One common question we receive at The Motley Fool is how people with a limited credit history can increase their credit scores quickly. It's an important question to ask, especially since that three-digit number is one of the most important factors in your financial life, and improving your credit score can mean the difference between reaching financial goals or falling short. People with good credit are better set up for financial success than people with bad credit, as they can secure better financial terms for life's inevitable financial needs.
In the video segment below, The Motley Fool analyst Michael Douglass hosts colleague Nathan Hamilton, who discusses the plan he and his wife set up to increase her credit score to over 750 in under a year. Tune in to learn how.
Michael Douglass: Hamilton, let's talk through some concrete tips to increase credit scores, and actually in your case, this is a personal story, so let's hop in.
Nathan Hamilton: Yeah, essentially looking at my wife's story and her credit history. If we go back about a year before today, she didn't have much of a credit history, what they call a "Thin File," had never really taken on a credit card, loans, and so forth, so really was starting from ground zero.
Douglass: I was in the same boat right after college.
Hamilton: Yup, yup. So we're going to talk about the process that we used that within a very short period of time, got her from whatever that beginning score was, to where she is now above a 750 score, which puts you in excellent credit card territory. And this will be kind of a how-to tutorial that will hopefully work for other people as well.
Douglass: Yeah, in just 12 months.
Douglass: Talk, that's pretty cool. So you started off by opening a no annual fee secured credit card. Now a secured credit card doesn't really function too much like a traditional credit card, it's usually specifically for building credit.
Hamilton: It is, and this is pretty much the entrance, or the beginner for many credit card newbies, is opening a secured credit card where you put a deposit down that backs that credit limit, and it's essentially if people claim bankruptcy, or if they're just building their credit, this is pretty much the building block, the first step that people take. And so we opened the secured credit card, I can't remember what it was, but it was a no annual fee secured credit card, didn't incur any costs, placed occasional purchases on the credit card to establish both a payment history, and responsible credit card use instead of going out and instantly maxing out that credit card limit, which FICO, the scoring models, would not reward favorably.
Douglass: Yeah, one of the nice things about something like that is to think through putting a recurring bill. Let's say an internet. Internet, or a cellphone, or something like that on it, so that it's just kind of happening each month, you don't need to think about it, and you can kind of automate that so that you're kind of showing that behavior without really having to put any additional effort into it.
Douglass: Let's talk about becoming an authorized user on somebody else's card.
Hamilton: Yeah, so as you become an authorized user, you're going to inherit some of their credit score behaviors.
Douglass: Kind of HALO effect almost.
Hamilton: Yeah, exactly, and to keep in mind, if it is somebody with good credit behaviors, you're going to inherit it, if it's somebody with bad credit card behaviors, you're going to inherit that as well, so it is something to pay attention and look at, "Okay, am I smartly becoming an authorized user on the right account?" Now if you have a spouse or anything that does have good credit, it does help. So what we did is put her as an authorized user on one of my accounts, and also got a little bit of a bonus for doing so.
Hamilton: Which some cards offer, and that helped her inherit my credit score behaviors, which I think, we haven't looked at the exact details of it, but it definitely influenced her score, higher, faster, than what it would've been in other scenarios.
Douglass: Got you. And of course, issuers vary how they treat authorized users, so it's really going to depend kind of on your issuer, and that's a conversation you can have with them probably pretty quick, conversation in terms of understanding what that's going to mean and how it's going to affect things.
Hamilton: Yeah because different issuers may not report certain credit card behaviors on that authorized user's credit report. Some may provide more details and so forth, so not every scenario's going to be the same as what we had, but I think sort of the broad picture to look at is starting off with credit cards and building your credit score is going to be a secured card. Manage it wisely, pay your bills on time, don't incur interest charges. You can do that without incurring any fees, so in terms of annual fees, transaction fees, interest charges, anything like that.
Douglass: And once you set it up, again if you put a recurring bill on it, you don't even have any really time fees involved either because it's just happening quietly in the corner, automated, while you're living the rest of your life. And that's kind of a beautiful thing that you can kind of build all of that with so little effort, if you just set up a system that'll work for you.
Hamilton: And, I mean, getting into the very nitty-gritty details, we actually left that secured credit card open to this date, it is still an open account that's establishing her average count age, which also is a factor that credit scoring algorithms want to see increase over time.
Douglass: Yeah, a lesser factor, but still one. When you're at excellent, these are the sort of small optimizations you have to make, because you're already kind of in, you're paying your stuff off on time, and you're low utilization, all of that.
What a great story, and hopefully something that can really help a lot of people if they're thinking through their credit journey. We've got a lot more information about that credit journey at fool.com/creditcards, so hop on over there, and we've got a lot of great content there really designed to help people as they're navigating all of this, and really thinking through their finances.
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