How to improve your credit score

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Here’s something that you’ll almost never see on a financial TV show:

Consider 2 people…

  • One has great credit
  • The other has poor credit

In their 30s, they decide to buy houses of similar prices.

How much do you think they pay?

Simply by virtue of having different credit scores, the person with poor credit will pay over $68,000 more than the person with excellent credit.

Source: MyFico.com. Data calculated in October 2011.

Over $68,000. How many lattes is that worth?

THAT is the power of having a great credit score. Yet most “experts” will either (1) continue yammering on about lattes and clipping coupons, or (2) give worthless, high-level advice like “Improve your credit!” (Okay…how? Jackass.)

They do this because lattes and coupons are obvious and top-of-mind. In psychology, this is called the availability heuristic.

But just because something is obvious and top-of-mind doesn’t mean it’s important, which is why I love mocking dumb financial experts whose advice doesn’t work.

My goal with IWT is to show you what’s beneath the surface — what’s important, but not obvious — to get you BIG WINS.

So today, I’ll show you a step-by-step process to improve your credit score, which is one of the top 10 Big Wins you can get in your life.

The tactics: How to improve your credit score

You don’t need to become a credit weirdo like me and read 50 books on credit optimization to raise your credit score. You can actually ignore most advice and simply do a few, key things to dramatically improve your score.

In fact, there are 3 major steps that will have the biggest impact in improving your credit score. Check it: Here’s what your credit score is composed of:

Source: MyFico.com.

I’m not going to give you 50,000 tips on how to improve your credit score. Instead, I’ll show you 3 tips to raise your credit score that work:

1. Automate your credit card payments

35% of your score (the biggest portion) reflects your payment history, so even missing 1 payment can cause your credit score to drop 100 points, jack your APR up 30%, add $200+/month to your monthly mortgage payment (insane, I know), and more.

Set up automatic payment using my IWT system. I even recorded a video showing you the exact accounts that should pay each other, using my amazing artistic skills.

Notes on automating your payments:

  • Since 35% of your credit score is based on your payment history, setting up automatic payments is your Big Win here.
  • Instead of doing what most people do (wait until the end of the month, then try to remember to pay…and when they forget, they get slapped with huge penalties), set up automation so you never have to worry about this again.
  • You should ideally be paying off your entire credit card balance each month, but if you can’t, you can still improve your score by paying at least the minimums, on time, every month.

Here’s the video on automating your accounts:

2. Pay off your goddamn debt

If you have credit card debt, read on…

Too many idiots decide that since they have debt, they should game the system and play the 0% balance transfer game, switching balances from card to card to save a few percentage points on debt interest. Yeah!! Let’s stick it to the man!

What I’ve found is that they spend more time transferring balances from card to card instead of actually paying their debt off. Honestly, get a life. The credit card companies are smarter than you, so if you try to game them, it’s only a matter of time before they destroy you.

Instead, here’s what I want you to do:

  • Go to http://www.whatsthecost.com/snowball.aspx (my favorite debt calculator) and plug in your numbers
  • You will see EXACTLY how long until you pay off your debt. Stick to the plan via automation (see step 1 of this email)
  • Decide, optionally, to use the negotiation material from Chapter 1 of my book. It doesn’t always work, but when it does, you may get results like this…

Just followed tips from @ramit and negotiated to lower interest rate on my Gold credit card from 20% to 7%!!! Incredible!Tue Oct 25 00:15:39 via web


The results someone got 2 days ago using my book to negotiate their APR down.

3. Keep your old accounts open — and set up a $5 monthly charge on them

So many times, when people get motivated to “do something” about their credit cards, the first thing they do is close all the cards they haven’t used in a long time. Sounds logical! Let’s clean out the old cobwebs in our wallet!

In general, however, this is a bad idea: 15% of your credit score reflects the length of your credit history, so if you wipe out old cards, you’re erasing that history.

Plus, you’re also lowering your “credit utilization rate,” which basically means (how much you owe) / (total credit available).

Bottom line? Even if you don’t use a card, consider putting a small charge — say, $5/month — and automating it each month. In this way, you ensure your card is active and maintains your credit history.

