How can I increase my credit score in a good financial situation?
July 20, 2011 9:28 PM Subscribe
With one small student loan, one small line of credit, and a decent savings built up, how can I improve my credit score so that I can get a nicer credit card?
I recently applied for an American Express Blue Cash Everyday credit card, but I was denied. Honestly, I didn't know if I would be accepted or not. My only other foray into credit cards is a Wells Fargo credit card with a $1,000 line of credit.
However, I do have a good deal of money saved up. It's coming up around $20,000. I have one subsidized federal student loan for about $3,500. On my credit report, it looks like I have a fair amount of debt (3/4 debt and 1/4 available credit). The loan and one credit card are also all that appear on my credit report -- the loan being about 4.5 years old and the credit card around 2.5 years.
With all this in mind, what can I do to raise my credit score, or whatever makes me enticing to credit card companies?
I recently applied for an American Express Blue Cash Everyday credit card, but I was denied. Honestly, I didn't know if I would be accepted or not. My only other foray into credit cards is a Wells Fargo credit card with a $1,000 line of credit.
However, I do have a good deal of money saved up. It's coming up around $20,000. I have one subsidized federal student loan for about $3,500. On my credit report, it looks like I have a fair amount of debt (3/4 debt and 1/4 available credit). The loan and one credit card are also all that appear on my credit report -- the loan being about 4.5 years old and the credit card around 2.5 years.
With all this in mind, what can I do to raise my credit score, or whatever makes me enticing to credit card companies?
Weirdly enough, not having any debt is a detriment to having a good credit score.
Borrow money on your one credit card, then pay it back on time. If you do that enough times, your score will rise.
posted by Gilbert at 11:04 PM on July 20, 2011 [1 favorite]
Borrow money on your one credit card, then pay it back on time. If you do that enough times, your score will rise.
posted by Gilbert at 11:04 PM on July 20, 2011 [1 favorite]
Go for easy approvals, like store cards. The APR will be high, but just use it and your other card and pay it off every month. Just don't get over 50% of the balance. Ideally, you'd use around 20%. Eventually, get another. You want at least three or four revolving accounts. With only two accounts and 4.5 years, you've got a pretty thin file.
If it hasn't been long since the decline for the Amex, you might try calling them and asking for reconsideration. The worst they can do is say no.
There's usually quite a lot of discussion at creditboards about what sort of scores are required to get approvals from the various lenders, so you might look there to see what you can easily qualify for.
The student loan shouldn't really be an issue unless the payments are high relative to your income. Pay it off if you like, it certainly won't hurt until it falls off your report in 7 years.
Oh, and how many inquiries do you have on your report? Lots of inquiries can make the credit analysts less likely to approve, especially in an already marginal case. It's not just applications for credit, the phone company, cable company, insurance company, and seemingly everybody else also check your credit file these days.
posted by wierdo at 12:20 AM on July 21, 2011
If it hasn't been long since the decline for the Amex, you might try calling them and asking for reconsideration. The worst they can do is say no.
There's usually quite a lot of discussion at creditboards about what sort of scores are required to get approvals from the various lenders, so you might look there to see what you can easily qualify for.
The student loan shouldn't really be an issue unless the payments are high relative to your income. Pay it off if you like, it certainly won't hurt until it falls off your report in 7 years.
Oh, and how many inquiries do you have on your report? Lots of inquiries can make the credit analysts less likely to approve, especially in an already marginal case. It's not just applications for credit, the phone company, cable company, insurance company, and seemingly everybody else also check your credit file these days.
posted by wierdo at 12:20 AM on July 21, 2011
Call Wells Fargo and ask for more credit, or better terms, travel miles, or whatever you need. Pay off the loan unless you're getting more in interest on your savings. Use the card for typical expenses, and pay it off every month. If there's a place you shop regularly, like Macy's or REI, apply for and get an affinity credit card, with benefits. Keep it paid down.
posted by theora55 at 5:05 AM on July 21, 2011
posted by theora55 at 5:05 AM on July 21, 2011
Have you considered getting a secure credit card? Most major banks offer them and you can usually convert them to a regular credit card after time.
With a secure credit card, you will have to pay an initial deposit, so it's a safer investment from the banks point of view, but the up-side is that you will have the benefits of a real credit card. Even your credit report will think it's a real credit card. The downside is, however, that you will have to pay the deposit, which can depend on how high your approved credit limit is. I had a friend that was approved for a secure credit card with a limit of $800, and he had to pay the $800 as a deposit. It wasn't so bad because, like you, he had been saving money for some time, plus after a month of getting the card his credit score jumped by 80 points.
