Episode 27: 7 Ways to Build Credit Fast
In this episode we cover:
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On this episode of the personal finance podcast, we're going to talk about seven ways to build your credit fast. What's up everybody, and welcome to personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the podcast, we're gonna be talking about seven ways to build your credit fast. And this is such an important subject because if you're in the market to say buy a home, or buy a car or make a big purchase in life, then you have to be able to ensure that your credit score is high enough to be able to make those purchases and everybody comes across having to make these purchases at some point in their life. And a lot of people don't look at their credit score very often. And they get a credit score polled, and they may not realize that the credit score is not as high as they actually want it to be. So I'm going to show you how you can raise your credit score or if you don't have any credit at all, how you can actually build credit fast, so that you're able to have a high enough credit score to take advantage of things that a high credit score allows things like being able to open high rewards credit cards, buying a house, buying a car, getting better interest rates on your house. And there's all kinds of other reasons to want to have a high credit score. So today, we're going to talk about what factors actually impact your credit score. And then I'm going to show you the seven ways on how to increase your credit score fast because understanding the factors that actually impact your credit score are extremely important. And we'll have a separate episode where we do a deep dive into those, I'm just going to give you the quick overview of what impacts your credit score. So you have an understanding as we go through these ways to be able to increase your credit score for the long run. And the cool thing about these seven ways is that you can do these over the course of your life and really get a extremely high credit score, you can get your credit score in the eight hundreds In fact, if you actually practice these and do these for a long period of time, and dig yourself out of the hole that your rank is if you have a low credit score is going to be holding you back for many situations, even to rent a nicer apartment, because a lot of times landlords now they do background checks, and they pull credit scores. And the only way that you can actually get a decent apartment is if you have a decent credit score because financial history has a major impact on your life. So I'm going to show you how to bring that up as fast as possible. Now, is this a quick fix that you're gonna be able to do in one month? If you have a low credit score? No. But is this a fix that if you do it over the course of a year, will you see a major impact? Yes, and you will be able to see a major impact. So let's get into the factors that affect your credit score the most. So there are three factors that affect your credit score the most that I really want you to pay attention to. And there's a number of other things that can impact your credit score, but they're more minute than the top three, and two of them have the highest weight over everything else. So the two I really want you to focus on are the first two we're going to talk about here. And the first one is payment history. So whether or not you're paying your bills on time, and consistently, specifically, anything that uses credit, so like a credit card or your mortgage, if you're paying those on time, then that's truly going to help your credit score. And a lot of times, it's going to impact your credit score significantly if you're not. So if you're not paying your bills on time, your credit score is going to take a hit because this is about a 35% impact on your credit score. And the 35% impact is major because that's one third of your credit score making sure you're paying bills on time. So paying bills late by 30 days or more is truly going to dent your score. And this is one of the first things you want to make sure you do is that you get up to date on your bills. And this is why we talked about having an emergency fund so much because when an emergency arises, a lot of people fall behind on their bills. But if you have an emergency in place, then this will never happen and impacts you across platforms of your life. So making sure you can pay bills on time is going to impact your credit score in the positive but if you don't, it's going to in the negative. And this may be the most obvious of the three. But you can see how much damage can be done if you're not paying bills on time. So one way to make sure you don't mess up bills or save if you start to forget to pay your bills is just set them up on auto pay and everything should be automated. And if you don't know how to automate your money, listen to the episode I did on how to automate your money because it's gonna change your life and change the amount of things you have to do each month towards your finances. The second big impact is credit utilization. You know, a lot of people don't understand this as much as they should. But credit utilization is actually very simple. And this is usually 30 to 35% of your credit score as well. So this is another third of your credit score. So that's why payment history and credit utilization are so big to understand. And really the two big things to put your focus on because this is an 8020 right here. Payment History and credit utilization are the 8020 but credit utilization is a percentage. It's the amount of available credit that you use at any given time. So the key to understand this is let's say that you have a credit card, and your credit card allows you a $10,000 credit limit. Well, if you spend $3,000 a month on that credit card, then you're using 30% of your credit utilization. So it's pretty simple. So let's say you have three credit cards, and