Notes on keeping your accounts open:

  • For nerdy people (aka half my readers), here’s the math of your credit utilization score — plus a little-known caveat: “If you close an account but pay off enough debt to keep your credit utilization score the same,” says Craig Watts of FICO, “your score won’t be affected.” (Most people don’t know this.) For example, if you carry $1,000 debt on two credit cards with $2,500 credit limits each, your credit utilization rate is 20% ($1,000 debt / $5,000 total credit available). If you close one of the cards, suddenly your credit utilization rate jumps to 40% ($1,000 / $2,500). But if you paid off $500 in debt, your utilization rate would be 20% ($500 / $2,500) and your score would not change.
  • If you’re applying for a major loan— for a car, home, or education—don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply. (However, if you know that an open account will entice you to spend, and you want to close your credit card to prevent that, you should do it. You may take a slight hit on your credit score, but over time, it will recover—and that’s better than overspending.)

Bonus! Raising your credit score if you DON’T have CC debt

I’m serious about this warning: This tip is only for people who have no credit card debt and pay their bills in full each month. It’s not for anyone else.

It involves getting more credit to improve your credit utilization rate, which is simply how much you owe divided by your available credit. As I mentioned, this basically makes up 30 percent of your credit score. For example, if you owe $4,000 and have $4,000 in total available credit, your ratio is 100% (4,000 / 4,000 x 100), which is bad. If, however, you owe only $1,000 but have $4,000 in available credit, your credit utilization rate is a much better 25% ($1,000 / $4,000 x 100). Lower is preferred because lenders don’t want you regularly spending all the money you have available through credit—it’s too likely that you’ll default and not pay them anything.

To improve your credit utilization rate, you have two choices: Stop carrying so much debt on your credit cards (even if you pay it off each month) or increase your total available credit. Because we’ve already established that if you’re doing this, you’re debt-free, all that remains for you to do is to increase your available credit.

Here’s how: Call up your card company and ask for a credit increase.

You: “Hi, I’d like to request a credit increase. I currently have five thousand dollars available and I’d like ten thousand.”

Credit card rep: “Why are you requesting a credit increase?”

You: “I’ve been paying my bill in full for the last eighteen months and I have some upcoming purchases. I’d like a credit limit of ten thousand dollars. Can you approve my request?”

Credit card rep: “Sure. I’ve put in a request for this increase. It should be activated in about seven days.”

I request a credit-limit increase every six to twelve months, like clockwork. Some people find romance in sending flowers to their significant others. I find it in talking to Delores, my friendly credit card rep, every 6 months.

Remember, 30 percent of your credit score is represented by your credit utilization rate. To improve it, the first thing you should do is pay off your debt. If you’ve already paid off your debt, only then should you try to increase your available credit.

3 things to remember when improving your credit score

  1. Improving your credit score is one of the top 10 financial Big Wins you can have. While others are scrounging around and worrying about ordering a medium Diet Coke, you can focus on something that will pay off with tens of thousands of dollars when you make the large purchases that we’ll all make in our lives.
  2. Dumb people like to do everything (e.g., balance transfers) EXCEPT doing what really matters: Automating, Paying That Goddamn Debt Off, and Keeping Old Accounts Open. Stay focused on these 3 steps and your score will improve over time.
  3. Improving your credit scores are a marathon, not a sprint. Give it a few months before checking. To check your credit score right now, check out myfico.com.

Hope this helps. If you want to get the entire system I use to automatically manage my money, you can pick up a copy of my book. You can also learn more about my favorite credit card.

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  1. How do cards like American Express (no preset spending limit) factor into the equation?

    • Typically the highest amount you have ever charge on your card will be picked up as for the “Credit Limit” on that card (much like a loan). So if you charge $500 (and only $500) each month it will show on your report as though you are maxed out every month. So if you have a big spending month you can put everything on the card to increase the reported “Limit” and then in the future your utilization will appear to be lower.

  2. I think that many other financial advisors DO actually advocate for building or improving credit score and paying off credit card debt. It’s not only lattes and frugality :)

    This is the easy stuff, but good to throw it out every so often for the next gen.

    • I appreciate Ramit telling us how to do that; I haven’t seen these recommendations in one place before for what improves a credit score. Thanks!

  3. Does anybody have a comparable free credit score checking solution for people not in the United States? Specifically Canada.

    I’ve been looking into this and it seems mythical – immediate, online credit scores from TransUnion or Equifax cost a fee, although you can apparently get one for free *somehow*.

