Hold on to your wallets! According to the Federal Reserve Bank of New York, U.S. credit card debt hit a record $1 trillion during the second quarter.
Experts say this increasing credit card debt is largely due to high inflation, rising interest rates, and just generally how expensive life is in 2023. And while there's nothing wrong with using a credit card, you do need to be aware of how your spending may affect your credit score.
In today's financial landscape, a credit score is more than just a three-digit number. Some companies, people, and, yes, even employers consider it a reflection of one's financial responsibility, and it can significantly impact various aspects of life.
A favorable credit score can ease the path to acquiring loans and credit cards. Moreover, it ensures that when you do get these lines of credit, they come with the best interest rates, ultimately saving you money in the long run.
For those seeking to rent an apartment or lease a vehicle, a commendable credit score can simplify the process. Employers in certain industries may also factor in credit scores when making hiring decisions.
Additionally, some insurance companies reward individuals with good credit scores through lower premiums. Even routine tasks like setting up utilities can become easier, often without the need for additional security deposits.
Credit Score 101
Your credit score is essentially a financial report card, showing lenders (and anyone who checks it) how well you've managed money in the past - and how likely you are to repay borrowed money.
The three credit reporting agencies are Experian (EXPGY), TransUnion (TRU), and Equifax (EFX). Their role is to gather, maintain, and provide financial data on consumers. Lenders then utilize this data to assess risks and make lending decisions.
The biggest factors that contribute to your credit score include whether you have a history of making your payments on time (35%), how much of your available credit you use (30%), how long you've been borrowing (15%), the kinds of credit you have (10%), and how often you're hunting for new credit (10%).
Because so much weight is given to factors that can take some time to measure accurately — such as history of making your payments on time, and how long you've been borrowing — improving your credit score is more of a marathon, not a sprint. Paying down your credit card balance is one good way to see a quick impact, but that may not be a practical option if you don't already have the extra funds.
However, there are a handful of free things you can do today to see a pop in your score over the next 30 days.
1. Request a credit line increase.
Credit utilization, or how much of your available credit you're already using, is one of the biggest factors used to determine your credit score. A high utilization can suggest potential over-reliance on credit, making lenders nervous. For a high credit score, you want your amount of available credit to be as high as possible - but a good rule of thumb is to keep this ratio below 30%.
Of course, paying down credit is one way to do that, but it's not the only way to increase your amount of available credit. You can also request a credit limit increase. That's right; a simple call to your credit card issuer asking for a credit limit increase can benefit your credit score right away. When making this request, ensure that the issuer doesn't perform a "hard" credit inquiry, as this can temporarily ding your score.
If granted, the credit line increase can instantly lower your utilization ratio, assuming you don't increase your spending to match. While the increased limit offers more borrowing power, it's crucial to avoid the temptation to spend more! The primary goal is to have a wider gap between your balance and your credit limit, not to accumulate more debt.
2. Become an authorized user.
If a family member or close friend has a credit card account with a long history of on-time payments and low credit utilization, ask if they'd consider adding you as an authorized user. This essentially allows their positive credit behavior to reflect on your credit report.
Here's the best part: You don't even need to possess or use the card. Just being linked to the account can benefit your score.
However, this strategy requires a strong degree of mutual trust. If the primary cardholder starts missing payments or maxing out the card, it can negatively impact your score.
3. Review and dispute credit report inaccuracies.
Just because the credit reporting agencies carry so much power doesn't mean they're perfect. It's not uncommon for credit reports to contain errors. Regularly reviewing your credit report ensures you catch these errors early.
These inaccuracies could be due to various reasons — mix-ups of individuals with similar names, clerical mistakes, or even fraudulent activities. Each of the major credit bureaus (Experian, TransUnion, and Equifax) allows you to request one free report annually, so you can technically check your report every few months without incurring any cost.
If you spot any inaccuracies, promptly dispute them with the respective credit bureau. Document any evidence that supports your claim, be it payment records or correspondence. Clearing up these mistakes can lead to a notable credit score improvement, especially if the errors were significant - such as wrongfully reported late payments.
4. Pay off credit card balances twice a month.
When you hear financial experts recommend paying off your credit card balances monthly, it's solid advice. However, there's a nuance to this that not everyone is aware of. Your card issuer reports your balance to the credit bureaus at a specific time each month, often well before your payment due date. So, even if you pay off your balance in full by the due date, if you had a high balance when the issuer reported, it could make it seem as though you're maintaining a high credit utilization.
To navigate this, consider splitting your monthly payment into two. The first payment, made before your statement closing date, ensures that your reported balance remains low. The second payment, made before the due date, ensures you're not accruing any interest on outstanding amounts. This strategy is particularly useful for those who use their credit card for most purchases, accumulating high balances throughout the month, even if they pay it off diligently.
By making these semi-monthly payments, you’re not only ensuring a more favorable reported balance - you're also establishing a buffer against potential forgetfulness or unforeseen circumstances that might prevent you from making a payment. This dual payment method can optimize your credit utilization rate on reports, which can, in turn, lead to an improved credit score.
5. Have bad credit or no credit history? Go alternative!
You can't establish a good credit score unless you have credit… but most lenders won't give you credit until you've established a good credit score! It can be a bit of a vicious circle. However, one of the major credit agencies now offers a program to help break the chain.
Experian Boost is a free program designed to include an individual's "alternative" data — primarily utility and telecom bills — into their credit report. But why is this a game changer?
Traditionally, credit scores have been shaped by specific financial behaviors - timely credit card payments, loan management, and so on. However, this left out a considerable chunk of responsible financial actions. Think about it: when you pay your utility bills, phone bills, or even streaming subscriptions on time, you're demonstrating financial responsibility, but this hasn't traditionally impacted credit scores. Experian Boost seeks to bridge this gap.
By connecting your bank account to Experian Boost, the program can track these regular payments and incorporate them into your Experian credit report. For many, especially those with thin credit files or those working to rebuild their credit, this can result in an immediate boost to their credit scores. This is pivotal in two ways: It offers an immediate enhancement for those already managing these bills responsibly, and it provides an incentive for consistent, timely payments in areas that previously didn't impact credit scores.
Keep in mind that while all of these tactics might give a short-term boost, maintaining a good credit score requires consistent and responsible financial habits over time.
On the date of publication, Meredith Margrave did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