each of those credit cards has $10,000 limits, well, that means you have a $30,000 credit utilization, what you have to understand is you have to maintain a lower credit utilization in order to increase your score. So making sure your credit utilization does not go above 30% is a good rule of thumb. Now I'd like to keep it under that. But at least maintaining 30% or less is the big rule of thumb, I'm going to show you guys a couple of ways to reduce your credit utilization here, when we go through this the seven ways to increase your credit score. And the last one I want to talk about here is the length of time that you've had credit. So your credit history is what a lot of people will call this, and this one has less of an impact than the first two. But it still does have an impact. So a lot of times, you'll hear people say, hey, you need to open a credit card, because you got to have some credit history, well, this is what they're talking about. But it is somewhat less of an impact, but it still has an impact on your credit score. And then a couple of other ones like credit mix different having different types of credit account those things like that, or the length of time since you've actually opened a credit card, all those will impact your credit score, but not as much as the first two, they have minute impacts compared to credit utilization, and payment history. Now that you have a better understanding of what factors affect your credit score, let's get into the seven ways to build your credit fast. So if your credit score is lower than you like, I'm going to give you some strategies that I've used to get my credit score well above the 800 range. And what you want to do is to practice these items and make sure that you actually put these into practice, because a lot of credit scores are lower, because people just don't understand what impacts their credit score. So if you're in the camp, that you want to buy a house soon, or you want to buy a car or anything like that, then doing these things is going to help you tremendously in the long run. Even if you decrease the amount of interest rate that you get, say if you're going to buy a house, you're going to be saving thousands of dollars over the course of owning that house. The reason is that your credit score has impacted your interest rate. And lowering your interest rate over the course of 30 years is massive for your personal finance, and you're going to be paying significantly less over time because of that. So the first thing you can do, and this is one of my favorite things to do of all is to make frequent payments. So if you're able to make smaller payments throughout the month to keep your credit card balances down, it's going to reduce your credit utilization. So here's what I do. every single Friday, I send my wife a text and I say, pay off your credit card. And then I do the same thing. So every single Friday, I pay off my credit card weekly. And I do this for two reasons. The first one is I want to keep track of my finances and be on top of them as much as possible. So for budgeting purposes, I pay off my credit card every single week, because I don't want my credit card balances to get out of hand. And I also want to stay on top of my wife's as well. And she feels the same way. So we pay off our credit cards every single Friday. And that just allows us to stay on top of our money, make sure we have all the entries in our budget, and allows us to stay on track. But the second reason is, is you're lowering your credit utilization. Remember, we talked about credit utilization, how it impacts your credit score at about 35%. about one third of your credit score is your credit utilization. So for example, if you're spending $3,000 a month, every month on your card, and you have a $10,000 limit, you're utilizing 30% of that. But if you're paying off that card, every single week, well now you're only utilizing 8% every single month. And that's a massive difference between those two things using 30%. And using 8% is going to significantly increase your credit score. And that's the cool thing about paying your credit card off every single week. So if you can, if it's something that you can do, try to pay it off every single week. Now, that's not something you can automate. So I love automating credit card payments. But that's not really something you can automate that I've seen as of late. So a lot of times, you're gonna have to manually pay it off every single week. But if you want to be fully automated, this may not be an option for you. And if you don't spend a lot of money on your credit cards, then it may not be an option for you as well. And I can give you the pros of spending, you know putting all your bills on your credit cards for reward points and things like that. But if you don't spend a lot than this may not be a strategy for you just automate it, let it auto pay every single month, just make sure that you're aware of what you're spending your money on. The second way to build credit fast is to ask for higher credit limits. Now why would you want to ask for a higher credit limit? Well think about this for a second when your credit limit goes up. But your balances stay the same every single month, it instantly lowers your overall credit utilization. So let's take the same example again. Let's say you spend $3,000 a month on a credit card, but you have a $10,000 limit. But then all of a sudden that you call up the credit card company and say hey, I'd like to increase my credit limit is that something I can do and they increase it to $20,000? Well, now that same $3,000 that you're spending every single month is only 15% credit utilization. See what I'm doing here, increasing your credit limit Going to lower your credit utilization. Now, if you have a problem with credit cards, you should not be doing this, if you in the past have had credit card debt, you should not be increasing your limits, because all that's going