by Matt Frankel, CFP | March 6, 2019
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Good credit isn't just about paying your bills on time and keeping your credit card balances low.
Most Americans know the basic ideas behind building good credit. For example, it's common knowledge that paying all of your bills on time is good, while late payments are bad. Similarly, most people know that maxing out credit cards is a generally negative credit score catalyst, while responsible debt management is a positive factor.
However, there are some other tactics consumers can use to maximize their credit scores. Here are three outside-the-box credit tricks that can help take your FICO® Score to the next level.
We know that 30% of the FICO scoring formula comes from the "amounts owed" category. This has less to do with the actual dollar amounts you owe than it does with the amounts you owe on revolving accounts relative to your credit limits, and how much you owe on installment loans relative to their original balances.
When it comes to reducing your revolving account usage (also known as your credit utilization), there are two options. Most obviously, you could pay down your debts. Alternatively, you can get more available credit. Both can have the same effect.
Think of it this way. If you owe $2,000 on your credit cards and have credit limits totaling $5,000, you are using 40% of your available credit. On the other hand, if you have $10,000 in credit limits, your utilization drops to just 20% even though you owe the same amount of money.
This can have a dramatic effect on your credit score, so one strategy is to simply ask your current creditors to increase your limits. Most people who do this are successful, and you'll get the benefit of lower credit utilization without the negative effects that come with applying for and opening new credit accounts.
Speaking of debts, I briefly mentioned that there are two main types -- revolving and installment. One important principle to know is that installment loans are generally regarded more favorably in the FICO formula than revolving debts such as credit cards.
Therefore, by obtaining a personal loan (installment debt) to consolidate your credit card debt, you can significantly boost your score. Not only that, but there's a good chance you'll find a personal loan with a significantly lower interest rate than you're paying on credit cards, plus the rate will be fixed over the term of the loan.
If you're just trying to establish or rebuild your credit, it can be challenging to get approved for a credit card. If this is the case, one credit hack you may want to try is to have a trusted friend or relative add you as an authorized user on an established credit card account.
There's one big caveat to keep in mind. Being added as an authorized user is only a good thing if the primary account holder makes the payments on time and doesn't carry an excessive balance. If the account owner starts making late payments or maxes out the card, being added as an authorized user can easily do more harm than good.
To be clear, these are three suggestions of how to boost your credit score in unconventional ways, but it's still important to use good common-sense practices. Don't take on more debt than necessary, don't apply for new credit accounts too frequently, and make all of your debt payments on time, just to name a few examples.
Having said that, if you're doing everything you're supposed to, and your FICO® Score has been stuck in place for some time, these tricks could help catapult you to the next level.
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