A lot of people on the Penny Forward facebook group have said that they want to improve their credit score. There are many reasons to want to improve your credit score, but many of those reasons point to deeper money problems that need to be solved first. Solving those problems will improve your credit score along the way.
Consider Chris, a 35-year-old married man with a full time white collar job making $100,000 a year. He has a mortgage, some student loans, and about $10,000 in credit card balances. According to his bank, his credit score is 650. This isn’t bad, but it’s not particularly good either, and Chris would like to improve it so he can get a better interest rate when he moves his family to a bigger home in the next few years. Chris’s best bet is to pay off his credit cards as quickly as possible. This will improve his score by reducing the amount of credit he has used, compared to the amount he has available. Credit professionals call this his credit utilization ratio, but this is just a fancy way of saying that Chris’s credit score will improve if his balances are lower. Making larger payments to his credit cards will reduce his balances more quickly, which means his credit score will improve more quickly too.
When Chris is finished paying down his credit cards, he is going to love having the extra money he has available to him because he isn’t making such large credit card balances. He could continue improving his credit score by putting that money towards his student loans, but by the time he has his cards paid off, his credit score has increased to 720. That is a pretty good score, and Chris might be better off putting that money towards an emergency fund instead. Either would be a good choice in Chris’s case.
Abby is a 38-year-old single woman who lived on Social Security until she was 30. At that time, she found a job working for a nonprofit organization producing materials in Braille. Her employer hires a lot of people who are blind, and they kept her wages low enough that she could continue to collect Social Security while she worked. During that time, though, she racked up some large credit card balances and missed some payments. Her credit score was 580 because of her missed payments and her short credit history. A few years later, she found a job in another state that would pay her twice what she was making. This would cause her to lose her Social Security benefits, and would mean that she needed to pay to move herself and her stuff. She got some help from family and friends, but she needed to use credit cards for the rest. Her score stayed in the high 500s, but because of her increased salary, Abby felt she could do better. Like Chris, Abby’s first step was to pay down her credit card balances as quickly as she could. This increased her score, but she wasn’t able to get it higher than 665, even when her balances were all at zero.
Abby was afraid to use credit cards again because of her bad experience with them, but an advisor told her that she wouldn’t be able to make more of an improvement without showing that she could responsibly make her payments on time. Abby chose to put a few inexpensive things, like Netflix and Hulu, on her credit cards. She then paid off her credit cards every month. After another year, Abby’s score was up to 690. It shot up to 750 a few months later, when she asked her credit card companies to increase her credit limits. They agreed because her income had increased and she’d been making her payments on time. Because of her great credit score, Abby was able to get a lone to buy her first home.
Elliott is a 42-year-old man who lives with his wife and a room mate in a home he has owned for a number of years. He and his wife both work, and they bring in some extra money from the rent their room mate pays to live with them. Elliot wants to improve his credit score, but he also has other money problems. Between his mortgage payment, his credit card payments, and his other living expenses, he constantly feels like there is never enough money to get bye. After his parents passed away, though, he found that he had inherited his parents’ left-over retirement savings. He is afraid to use that money, though, because his parents’ financial advisor tells him that he will need to pay taxes on any money he withdraws from his parents’ accounts.
Elliot doesn’t have very many choices. He can either continue struggling, try to find a higher paying job, or use some of his parents’ money to improve his situation. After talking it over with his wife and a few trusted advisors, Elliot decides that he needs to use some of his parents’ money. He owes $25,000 on credit cards, so he withdraws $50,000 and puts it into a high-yield savings account. He uses $25,000 to pay off his credit cards. After a few months, the boost shows up on his credit score. He is still worried, though, about his taxes, so he leaves the rest of the money in the savings account until the following year to pay them.
Sure enough, when Elliot does his taxes, he owes more than he usually does. Fortunately, though, he can pay his taxes using the money he left in his savings account, and it turns out he has quite a bit left over. He intends to use that to make improvements to his home. He and his wife feel much better, so spending the money was well worth it to them.
If you’re unhappy with your credit score, consider whether your low credit score might be the result of deeper money problems. Solving those problems will improve your credit score and make you feel better at the same time. You won’t regret working hard at tackling them as quickly as possible.