  4. Jared – I think you are asking about charge cards. That’s an interesting question as there is no set credit line limit.

    I opened up a $15k credit card last month and boosted my credit score by 50 points. I put a few charges on it, but just opening up a new credit card lowers your credit to debt ratio (utilization rate). We we also aggressively paying down our debt (we were at $43k, now $25k in 9 months) which also improves your score for the long-term.

  5. This is good, I’m going to call my credit card company and ask them to boost me to $15,000 from $7,500 since I’ve never had a late payment in 6 years and always pay in full.

    I would add to check with the credit card to verify how they report your credit to debt ratio. I heard a rumor that with some cards they will report your credit limit as the same as what you spent, even with a limit of say $10,000 and only used $1000. I never verified it since it didn’t relate to my Mastercard.

    • That rumor can happen, if all of the lines on the transmittal to the credit bureaus are not filled out, or are filled out incorrectly. In the case where it is missing, the bureau just assumes the amount spent is at least the limit (same as American Express is typically handled).

      I’ve even seen where the limit was correct for one bureau, but missing on another. That issue is usually a reasonably easy fix via dispute through the credit bureau that is misreporting.

    • For some reason, on my credit report, my Chase Freedom card always shows a $0 credit limit even though my credit limit is something like $11,000.

      One time I called Chase to have them fix it, and got a lengthy letter back to the effect of “its revolving credit so there’s not a credit limit” or something retarded along those lines. I’m sure they’d gladly charge a fee if I happened to go over this ‘non-existent’ credit limit though.

      I haven’t called back to try to get it worked out though and wasn’t sure how it affected my credit score.

      Anyone else have this issue?

  6. What recommendations would you have to someone who has little or no credit history at all?

    • Ron–

      You need to show the credit companies that you are willing to play their game. Open a credit card, if you don’t have one already, and use Ramit’s point #3. Put something on it every month and pay it off every month. My sister puts her rent on hers and has an automatic payment. No fees, and she’s still building her credit history.

      It takes time to build a credit history. There’s no way to speed it up, so start soon.

    • You can “speed up” the process by having yourself added to someone else’s credit card account as an authorized user. Some credit card companies will then report that person’s history, good or bad, on your report.

    • Go get a Macy’s card. They will approve anyone for $100 credit. You can also try AmEx or Discover. Unlike Visa or MasterCard, they handle all their own financial risk. AmEx or Discover will actually review your history carefully versus some automated online BS that most of the other banks do.

  7. Does having credit cards open that you don’t regularly use negatively affect your credit?

    Also, does the hit to your credit score when you close a credit card come only from the hit to your debt utilization ratio? If I open a new card and then close an old one with an annual fee, does my score stay relatively the same?

    • Not using a card doesn’t hurt your score, but you want to regularly put a small charge on unused cards because banks will often close inactive accounts.

      The graph above shows that 15% of your credit score is determined by the average length of your credit accounts. In addition to hurting your debt utilization ratio, closing an account also reduces the average age of your accounts, making closing accounts a double whammy.

  8. Wow I love how this worked out. The same day I release my guide on credit you have a similar post go up.

    I always stress to friends not to close any accounts prior to applying for a mortgage because the negative bump will hurt them. I was actually working with a friend (who asked me for advice, not me preaching) on buying a property.

    His credit score sucks, his salary is okay, and he’s 30. I suggested that he took a year to pay down his debt, improve his credit score, and save more money for a down payment. He was upset because he experienced the intoxicating feeling of telling everyone he knows about how he plans on buying a home this month.

    As you said, it is a marathon!

  9. Don’t forget that your credit history impacts your ability to be hired in certain industries, so that is another reason to be as responsible as you can be.

    Also, Ramit, didn’t I make myself clear what would happen if I ever saw “latte” in a post… :)

    Ron, my advice would be to get a credit card, even a dept store card, and pay on time. That’s how you build credit. The next would be a car or mortgage loan…but another viewpoint is what Dave Ramsey suggests: you only need a credit score if you have debt or need to have debt! In other words, It’s ok (and yes, liberating!) to be debt free and then who cares what your score is!. Unfortunately, most of us are unable to live that way unless you’ve busted tail to pay off your mortgage early, which isn’t always the wisest use of resources, esp. in our current economic environment.