to do is tempt you. But if you've been responsible with credit cards or you're trying to build credit, then increasing your limits is something that you want to consider. Because you're going to lower your credit utilization. Now usually, if you just open a new card, you can't ask to increase your limits. A lot of times, it takes about six months before a credit card company will increase your limits. So trying to ask you know, two to three months after you've opened up a card is probably a waste of time, you could try and maybe they'll do it. But I've never seen anybody get that done, especially if you're a new card holder. So wait about six months before you try to increase the limit. Number three is to dispute credit report errors. So if you're not pulling your credit score fairly regularly, then you may be missing out on credit report errors, because this does happen a lot. So what you do is you pull a credit report, and you can do this for from a number of various places like I have a couple of credit cards, that Capital One and a Capital One, they'll pull your credit score for you. And it's a really cool tool that you can use. But there's a bunch of other free places that you can pull your credit score as well. And using those free places is great. But you want to make sure that you're using a company that doesn't take a ding on your credit score, because there are certain ways that you can pull your credit report and take a ding on your credit score. But there's so many companies out there now that allow you to pull your credit score for free and not take a ding on your credit report. So if your company that you're using takes a ding on your credit report, stop using them now and use somebody else because there's way too many free options that allow you to do this. And then once you pull the credit report, look at the report and see if there's any errors on it. Maybe someone says that you were late a few months in a row on on payments, but you weren't, we'll go ahead and dispute those credit reports. And all you have to do is just pull the statement out and say, Hey, I was on time on these payments, I don't know where this comes from. And this happens way too often because people are not checking because there's a lot of errors out there. So make sure you're continuing to check your credit report. And if this keeps happening, then make sure you're talking to someone. And now another thing that you can do is talk to the creditor and ask if they'll take it off your credit report, if it actually did happen, say I've been paying on time since this happened, can you take it off of my credit report, because negative credit information is going to stay on there for a good period of time. So try to dispute any errors. Or if something's on there, and you've been a good patron, since that happened, then see if you can get it pulled off. Because those can significantly be putting a ding on your credit report. Number four, become an authorized user. So what I mean by this is, if you're trying to build up credit, and you have a bad credit score, or you have no credit at all, what you can do is become an authorized user on a credit card. And what that means is they're just adding you to their credit card account. But you can become an authorized user. So you find someone responsible out there, maybe your parents are very responsible with their money, or you have an aunt or a friend who's very responsible for with their money, they can add you as an authorized user, which means that you start to build credit, but they don't even have to give you a credit card or allow you to make one single swipe with a card or even a transaction with your card. But if you're an authorized user on their account, it helps you build credit. So this is obviously got to be someone who is extremely responsible and someone who's probably related to you or you're really close with because you don't want to walk up to a stranger who you know is good with money and say, Hey, can I become an authorized user on your credit card, unless you want to have a real awkward conversation. But asking you know, a relative or a friend or someone you know is responsible with their money who would consider allowing you to do this and ask if they'll let you be an authorized user on their card, you don't have to make a single swipe, you don't have to do anything. But this will give you credit experience a if you do not have any credit whatsoever, and you're maybe younger and you have zero credit, or if you have a bad credit score, and they pay their bills on time. This will allow you to build up that credit now be weary. If you do not know this person very well. Do not do this. If you think you know someone, make sure that you understand where they are, what their credit score, because if they don't make the payments on time, you could be somewhat liable. So make sure you know this person. But this is a great strategy. If there's someone that you know and trust that will allow you to do this and they make their payments on time. Number five is to use a secured credit card. Now this is a fantastic option if you know that you're bad with credit cards, because this is going to allow you to have the discipline to build credit without having the freedom of a credit card. So a secured credit card is backed by cash. So what you do is almost like a debit card, you put cash in there, and then you can run the car based on how much cash you have in that account. And the cool factor about this is this is perfect for people who have been in credit card debt before making sure you get yourself in a position that allows you to build credit, but you're not jeopardizing your financial future at the same time. Because if you can't handle having a credit card, then you shouldn't have a credit card. But having a secured credit card that's backed by cash which a lot of times if you have a bad credit score, this is what you have to do anyway, you can't open a