Raising your credit score requires diligence, but we have a neat credit-building trick that requires little time and no upkeep. While it’s important to make punctual payments and stay below your limit, establishing credit doesn’t have to consume your life. Here’s a cost-free, time-efficient technique for increasing your FICO score.
Why your credit score is lower than it should be
First, you’ll need to understand two of the most influential factors impacting your credit score: amounts owed and length of credit history.
Simply enough, amounts owed means debt. High credit card debt has a negative impact on your credit score. That doesn’t mean stop using your credit card—making regular payments is one of the best ways to build creditworthiness. Just don’t let your spending get out of hand.
Everyone tells you to avoid credit card debt so you don’t earn interest. But even if you pay off your card every month, high spending can hurt your credit score. High spending raises your “debt utilization ratio,” or the ratio of your balance compared to your overall credit limit. It scares lenders if you’re consistently on the verge of exceeding your limit, and ideally you’ll want to stay below 30%. This gets tricky—and oftentimes impractical—if you have a low credit ceiling. With a $500 limit, you theoretically wouldn’t want to charge more than $150 at a time, even if you consistently pay it off.
The length of your credit history takes into consideration the age of your accounts. The older your accounts, the more reputable you seem. Account age demonstrates your experience and your fiscal responsibility. Much like people, old accounts are respected and rewarded, while young accounts are looked upon with a little trepidation.
A simple solution for better credit
The best way to lift a sagging credit score is to get a secured credit card, like the Capital One® Secured MasterCard®. Since you’re probably not going to get approved for a normal credit card, the most consumer friendly alternative is to put a deposit of $250-300 upfront to get a credit line via a secured card, and prove to the bank that you can pay down the new balances you rack up on a monthly basis.
Within 6-9 months of paying off your card regularly, you’ll see your credit score rise dramatically, and you can request a normal credit card and get your deposit back. The key here is to pick a card with the lowest annual fee possible – we think $29 from the Capital One® Secured MasterCard® is quite reasonable.
|Capital One® Secured MasterCard®|
on Capital One's
|Annual Fee||Signup Bonus||APR , Variable*||APR Promotions|
|$29||None||22.9% (V)||Purchase: None
If you already have fair credit
If your credit is average or fair, you may be able to stretch for a regular credit card.
Two options for people with average credit are the Barclaycard® Rewards MasterCard® - Average Credit and the Capital One® QuicksilverOne® Cash Rewards Credit Card. We prefer the Barclaycard® Rewards MasterCard® - Average Credit even though the rewards program is less attractive (you get points instead of cash), because the card doest not have an annual fee.
No-fee credit cards require little time and little effort and can lower your debt ratio while lengthening your average account age. Before we proceed, a word of warning: Do NOT apply for a ton of credit cards all at once. Lenders find rapid expansion of your credit limit a little suspicious. Every time a lender asks about your credit history, your score gets dinged. Plus, a bunch of brand-new accounts will lower your average account age significantly, which is the exact opposite of what you’re trying to achieve. Get one card now, and wait awhile before you consider another.
Credit cards with no annual fees are great because they cost nothing to maintain. You can keep an account open even if you never actually use the card for purchases. Signing up boosts your overall credit limit, which in turn lowers your debt ratio (assuming you continue your regular spending habits). And once you have the card, you can keep it open indefinitely at no penalty, increasing the average age of your accounts.
There are a lot of free credit cards available for a variety of credit scores. If you already have a good rewards credit card and are looking for a supplement, you may want to make your decision based on the signing bonus. There’s no sense in looking at the rewards rate or APR if you’re not going to actually use your new no-fee card for an extended period of time. We recommend you find a high signing bonus, spend a couple months earning your cash and, bonus in pocket, revert back to your card of choice. Then you can stash away the new card and let it age.
When you apply, make sure that your debt utilization ratio is pretty low – for example, when you’ve just paid off your credit card bill.