  10. Ramit – great post. I’m a long-time reader and fan of your work, and have personally benefited tremendously from taking your advice, both on the blog and the book. From CC to bank accounts, to investments, when friends ask where I learned it all I point to you.

    I want to add something to this regarding Capital One. I was offered a “starter” card from Capital One for people w/ poor credit and had been paying it off in full every month for over a year while they continuously refused to raise my limit and instead kept offering me more cards. Finally, I decided to leave a small balance each month ($15-30) and let them make some money off me for a bit, about 4-5 months. Now I check my account and w/o notice my limit was doubled. Correlation is not necessarily causation, but something to consider as banks tighten their purse strings.

    Anyways, thanks always for your guidance.

  11. How do I battle the “too many inquiries” drop? We are house hunting currently and so the potential lenders each put in a request. Should I still get the credit limit increased?

    • Inquiries within a certain time frame like 45 days will all be grouped together. If you’re searching for long periods of time, then it may show as a hard credit pull multiple times.

    • Your oldest inquiries drop off after awhile. This means, just don’t seek new credit or engage in activities that require a hard pull.

  12. Ramit, when I called my credit card company to request a credit limit increase, the rep informed me that it would involve a credit check. Normally, I’d think credit checks are bad unless absolutely necessary because the check stays on my credit history for several years.

    Is it worth the credit check for the limit increase?

  13. Ramit,

    I just wanted to say that this post sucks. Why? Because I read your book two years ago when I was $25k in the hole making $42,000 a year, and a 530 credit score. Read your book, took E1K, and my whole life is different now. I now have zero debt (save for my $5 credit card balances every month), I make over $35,000 more with the same company, and I’m pinging 700+. You may ask what my strategies were, but it would be the same as looking in the mirror (“oh yeah, I did say drop that brilliant wisdom on my readers, didn’t I?”)

    24 months.

    So while I found your post useless, it’s only because I deployed your strategies a long time ago and everything in my life is different now. It’s my jerk way of saying you’re awesome and thank you. Thanks for always bringing the pain on personal finance.

    Bobby

  14. Would love to hear about negotiating salary, esp. in a workplace with “fixed raises.”

  15. Sara,
    It looks like your link is only for the report, not the score, so beware. You usually always have to pay for the score, unless you’re sitting in the auto dealer ‘s finance office and ask what it was and s/he tells you.

  16. So…let me get this straight:

    In order to keep a good credit score, you have to keep playing Kissy Face with the bank? That is you have to keep borrowing and repaying. The FICO score’s formula is completely based on debt, not net worth, savings, or any formulaic aspect of your investment portfolio. None. Nada.

    Perhaps a better approach to getting a good deal on a mortgage is to STOP worshipping the almighty FICO score and focus more on one’s rental history, consistent income, etc. That is the old fashioned way where you EARNED your mortgage and didn’t play these worthless games with banks to increase’s one’s “credit score.”

    • The only things the credit score measures is how willing you are to use credit, and how good you are at paying it back. FICO was originally an internal tool developed by Fair Isaacs as a way of measuring whether or not someone was a good lending risk. So yes, the FICO score is only based on debt.

      That’s why when you apply for a mortgage, one of the factors they look at is your FICO score. You want to borrow money? What are the odds you are going to pay it back. The bank also looks at income vs. expenses, rental history, and job history. All of those things together give them a good profile of you as a potential mortgage borrower.

      There is no “old fashioned way” where you EARNED your mortgage. It’s not a reward for being a good person, it’s an investment on the bank’s part, in you. If you don’t understand how the system works, you are not going to get what you want.

    • The DR is in *winks to Cornelius*

    • You might be interested in Dave Ramsey’s perspective on credit scores: http://www.daveramsey.com/article/the-truth-about-your-credit-score/lifeandmoney_creditcards/

      In that article, he talks about using a mortgage lender who does “manual underwriting” – basically examining your financial situation and history, rather than relying on the score. That is, basically, the “old-fashioned way” you’re talking about.

      I have no idea how practical it is, but Dave’ s been giving that advice for years, and provides a list of lenders who offer manual underwriting. (and who also, I’m sure, give him a kickback for referrals)

  17. @CorneliusAllen – While that old fashioned way may be the way one earned their mortgage, the “game” works.