If you're not going for a secure credit card, then I suggest that you look for cards that are marketed for your credit score range. If you have a low credit score, just know that whatever interest rate you get on a card is probably going to be 18% or higher. Low interest rate cards, or cards with really nice perks, are only for those with good credit, so if you apply to this kind of credit card, you're probably going to get denied. Make sure this isn't what happened with your Amex card.
Banks usually have a helpful guide on their website that describe which of their credit cards are best for which people, and I highly recommend you check it out to get a better idea what kind of card is best suited for you.
Finally, if you're still getting denied, you can have someone with a higher credit score co-sign on your credit card application. You might even get a higher credit card limit this way, but this doesn't mean you can shirk your credit card responsibilities because your co-signer will feel the burn you're late on any payments.
posted by nikkorizz at 5:15 AM on July 21, 2011
With a secure credit card, you will have to pay an initial deposit, so it's a safer investment from the banks point of view, but the up-side is that you will have the benefits of a real credit card. Even your credit report will think it's a real credit card. The downside is, however, that you will have to pay the deposit, which can depend on how high your approved credit limit is. I had a friend that was approved for a secure credit card with a limit of $800, and he had to pay the $800 as a deposit. It wasn't so bad because, like you, he had been saving money for some time, plus after a month of getting the card his credit score jumped by 80 points.
If you're not going for a secure credit card, then I suggest that you look for cards that are marketed for your credit score range. If you have a low credit score, just know that whatever interest rate you get on a card is probably going to be 18% or higher. Low interest rate cards, or cards with really nice perks, are only for those with good credit, so if you apply to this kind of credit card, you're probably going to get denied. Make sure this isn't what happened with your Amex card.
Banks usually have a helpful guide on their website that describe which of their credit cards are best for which people, and I highly recommend you check it out to get a better idea what kind of card is best suited for you.
Finally, if you're still getting denied, you can have someone with a higher credit score co-sign on your credit card application. You might even get a higher credit card limit this way, but this doesn't mean you can shirk your credit card responsibilities because your co-signer will feel the burn you're late on any payments.
posted by nikkorizz at 5:15 AM on July 21, 2011
I forgot to mention that secure credit cards are much easier to get approval for than regular credit cards. However, I'm not sure if secure credit cards are easier to get than department store credit cards, as others have suggested. However, I would still suggest that you get a secure credit over a department store credit card because you won't be limited to buying things just from one store. Plus, I feel that department store credit cards will encourage you to buy things from a store that you normally wouldn't buy, but you will do it anyways so you can raise your credit score and keep your card active. In the end, you will probably lose out on money that could have easily been put to savings. But then again, you could lose more money on a secure credit card if you like to keep a balance on your card.
Right now, I'm looking at the Macy's website, and their store credit card will come with a 24.5% interest rate, but you will only be charged interest if you don't pay the bill in full every month. Wells Fargo has a secure credit card that starts at 18.99% with an $18 annual fee, but you can use it anywhere you want.
Take your pick. I would choose a card that would generate the most savings based on your lifestyle.
posted by nikkorizz at 5:52 AM on July 21, 2011
Right now, I'm looking at the Macy's website, and their store credit card will come with a 24.5% interest rate, but you will only be charged interest if you don't pay the bill in full every month. Wells Fargo has a secure credit card that starts at 18.99% with an $18 annual fee, but you can use it anywhere you want.
Take your pick. I would choose a card that would generate the most savings based on your lifestyle.
posted by nikkorizz at 5:52 AM on July 21, 2011
apip: "With all this in mind, what can I do to raise my credit score, or whatever makes me enticing to credit card companies?"
Probably the most important is time. Part of your credit score is based on a history of timely payments and no defaults. So 4.5 years isn't brand new, but you still don't have a complete history to go by. Beyond that, you could improve debt utilization by paying off the student loan, so assuming your 20k is earning less interest than you pay for the student loan its a good idea (remember that student loan interest is deductible).
The other thing to do is maybe try someone less someone less selective than American Express. They're notoriously picky. Discover runs a similar program, and which they gave me in 2000 while I was still in college with no job.
posted by pwnguin at 6:32 AM on July 21, 2011
Probably the most important is time. Part of your credit score is based on a history of timely payments and no defaults. So 4.5 years isn't brand new, but you still don't have a complete history to go by. Beyond that, you could improve debt utilization by paying off the student loan, so assuming your 20k is earning less interest than you pay for the student loan its a good idea (remember that student loan interest is deductible).
