How to Fix Your Credit Score: Expert Tips

Questions covered in this video interview:

• How to build or rebuild your credit score?
• How to build a credit score for a teenager?
• What is credit utilization?
• Should you close an account when you pay off a credit card?
• Credit score tips

How to Build or Rebuild Your Credit Score?

Michael: How do you restore the credit score? What are the credit cards that would be better, or helping you in assisting it? Another question is, kids, someone in high school, how do they go about building their credit score? So those are the two parts of the same question. How do you either build or rebuild your credit score to the good numbers?

Nathan: Well, I got great answers for both of those, because they kind of relate a little bit. Because once we get past the first part of it, this is where one of the general principles of credit cards does come into play. But I'll start with the first thing.

Let's say, whatever the example given is, you have bad credit scores and you want to turn things around. It can be difficult because sometimes you go to apply and because of those very bad credit scores, you can't even get approved for a credit card to help build your credit, even if you were planning on being super responsible.

So luckily, even if you're at rock bottom, there are options. 

Option 1: Using a lender service

Nathan: Before looking into credit cards, there's a company called Self Lender that allows you to do... I'd say it's almost like a reverse loan. You make installment payments, just like you would on an installment loan, but you're paying into an account that you can't access. And once you pay off whatever the amount that you agreed to in full, then you get the money.

But the thing about that is, it's reporting that payment information every month regularly, just as if you were paying a loan. So that's one way to start building up some good credit scores, by sending those positive signals to the bureaus by using a service like that. But there are even credit card options for people who have bad credit. 

Option 2: Using secured credit cards

Nathan: There's a thing called secured credit cards. And basically, they work like credit cards. You use them like a credit card, you pay them monthly like a credit card, but the credit limit, instead of being approved for a limit, it's a deposit that you put in at the beginning.

So let's say you get approved... You still have to get approved for these cards, because there are other factors besides just your credit scores when you go to apply for a credit card, different factors that they look at when you fill out an application. But let's just say everything else checked out, and it was just your credit scores and they approved you.

Once you're approved, let's say it was $1000. You now have a $1,000 limit that you use for purchases. And then just like any other credit card, you'd make payments every month, and when you pay off the card over time, those are signals being reported directly to the credit bureau.

It's slowly improving your credit scores, just as if you were using your credit card anyway no matter where you came from. Once you have it all paid off, this doesn't happen with every issuer who puts out secured credit cards, but some of them will even let you upgrade to a traditional credit card once you've paid off the amount. 

What's great about that is, the activity that's reported isn't just helping your credit scores. But another factor that goes into credit scores is the overall age of your account. So if it's an account that you have been paying as a secured credit card, and all of a sudden becomes a new credit card, and it doesn't get a new number and doesn't have to close that account, you now have a long history with that card on your credit reports going forward. It's just such a helpful way to get kind of back on track. But again…

...you have to pay on time every month, you have to do the responsible thing.

So you could get yourself in a worse situation if you aren't being responsible for it. But it is kind of that path to getting back there.

Option 3: Using retail store credit cards

Nathan:  And then I'd say, a lesser, successful way, but something that still can help is looking at retail store credit cards, because even though they often have higher than average APRs, and even though you might not get approved for a high limit, they sometimes have less strict approval standards. So a lot of times those are people's good first credit cards. So kind of teasing into your next question of younger aged people.

Sometimes, people, that's their first credit card when they turn 18, is a store card. And if it's a card at a place that you shop at regularly, and you're not just using it to use it, you're able to make those purchases you'd make anyway, earn any rewards that might be offered, but also send those positive signals to the credit bureau. So, important to look at that, and if you are paying off your balance in full every month, then the high-interest rates aren't even a factor. So I feel like sometimes retail store cards can get a bad rap because they have higher interest rates. But those only affect you if you're carrying a balance month to month. So if you're just using it and paying it off by the due date every month, you're earning all those rewards without having to worry about that.

So for somebody with bad credit, I think those are the best options for them to start turning things around. And the more that you pay beyond the minimums due, and the less of a balance you're carrying month to month, the better it's going to be for your accounts overall.

How to Build a Credit Score for a Teenager?

Nathan: Now that's all well and good, but you mentioned how children are supposed to build their credit scores when, as I mentioned, you turn 18, you can officially get a credit card, but how are you supposed to even get approved for a credit card once you're entering into adulthood if you don't have a credit score.

So one of the more popular ways to start building credit for teenagers and stuff is a lot of credit cards that allow you to add an authorized user to the card. So the parents, let's say, might be the actual cardholder, but they can add an authorized user.

So if your child is added as an authorized user to the card, whoever is using either the main card or the authorized user sometimes gets their own card as well, the same thing applies, you use that responsibly and start making payments and everything every month, that's sending signals to not just the cardholder but the child as well. 

That's really a good way for kids to kind of get a leg up on it. But I will say, it works both ways. If you aren't making the payments on time, or even if mom is not making the payments on time, the negative signals are going to impact both of you. So it's something that has to be trusted because sometimes spouses and stuff will add as an authorized user too.

You just gotta make sure it's a trustworthy scenario, you're not just giving the kid the card to spend willy nilly, that if it's being paid off once a month responsibly, then it's going to positively impact them.

This is where I said now, a general piece of credit knowledge, whether you are coming from bad credit, whether you're coming from no credit at all, or whether you've had credit cards for years, the best way to improve your credit scores is through positive payment activity. 

So not carrying a large balance. And that doesn't just mean making your payments on time, but if you're just making the minimums every month, now that's good, you're not going to send any late reports. Because even a single late payment can stay on your credit reports for up to seven years.