  18. Hey Ramit,

    What do you know about any negative effects of too LOW a credit utilization? My friend had like a $3,000 credit limit on his card but only used like $50-100 a month (while immediately paying those off even before the statement is issued). He got denied for credit limit increases and got a new credit card which also only gave $3,000. Does his ridiculously low utilization affect limit increases and future cards? Thanks!

  19. Ramit,

    What if you don’t even have a credit card? I have student loans and a car payment that demonstrate a solid payment history but it is yet to move my credit score in any direction. Should I just open a small card and charge/pay off something small for a few months?

    • @Brina

      Yes! You should get a credit card ASAP to build your credit rating.

      Preferably, get a rewards card where you can work towards something with your purchases (I have a Chase Amazon Visa). Start with small purchases every month, and pay the balance every month. Once you get comfortable with that, pay for more things with your card. It makes it easier to track your spending (plus the rewards).

      I now pay EVERYTHING with my rewards card, and pay it off every single month, never keeping a balance and never paying interest. Hope I helped!

  20. awesome post ramit!

  21. One strange thing I’ve found out after paying off all my debt… To have a credit utilization of 0% is actually not great. According to sources like Credit Karma, having, say, $0/$15,000 only gets a grade of “C.” I guess having something like $1,000/$15,000 would be better. That said… I think I’m willing to take the hit rather than leave money on the books just for a bump. The interest I’d pay may not be worth it. Has anyone else seen this?s

    • This is a misconception. Your credit score is based on your statement. You never have to pay interest if you pay off your statement within the grace period. If you charge $10 on the credit card, you just have to pay it off by the due date assuming you had no balance the previous month.

  22. Great post Ramit!

    I once had a job where I looked at all of our clients’ credit reports. I think #3 is the best part of this post, because it’s the part that’s not obvious–I never figured it out until I saw the first 50 or so reports.

    Also, you would not believe how bad doctors and lawyers are with money. It’s astonishing how bad they can be.

  23. Excellent advice/post except for the unneeded use of idiot, stupid, jackass and goddammit which at least for me is a turnoff.

    Thanks.

  24. Is that true that a hard inquiry is required to raise the credit limit above $25K?

  25. I have no credit card debt, and always pay off my balance in full and on time. I am also 2+ years away from even thinking about buying a house (so I have time to get my score as high as possible). Would I be better off right now opening up additional lines of credit, or should I just focus on growing my credit line on the card I have (which I have had for around four years)? I have a rewards card but there are definitely better cards out there, and I suspect I could increase my credit limit fastest if I had multiple cards.

    I don’t know if this impacts things, but I’m currently a grad student and while I am building up (federally subsidized) student loans, I already have a job lined up for graduation that will let me pay off these loans in a couple years (3-10).

  26. To add on to the previous post, my credit limit on my sole card is not especially high (<$5,000). I've requested increases several times, but generally don't approach my limit so I've never been granted more than a $1,000 increase.

    • Noah, I’m not a credit expert but in my experience I get limit increases either when I charge 50% of my limit or more for a period of several months (work trips are good for this), or if I call and ask for it and have a specific reason, like “I’ll be traveling for work and may need to charge some expensive airfare.” My guess is that significant credit increases are only given to people with both great credit and who have used a significant chunk of their available credit with that company. If you’re using less than $1000 each month on a $5000 limit, they don’t really have an incentive to increase your limit. I believe there is some risk management math on their end that makes financing their business more expensive if they have lots of customers with tons of available credit–they have to have their own lines of credit to cover potential spending by customers.

  27. Wow I love how timely this post is for me! I recently learned that a person in my life has a credit score of 849. I began interviewing him on how he did this and I have put together about 13 chapters for a guidebook on obtaining perfect credit (among other financial strategies). I’m glad to see the interest in this information is strong!

    The one thing I don’t think he does is automate his payments (he is just very diligent) but personally I think automation is a great tool. Thanks for the suggestion Ramit!

  28. I can’t help but point out to the younger folks reading this…buying your latte’s with a credit card and paying it off each month is a good way to start small ;-)

    • Why not buy drip coffee instead of a latte? That costs 50% less. Or better yet, make it at home. $10 for a pound of coffee, or two lattes… Hmmm

  29. Credit score *does* matter for things other than taking on debt.

    About a year and a half ago, I had no credit at all– I had gotten by with no credit cards for over a decade after some minor debt problems in my early 20′s, and I didn’t carry any other debt. I so completely had no credit, as it turned out, that one of the three credit score bureaus couldn’t even identify me initially.