The other thing to do is maybe try someone less someone less selective than American Express. They're notoriously picky. Discover runs a similar program, and which they gave me in 2000 while I was still in college with no job.
posted by pwnguin at 6:32 AM on July 21, 2011
Part of your credit score is based on a history of timely payments and no defaults. So 4.5 years isn't brand new, but you still don't have a complete history to go by. Beyond that, you could improve debt utilization by paying off the student loan, so assuming your 20k is earning less interest than you pay for the student loan its a good idea
This is exactly why you shouldn't pay off your education loan. The longer you keep it and make timely payments on it, the more likely your credit score will go up. Paying it off early is likely to stunt the growth of your credit score, especially when you have no other credit source to significantly raise your credit score except another credit card. With a loan, you will build credit the longer you have that loan, but you do this at the cost of paying interest on your loan.
Looking at it from a long-term prospective, I would pay the educational loan through its normal term (ie, not early), and, as the OP suggested, get a second credit card now. You may pay more money now in interest, but you will be getting credit score benefits from your loan, your first credit card, and your second credit card. The longer you keep those credit cards active will also improve your credit score, that's why you should get them now and not later. This means 10 years down the road you will most likely have a higher credit score than if you either 1) paid off your educational loan early, or 2)you took too long to get a second credit card. A higher credit score will make you eligible for lower interest loans, which could potentially save you a crap-ton more money later on when buying big ticket items, like a car or a house.
This is all assuming that you use your credit cards wisely and pay them off entirely every month, on time. If you leave a high balance on your credit card each month, you might end up spending more money in credit card interest, which could offset any other savings generated from anything else.
posted by nikkorizz at 8:01 AM on July 21, 2011
This is exactly why you shouldn't pay off your education loan. The longer you keep it and make timely payments on it, the more likely your credit score will go up. Paying it off early is likely to stunt the growth of your credit score, especially when you have no other credit source to significantly raise your credit score except another credit card. With a loan, you will build credit the longer you have that loan, but you do this at the cost of paying interest on your loan.
Looking at it from a long-term prospective, I would pay the educational loan through its normal term (ie, not early), and, as the OP suggested, get a second credit card now. You may pay more money now in interest, but you will be getting credit score benefits from your loan, your first credit card, and your second credit card. The longer you keep those credit cards active will also improve your credit score, that's why you should get them now and not later. This means 10 years down the road you will most likely have a higher credit score than if you either 1) paid off your educational loan early, or 2)you took too long to get a second credit card. A higher credit score will make you eligible for lower interest loans, which could potentially save you a crap-ton more money later on when buying big ticket items, like a car or a house.
This is all assuming that you use your credit cards wisely and pay them off entirely every month, on time. If you leave a high balance on your credit card each month, you might end up spending more money in credit card interest, which could offset any other savings generated from anything else.
posted by nikkorizz at 8:01 AM on July 21, 2011
Keep in mind we're in a period where it's harder to get a credit card because of all the crap this economy is going through. Your credit score is retro active, so keep making on time payments and pay more than the minimum on your credit card. It will increase chances for a better score. You can also double the amount of income you make when you're filling out applications so this way they see you're able to pay off everything on a whim. Otherwise, if you feel it's unethical just keep paying a little more than the minimum for each card or like others suggested, charge an item and pay it off right away. That makes the bureaus happy. :-)
posted by InterestedInKnowing at 8:46 AM on July 21, 2011
posted by InterestedInKnowing at 8:46 AM on July 21, 2011
When I asked my Chase banker about likely credit cards for my recently graduated daughter to start building credit, he said there are 3 tiers of credit cards: at the bottom is CapitalOne then Chase and Bank of America then at the top is American Express. CapitolOne has a webpage with an instant credit approval function so you could find out immediately whether you were likely to qualify. So try CapitalOne.
posted by CathyG at 11:21 AM on July 21, 2011
posted by CathyG at 11:21 AM on July 21, 2011
Nthing making larger purchases on the credit card and paying them off over time. Nthing (maybe one or two) department store cards.
Student loans are not dischargeable if (god forbid) you ever have to declare bankruptcy, so it's ok to pay them off as quickly as you can. I don't think it's going to make a big difference in your score.
Sites like Credit Karma have simulators to show what will maybe happen to your score if you get a mortgage, pay off a debt, etc and are helpful.
posted by getawaysticks at 1:21 PM on July 22, 2011
Student loans are not dischargeable if (god forbid) you ever have to declare bankruptcy, so it's ok to pay them off as quickly as you can. I don't think it's going to make a big difference in your score.
Sites like Credit Karma have simulators to show what will maybe happen to your score if you get a mortgage, pay off a debt, etc and are helpful.
posted by getawaysticks at 1:21 PM on July 22, 2011
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posted by epimorph at 11:02 PM on July 20, 2011