One of the realities of our financial lives is that our FICO credit score will dictate our ability to obtain and use credit. This comes into play when we’re applying for a home loan, car loan, or credit card. Our score will dictate not only our eligibility, but the interest rate we’re able to achieve.
This can affect the interest we pay on loans by thousands or tens of thousands of dollars. A difference of 100 points could cause you to pay an extra $47,000 in interest on a $400,000 home loan (based on interest rates in August 2020 for a 30-year fixed loan). Isn’t that insane?!
We all have different experiences that we’ve gone through in life that have affected our score. No one is here to pass judgment. Even if you’ve run into unfortunate situations, there are ways to take control to improve your standing. It won’t always happen overnight, but there is no better time to start than now. To improve your score, you have to understand how it’s calculated.
FICO Math
I want you to focus where the money is (no pun) – Payment History and Credit Utilization which make up 75% of the score.
Payment History is as simple as it sounds. This is your ability to make on-time payments on your outstanding credit. If this is an area where you’ve struggled, focus on making at least the minimum payments on time. If you think there are mistakes on your credit report for missed payments, you can call your credit card company or contact the credit bureau that is noting the late payment.
Credit Utilization is the amount of your available credit that you utilize. If you have $20,000 in available credit from your credit card companies and you have $5,000 of credit being used, your credit utilization rate is 25%. A good credit utilization rate is usually below 30%.
You Can’t Get What You Don’t Ask For
The one great thing about credit utilization is that it can be a negotiable metric. When you apply for credit cards, credit card companies will allocate you a certain credit limit. This is based on a number of factors, but your history and current income are big ones.
One simple tactic you can do with your credit card companies is to call them every 6 months and ask for a raise on the credit limit. The higher the credit limit, the lower your credit utilization will be hence negotiating your credit.
I don’t know all the magic metric credit card companies use to determine how much of a raise to give you, the person you’re talking to on the other end of the line probably doesn’t either. The one thing I do know is that you don’t get what you don’t ask for. Every so often your credit card company may automatically raise your credit limit. I love to just call them up and ask for it.
Have you been great at paying on time? Has your credit score been rising? Have you gotten a substantial raise at work? These are all great reasons to give them a call (or just call them anyway).
How ‘Bout a Little Walk Through?
“Hey Joe, I’ve been with you guys for about a year now. I’ve been making payments on time and my credit score has actually gone up a bit since I initially applied last year. Right now my line of credit is $10,000 but I would like additional flexibility. Could you approve me for $20,000?”
Joe might come back with a yes or a counteroffer of something somewhere in between. Maybe you don’t get the full $20,000 but he comes back with $14,000. That’s $4,000 of extra credit to bump up your credit utilization.
Do this with all your credit card companies twice a year. The worst thing they can say is no; you have nothing to lose and everything to gain!
How Many Cards?
You may think that opening up additional lines of credit (and not using them) could also be a useful way to improve your credit utilization. You wouldn’t be wrong but I don’t advise having more than 2 or 3 credit cards max. If you only have 1 credit card and you can get approved for a second line of credit to bump up your credit utilization, that can be worth doing.
Conclusion
You don’t get what you don’t ask for. Being an advocate for yourself is necessary for many financial decisions and this is a great example of that. Call your credit card company when you get that raise at work, you see your credit score trending upward, or set a calendar appointment every 6 months to just ask. Take control. Use the system to your advantage.