    I tried to switch cell phone companies at one point and they wouldn’t give me an account because I didn’t have a credit score. Businesses often do credit checks on new hires. There’s still often an advantage to things like renting a car with credit vs. debit card (the latter often requires a bigger deposit). Credit scores are more pervasive than you might think.

    And for those wondering about getting that first credit card– I’m with a credit union with awesome client service policies, so they were willing to float me a tiny little $500 limit card (didn’t even require me to do a secured one!) because I’m a customer. Six months of flawless automated payments later (thanks Ramit!) I expanded my available credit another $5k. Six months of still-flawless payments and careful usage of credit later, I have a great credit score. Now, I’m getting ready to expand my available credit again, and am otherwise just maintaining habits and letting my accounts age.

    So yes, it is very much a marathon, but you can achieve a tremendous amount of change in just a year. Which sounds like a lot when you’re starting the process, but goes by so quickly that when it’s past, it feels like it was nothing.

    Thank you again, Ramit. Your advice is awesome and this post is no exception.

  30. “Over $68,000. How many lattes is that worth?”
    Answer: Approximately one per day until your mortgage is paid off. Skip the lattes and have a good credit score, save $136,000.

  31. I have a question regarding your “Bonus! Improving your credit score if you DON’T have CC debt”:

    I’ve heard that if my bank were to reject my request for a credit increase (even though I’ve never missed a payment, have no CC debt, etc) – that rejection would lower my credit score. Is that a myth?

  32. What is the most “free” link to view your credit score?

  33. Ramit,

    After reading your book, I enacted these strategies while still confined to bed from an injury. Raised my credit score 50+ points in 6 months to 832. That was almost 2 years ago. The bank keeps asking me to borrow money now!
    A credit score of 832+ puts you in a different class.

    Credit score matters for things like rent applications as well. Being a lower risk tenant you get bumped to the front of the line and can even negotiate rent payments.

    Johnny
    Vancouver, Canada

  34. I am also wondering how American Express cards factor into your credit score. Is it true that they assume the amount spent is the limit for charge cards? If so, would it be more benificial in the long run for someone with little credit history and no debt to use a credit card instead?

  35. I put my lattes on my credit card. Well, to put money on my SB card. Then I make sure to pay my CC off every month. Win-win.

    Interesting advice about increasing your credit limit. It shows how screwed up the system is that you can actually improve your score by getting more credit.

  36. I’ve caught myself in a bit of a sticky situation. I took more than a year to pay off a debt of $500 – naturally, it swelled to about $800 before I finally paid it off. But *I paid it off!*

    I think they cancelled my credit card in the meantime. That was about 3 months ago. Since then, I’ve been trying to apply for new credit card with various banks, but have been getting rejected repeatedly.

    Should I be worried? Coz I am. A little.

  37. Rebecca, thanks for your tips! I’m planning on getting a credit score too, so any guidance is welcome.

    My bank is a small local bank that doesn’t offer credit cards, so my guess is I’ll have to go with a secured card with a yearly fee.

    Ramit, I understand the purpose of keeping old accounts open to maintain your history, but why put a $5 monthly charge on them? Do sleeping accounts perhaps get closed?

    • I know from experience that if you don’t use a credit card they will never increase your CC limit and they can close due to inactivity which is not good for your credit score. Keep your credit history going and order that latte on the card!

      I personally set-up the two cards I never use with my monthly gym membership and the other with my monthly car insurance payment. Then I set-up automatic payments through my Charles Schwab account so I never have to think about those cards.

    • Inactive (sleeping) accounts can get closed. In practice, I have a Capital One card I only use for overseas travel (it doesn’t charge any currency conversion fees), and they haven’t closed it even though I go months between using it. They might leave it open for me because I have great credit (above 770), but you’d probably need to be inactive for 6+ months before needing to worry about it. On the other hand, if I had my electricity bill go to that credit card and automated payments, I wouldn’t have to think about it.

