Can you have too little? Typically, if you're looking to buy a home, they're usually

looking for about three lines of credit. So I guess if there was a sweet spot, it's that. Three lines of credit. So that would be like a car payment, a credit card, student loans. Does that count as three lines of credit? Okay. Absolutely. And if you have like five, is that bad? It's not necessarily bad if you're managing them well. To me, between three and ten is probably best.

But honestly, what do you need more with five, if you ask me? Tiffany, oh my gosh. It has been so awesome talking to you. Thank you for all of the tips. Thank you, Sarah if you ask me. Tiffany, oh my gosh, it has been so awesome talking to you. Thank you for all of the tips. Thank you, Sarah, for having me. So let's recap. Here's what you need to remember. Credit isn't good or bad. It's a tool. And take credit out when you know you won't abuse it. There are five components to your credit score. New credit, 10%. Length of credit history, 15%. Credit mix, 10%. Amounts owed, 30%.

Payment history, 35%. The beginning of perfect credit is 740. So if your credit score is 740 or above, you really don't need to worry about getting it any higher. You're basically perfect. If you want to raise your credit score though, ask someone with good credit to add you onto their credit card. Just make sure that that person makes all of their payments on time or it will hurt you. And if you can, this is the magical pixie dust, pay off your own credit card in full every month. After the statement date and

before the due date, you should actually call your credit card company and ask them what the official statement date is because it's not often spelled out. And last but not least, credit is mostly a game and it is a game that you can win once you know the rules and now you know the rules. For more episodes of Life Kit, go to npr.org slash life kit. We have episodes on all sorts of topics from how to eat healthy on a budget to how to start a creative habit plus tons of other episodes on personal finance parenting health if you love life kit and want more subscribe to our newsletter npr.org slash life kit newsletter also we want to hear your tips leave us a voicemail at 202-216-9823 or email us

at lifekid at npr.org. This episode was produced by Claire Marie Schneider. Megan Cain is the managing producer and Beth Donovan is the senior editor. I'm Sarah Gonzalez. Thanks for listening. I fear losing my job. It is our biggest success and our biggest failure. On this special series from ThruLine, capitalism. Listen now to the ThruLine podcast from NPR.