credit card with a bad credit score. So Making sure you have a credit card that's backed by cash. So you can at least build up that credit like you have a normal credit card and making your payments on time allows you to build that credit up with a bad credit score. Number six, keep your credit cards open credit history obviously has an impact on your credit score. So closing credit cards can actually make the job harder if you're trying to increase your credit score. Because first of all, it means that you lose the credit limit, which means you you, you lose some of your credit utilization. That's the first impact. The second is that you are closing a car that has a long history of credit. So even if you keep the card open and use it occasionally, that's good. So maybe you have one car that you just use once a month to buy gas, but you keep it open for a long period of time, well, that's going to give you a long credit history with that car, which is going to really help your credit score. If this credit card has a fee, then I wouldn't keep it open just because you want to have a longer credit history. So say a lot of cards now will have saved like a $79 fee. Well, if you're paying $79 a year just to have a credit history, I wouldn't keep it open. If it's a credit card that has no fee, then I would definitely keep it open for as long as possible. So like a lot of store credit cards would have that. Or if you get a credit card, like the chase freedom that doesn't have any fees, those would be perfect as well. So there's a lot of different options for you. So you can keep that credit card open. And then the last strategy number seven, is to pay your bills on time. So out of all of these strategies, if you're not on time with your bills, the thing that's going to bump up your credit score the most is to make sure you're paying your credit card or your bills on time because payment history has the single biggest effect on your credit score, I repeat, payment history has the single biggest effect on your credit score, and late payments can stay on your credit report for seven years. This is why it's the biggest impact because late payments can literally stay on your credit report for almost a decade. So if you miss a payment by 30 days or more, which is when it's going to hit your credit score, call the creditor immediately so you can arrange to pay. So it does not stay on your credit report for seven years, because that's a huge, huge problem. So sometimes people forget they understand that. So if you call them up and be and make sure that you can get that paid, you're not going to take the huge hit and a huge ding on your credit report. But even if they won't take it off your credit report, you call them up and say they say No, they won't, they won't take it off the credit report, still make sure that you pay off that card or pay that bill or whatever it is as soon as possible. Because every month and account is marked delinquent hurts your score, the longer your late payment is late, your score gets worse and worse and worse. And it stays on your credit report. So the good thing is that over time, this will fade away. So if you have say, a late payment from two years ago, and you, you think, Oh my gosh, this is going to impact my credit score for another five years, especially if it's a big, big deal, just know that it slowly starts to get better over time. And then by that seventh year, it should be off your credit report. Now if you're seeing this as a habit, and you're not paying your bills on time over and over and over again, a You shouldn't have a credit card, you should be paying for things in cash and I would go to a cash system. So going to a cash system will allow you to say hey, I don't have any more cash in this envelope for groceries. I can't spend any more money on groceries this month. And it's going to show you how to kind of budget your money and allow you to be able to get control over your money. Because if you're just late on your bills over and over and over again, that's one of the biggest things. And the second big thing that you need to do is make sure you get an emergency fund because when emergencies happen, poor people can't come up with enough money to fix the emergency. So if you want to get out of your situation, you want to build wealth for the future and for your family's future. Make sure you have at least $1,000 in your emergency fund and start to build that up over time, do whatever you can to get that first thousand dollars in your emergency fund, and then build it up over time so that these when these situations arise, you can pay off the emergency, you don't have to rely on getting into more debt. And those are the seven ways to build credit fast. Make sure you subscribe for future episodes, because we're going to get more into how you can build up your credit and the cool things that you can do with credit cards, especially when you have credit card points and how you can travel the world for free with those credit cards. So those are future episodes coming up that are associated with this episode that you want to stay tuned for. So make sure that you're subscribed, share it with a friend, leave a rating and review on iTunes. And we'll see you on the next episode. Thank you guys so much for listening. If this is your first time listening, consider subscribing so you never miss an episode. And hey, if you get value out of this show, consider sharing it with a friend because we believe that every person in this world can build true wealth and build financial freedom. We want to share that message with everyone else because it starts right here. It starts with financial education. And it's not taught in high schools. It's not taught in colleges. And so we want everyone to understand exactly how they too, can build wealth and how they can go about building an amazing financial future. Again, thank you so much for listening and I hope you guys have a great day.