You really want to avoid paying late. If things are tight and you can only pay the minimum, you will definitely be making the right decision by paying that minimum every month and avoiding late payment. But you want to pay as much over, because not only will you get it paid down faster, because if you add the interest rates, make those finance charges every month, sometimes so much that you almost feel like you're paying more and more and just never catching up.

What Is Credit Utilization and How Does It Affect Your Credit Score?

Nathan: You want to pay it as much as you can over the minimum to help with that. But also, another factor that goes into the actual scoring in the credit scores is what's called credit utilization. And credit utilization is basically the amount of your overall available credit that's being used. 

So if you have $1000 and you only have a $100 balance on it, that's a much lower utilization than if you had it maxed out, like 950. So paying above the minimum is going to get that... The more you pay, it's basically just going to get lower and lower and that's going to help you more over time.

It really does all kinds of work together. But however you go to rebuild your credit scores, it's going to take time. The good news is... It's kind of weird, it takes time. Overtime is what does the best for you, showing this positive activity over time.

But it's one of those things that you can start doing today. So you come from the rock bottom, you can go, "All right, well, from today on I'm going to never make a late payment again. I'm going to make as much as I can each time." So you can turn it around, even if it does take time to really start showing that, it can start any time. 

It's one of those hopeful things I'll say, even when things seem really hard to manage, there are so many options out there to really start turning things around.

Should You Close an Account When You Pay Off a Credit Card?

Nathan: But the things I mentioned, I wanted to mention those things, particularly because those are the factors that really go into it the most. Obviously, there are other smaller things like when you start paying off debt, your instinct might be to close the account, I never want to use it again.

Remember I told you the age of your accounts helps. So unless you're paying an annual fee to keep a card open, it's worth keeping that card open and just not using it, and it's going to make your utilization percentage lower, and it's going to make the age of your accounts longer.

Being aware of things like that will help too, but those are, I'd say, secondary to just the positive activity that you can show. Because credit cards in general, what is it? It's an issuer or a bank lending someone money and it's all built on trust and risk, and that's where your interest rates are often set based on your credit score.

So if you have low credit scores, you might pay a little higher interest on the debt, but as your scores improve, you might be able to get approved for better cards…

...that aren't only more rewarding to shop with and stuff but are costing you less in interest if you do happen to carry a balance. It all connects, it all ties together, but it really starts from the individual making that choice and starting from square one.

We're speaking specifically to credit utilization. That is the percentage of your overall, whether it's multiple cards, one card, that's applied across it all. So it could be better one way or the other in terms of just that metric. But I already mentioned that closing an account can lower your scores a little bit.

So even if you're done with a card... I've just put away a card that I know... I have a retail card, I think I had a Guitar Center store card once when I was buying a keyboard, and that's all I used it for. And it was years ago, so before I heard of Credit Card Insider, I sometimes was tempted by that 20% off for signing up offers. And I probably am never going to use it again, but I kept the account open because it's something that…

There's not a fee to keep it open, they're not saying you have to use it in order to keep it open. So by keeping it open, it's positively impacted my credit scores by just having it. So I can't give a hard answer of whether this is better than that, but looking at your own situation and seeing where it could benefit you... And a lot of times, in somebody's situation, if they have that card, they might be tempted to use it.

And if they know, like, "I can't trust myself to not spend," even if it does dip their credit scores a little bit, it might be better overall for them to close it and just focus it on the one they had been. Everybody's situation is different. But it is important to just realize that every little decision like that, whether it's closing an account, could affect it negatively.

Tips for Improving Your Credit Card Score

Nathan: As long as you're making sure you're using things responsibly, no matter how the balance is. I will say though, another positive factor that goes into credit scores is a good variety of credit. So if you have an old student loan and some credit cards and a vehicle loan, and even things like some phone plans, they report the fees or utilities. Sometimes utilities are reported to the credit bureau.

Thinking about a wide variety of stuff definitely can be a beneficial thing to your credit scores if it's all paid on time and stuff. So I would say, the variety can help in that regard. But again, in everybody's situation, you'll hear one person be like, "Hey, I had this many cards and this situation, and I got charged this much interest, and this affected my credit scores this way." 

Sometimes there are these weird situations where you're like, what worked for one person didn't work the best for that other person, but you can kind of see where the commonalities do lie. Okay. No matter how many cards I have, how am I using them? How long have I had them? Those kinds of things you can kind of, once you know that, then you can make the right decisions based on that knowledge. 

Credit Card Insider can best be described in the kind of a two-fold approach. On one side, Credit Card Insider reviews, rates and compares different credit cards across all sorts of categories. So it could be general-use credit cards, first-time credit cards, people who are coming from bad credit or no credit. And then things like travel credit cards, retail store credit cards, gas cards, and even things like hotel or airline co-branded credit cards.

We categorize these different cards based on different people's needs and rate them against each other accordingly. And one thing that we take pride in at Credit Card Insider is that we don't let any affiliate advertising relationships affect what our picks are for the best card. We have some relationships with certain card issuers, but it doesn't cross into our editorial stance, which is to provide the best picks.

So a lot of times, we have some cards that aren't being talked about as much in other places, because even with advertising relationships, there are a lot of great cards out there that issuers are working with, lots of people like us who do review credit cards and stuff. But what makes us unique is the editorial stance allows us to really spotlight someones that might kind of stand out from the crowd for specific people.

Conclusion

No matter how hard it may seem, there are ways to rebuild your credit card score. We thank Nathan Grant for explaining how credit cards work and what can help you improve your credit card score. Take expert advice, pay your debts on time, and you’ll quickly get on track with your finances. 

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