  38. Followed all of these when I read your book several years ago. The update is good :) Chase recently told me that they couldn’t increase my credit anymore because it is now equal to what I make in a year. Do I just leave it alone now then? I have Hyatt and United rewards cards from them. I did close my Continental card when the two airlines merged – but I called Chase and asked if they would just “merge” the limit of the two airline cards since the airlines had merged. Since the United card was my original card and I had added the Continental later (when CO was still part of Skyteam) the “merging” of the limits didn’t affect my credit since it was within the company. I also have a Hilton AmEx for some diversity from Chase. Is that a good idea? I wasn’t sure if having all my credit with Chase was a good idea or not, so I added the AmEx and just use it to get gas (double points) and shop at Costco…….the Hyatt Visa card is solely for international travel as it has no foreign transaction fees – but I am overseas A LOT so it’s worth it. The United Visa it my regular card for everything in the US but Costco and gas.

    So back to the questions – is it helpful to “diversify” credit companies or does it matter? And when two cards are within one company is consolidation okay if you keep the older card?

  39. Good advice. As far as closing accounts, I typically sign up for new cards with mileage bonuses that waive the first year fee. I like to close these accounts within twelve months to avoid the charges (then sign up for new bonus cards…rinse and repeat). I’ve never had a home or auto loan and my credit is 750 (not too shabby). Is closing these accounts alright or am I really continually resetting my credit history?

    Also, to be fair Ramit, in your 30-year loan example, $4 lattes five days per week over the same period would cost over $30k. If that was invested wisely it could breach the $68k mark making lattes the bigger win!

    • I’m in a similar situation–my credit score never seems to get above 780, and once when I paid for an “analysis” on experian.com they said the main thing I could do to improve my credit was use different types of debt. The only debt on my record was student loans and then now revolving credit card debt. I suspect an auto loan would be helpful. One thing that has helped me is to keep a selection of no annual fee credit cards open long-term which help to offset the annually refreshing bonus cards I get. Currently in my drawer at home: free Capital One cash back rewards used for overseas travel (no finance charge on currency conversion), free Virgin America rewards card that is also a Visa Signature. My recurring bills go onto these. “New” cards that won’t last 12 months: Chase United mileage rewards card, Southwest Airlines mileage card. Note that the Southwest card charged its annual fee up front, which is kind of annoying, but that $69 fee got me 45000 points, or enough for several free domestic flights so I think it was worth it. United card will be canceled before next March, and then I’ll sign up for the new improved United card they just released, again for just 1 year.

  40. So just to be clear, if I’m near my limit on my card, it would be better to raise my limit so I’m not utilizing 90% of my credit limit on that card?

    • Chris – it would just be better to have less credit card debt. I am more under the impression that what is important is your total debt to credit ratio, but you also don’t want to go over the limit of your individual credit cards. I’m paying down debt, so I’m going to toy with taking some cards up to 90% ;)

      Here is what CreditKarma says:

      Credit Score Weight: High

      Credit card utilization is defined as your total credit card balances divided by your total credit card limits. The utilization percentage is often correlated to your credit score.

  41. What do you tink of creditKarma.com I use it to look at my score but I am not sure how accurate it is.

    • I was wondering the same thing so I ordered my credit scores (my bi-yearly review) and checked credit karma. It wasn’t close for me but check it out yourself.

  42. Two other big wins that come from a good credit score…

    1) Employment – It’s becoming increasingly common for companies to run credit checks prior to employment, and its a requirement for any job that requires a security clearance. In fact, if you work in a job that requires a clearance, they will continue to check your credit while you have that clearance. People have been fired for losing their security clearance due to bad credit. Maybe not a big win per se, but if you don’t get a job or lose one, that’s a big loss.

    2) Insurance – Many insurers (depending on your state) use credit scores to determine your rates. For example, the average yearly premium for my car in my state is $1,026 (insure.com). I pay $710. Certainly, I have other discounts that are reflected in that rate, but I also have 5 speeding tickets.

    A little off-topic, but I’d love to see some posts on optimizing insurance. What to get, how much to get, etc. I know I pay almost $1000 every year for just auto and renter’s insurance. For people that also need health insurance, life insurance, and random other insurances this could be a really big win.

    • It’s becoming increasingly common for companies to run credit checks prior to employment

      Can anyone confirm this? I know it *happens*, but I’ve been seeing more and more PF and career bloggers online mention it lately. But can anyone cite some study or poll that indicates that this is happening more frequently – or even that it’s common at all?

  43. Quick Question / Critique –

    I use an Airlines Reward Card to pay for pretty much everything so when I take vacation I can go anywhere I want to for free. However, the best rewards cards, in my experience, have a yearly service fee associated with them — 75 bucks a year, for my Airlines Card. On instinct, when I get a new credit card, I’m not going to want to keep my old accounts open, simply because of that horrible service charge.

    Would a good course of action be to keep your old accounts open before a major purchase (Such as car, home, etc.), lock in your APR with the loan, and THEN close out the old account?

    Also, I’d be interested in hearing about “No Service Charge Rewards Cards”, because from the research I’ve done, Free Rewards Cards aren’t worth having: I would love to be proven wrong on this, so I can have the best of both worlds.

  44. Adam–

    Why have you heard that free rewards cards aren’t worth having? For me, I can’t imagine that given my low yearly spending that I’d “earn” back the $75/year charges on the “better” rewards cards.

  45. Hey Noah –

    Well, I dump all of my bills into my Citi AAdvantage Airline Card, which equates to about $25k per year in Expenditures (And thus 25k Miles on my Account for Upgrades / Free flights), and I’m signed up for the AAdvantage Dining Program on the AA Website which gives me Triple Miles on local, non-chain restaurants around the country when I travel for business.

    When alls said and done, it works up to be about 60,000 Miles per year, which not only upgrades me to AA Gold (Which is nice to have when you travel a lot like I do — there is nothing worse than working a 10 hour day and being stuffed into Coach on the Red Eye back home.), you also get about 2.5 Free Domestic Trips anywhere in the country per year, which is about 900 dollars or so in rewards, maybe? Depending on when you take the trips.

    I’d love to find a Free Rewards card that was comparable, but everyone I’ve talked to says nothing really beats Free Airfare as a reward. I’d love to hear alternatives.

  46. [...] How to Improve Your Credit Score  Some very solid tips from Ramit on how to improve your credit score with minimal effort. [...]

  47. I did the balance transfers to 0% interest thing to get out of bad credit card debt, but this was about 5-8 years ago when those 0% intro rates were falling from the trees. I wasn’t doing lots of extra work, I’d just set up a reminder in Outlook to tell me when the rate was going up. I’d call and ask them if the new rate could be something lower than retarded, and when they said no, I’d get a new card, transfer the balance, set up another reminder for 6 months to a year from then, to do it again. I paid off thousands in debt without any of it going to interest payments. I’m not an idiot and I didn’t spend more time transferring my balance than paying my debt off. It’s something I had to take care of once every 6 months to a year. And I wasn’t saving a few interest points, I was saving myself from rates of 20-30%.

    • I don’t know what your balances being transferred were, but you are paying anywhere from 3% to 4% on those balances. If the intro 0% APR was only for six month, you are effectively paying an APR of 6% to 8%. Not such a good deal sometimes.

  48. I did all that and it still hasn’t worked! I have three debts on my credit score: one is my car which is an automated payment, another is a school loan, also automated and another is a bill I never paid but made arrangements to pay 100$ a month on it for the next 14 months and then it’s gone.

    Over the past six months I have paid off everything on my credit report but those two, I opened two secure credit cards (that I didn’t want but use to raise my credit score) and my score hasn’t budged!

  49. Hey you are full of crap about credit increases. The banks just don’t increase your credit when you.call and ask. It depends on factors they set like credit rating, no current increases for noone, ect. I asked 2 diffent companies for increases with perfect payment history after 1 year+ and the said they weren’t doing increases at all. Be thorough before you give out inaccurate info.

  50. John E – I have gotten an increase every time I have asked – which has been about once a year.

  51. Joy, hurray for you, but his info is not for every card nor every situation was the point, not your mutual liberal credit extension like the author. sounds like a cheap jab if you ask me.

  52. [...] your credit score: Since having higher credit limits helps your credit score, it never hurts to call your credit card companies every year and ask them to raise your credit [...]

  53. [...] Credit ScoreCredit Report – How to Improve Your Credit ScoreTroubled about your credit scores?How to improve your credit score /* Link color */ a, #site-title a:focus, #site-title a:hover, #site-title a:active, .entry-title [...]

  54. To put this in perspective: $68,000 is one $5 latte a day, every day of the year, for more than 37 years…