CHAPTER 5
How to Increase and Maintain Your Credit Score (and Why It's Important)

I am having my life screwed over by a Nordstrom credit card.

That's the message my friend Alex (not her real name) sent me, asking for help. Alex is a very cool single mom to two girls, and she's usually diligent with her money. For example, she bought her car with cash, she owns her own business, and she's great at finding beautiful clothes for great prices.

But, caught up in all the stress during the Covid‐19 quarantine, she completely forgot to pay her credit card bill, the first time in the history of having that card that it happened. Because of this one late payment, her FICO credit score dropped 81 points.

She said, “I spent the morning in tears wondering how I could have one late payment and it can drop that much. I don't know what to do.”

Alex was, in her own words, completely pissed at herself. I hated to see my friend upset, so I tried to get to the root of what was bothering her. “Are you trying to buy a new house soon? Is that why you're worried that your score took a hit?” I asked. “No,” she replied. “Well, then why are you beating yourself up about this so much?” I asked. After all, I knew if she just gave it a little time to recover, her score could bounce back.

But for Alex, the frustration went much deeper than that. She explained that when she was younger, she wasn't educated about money and she made some mistakes. Since then, she's worked extremely hard to learn about managing money and increase her credit score. She took pride in paying attention to her finances. Then, when she got divorced, she had to rebuild her life as a single mom, and having a high credit score was important to her. To her, it was a sign of independence. It meant that she was financially secure and didn't need anyone else to help her finance big purchases in the future.

So when her credit score dropped 81 points in one day, it didn't just make her angry. It rocked her sense of security. And it's that panicked feeling that can contribute to a scarce money mindset.

I reassured Alex that her credit score meant nothing about her as a person. This is not The Scarlet Letter. We don't have to go around wearing sweaters with our credit scores on them for everyone to see. Plus, being late on a payment is a mistake that a lot of people have made, myself included.

I knew if she made all her payments on time again consistently over a period of a few months, her credit score would eventually go back up. This one late payment would not have to define her for years.

That reassured her, and sure enough, only three months later, her score jumped 35 points, and it continues to go up. We agreed that perhaps she should take a break from checking her credit score every day. It was causing her stress and became an obsession. Instead, it's best to check it about once a month just to see how you're doing.

Also, before I get into this chapter on credit scores, first let me say that I view credit cards and credit scores as a bit of a necessary evil. I don't love credit cards. I think they cause a lot of damage and heartache in families, and I personally lose a lot of my spending discipline when I use them. I do own credit cards, but I don't use them regularly. I use my debit card and my one‐month‐ahead budgeting system for just about every single purchase I make. However, I do put one expense a month on a credit card, like my Netflix bill, so the credit bureaus see I'm using a card and paying it off regularly. I've successfully disputed purchases with my bank connected to my debit card, so I do have access to fraud protection like you would with a credit card.

Plenty of my friends who work in the same industry as I do use credit cards every day, earn airline miles, and have solid arguments for why they think credit cards are better for day‐to‐day spending. But for me, it comes down to personal preference and knowing myself. I simply have more discipline when I know money comes directly out of my checking account, with no credit card “runway” to save me or give me time to come up with the money to pay for what I just bought. It keeps me organized and disciplined, which is a great way to manage money.

You should know that it is entirely possible for you to go through life without debt, without a credit card, and without a credit score. And, if that's what you want to do, you don't need to read this chapter. Debt does not have to be a fact of life like many people think. You can still buy a house with a mortgage company that does manual underwriting for a mortgage. You can still pay for a car in cash. You can also rent a car with a debit card through some companies. But, more and more often, companies that provide services, like car insurance companies, are using your credit score in their applications process. Those with excellent credit scores typically get the best rates. That's why I call credit cards a necessary evil and why I still have them. I know having a high credit score is very useful in some situations and guarantees me very competitive interest rates that will save me money over the course of my lifetime. I monitor my credit and keep track of my credit score, not obsessively, but enough to know what's going on. The truth is, credit scores are a measure of how you handle debt or the credit extended to you. It's important to use that responsibility wisely and to know where you stand.

If you're wondering how to check your credit score or how the numbers are even calculated, you're in the right place. After reading this chapter, you'll be a knowledgeable boss mama, capable of making your own decisions about your use of credit. You'll learn exactly how the choices you make could affect your credit, which will help you to get on track and stay on track when it comes to your money.

So, let's start with the most important thing: your credit score is just a number. It's kind of like how math is just math. And budgets are just budgets. The credit score you have attached to your name says exactly nothing about the type of person you are. You're not a bad mom if you have a low credit score. You're not uneducated or bad with money or a loser or whatever you tell yourself if you have zero clue how credit scores work (or how you got the one you currently have).

As you'll see below, credit scores can be a little confusing. The world of credit reports is highly complex, and to make things even more difficult, there's not just one credit score attached to your name. There are several. But my goal is not to overwhelm you. Once you have the basics down and you know how it works and how to improve your score, it's game on.

We're not going to be able to predict with exact precision that if you do x, you'll get exactly an 800 credit score. But, what I can do is share a few things you can do to raise your score and then keep it that way.

If it helps, you can think of a credit score like a grade. The class you're in is called Financial Choices, and if you make a lot of right choices, you get an A. As I said, this grade has no reflection on who you are as a person. Your credit score doesn't know about that casserole you baked for your friend who just had a baby or how you volunteer at a soup kitchen every other Friday. All it knows is a simple list of loans and transactions. It's a financial record, and for better or for worse, that record comes with a grade—a score.

The records are held with three main credit bureaus: Experian, TransUnion, and Equifax. These three agencies maintain all your credit information and put it all together in what we know as a credit report.

Another company—the most well known being the Fair Isaac Corporation or FICO—then takes that information and assigns your credit score. If the information on your credit report is positive, your score will likely be good. If you have a few, but not a ton of blips on there, you might have an average score. If you have lots of late payments and bills in collections, you might have a poor credit score.

FICO isn't the only type of credit score. There are other credit scores like a VantageScore and even the recently released UltraFICO™ score (which considers your checking account records). But, for the purposes of this chapter, we're learning about what affects FICO scores because that is the credit score lenders most commonly use when deciding whether to offer you a loan.

Also, here's the good news about credit scores: if you have a low credit score, you can raise it. You won't be stuck with your grade forever. In the school of life when it comes to your finances, you get a lot of chances.

Your credit report should have a list of every credit line you have, how much you owe, and whether or not your account is in good standing. When you look at your report, you should see a list of the credit cards you have, your student loans, as well as your car loan and mortgage if you have those.

Sometimes the three credit bureaus have the same data. Other times, the data might vary. This shouldn't be too concerning unless the data on your report is flat out wrong. That's when you need to contact the credit bureaus to get it corrected. Most of the time your credit report shows the past seven years of your financial life. You should see every time you've paid a bill on time. If you missed a payment and were more than 30 days late, you'll see that on there too. If you have an account in collections, it'll be listed near the top in the adverse accounts section.

But remember, even if your credit report has some blips or issues on it, that doesn't say anything about you as a person, as a mother, or as a human being. It's just a credit report. It's simply a record of your financial habits that you can change and improve upon over time.

Credit scores usually range from 300 to 850. So, you might be wondering, “What's a good number?” And when do we need to say, “Hey Mama, let's work on this”?

Credit Score Rating What It Means
300–579 Poor Credit Score It might take lenders time to trust you. It will be very difficult to get credit. If you need to borrow money, you'll likely have to pay deposits, fees, or crazy‐high interest rates.
580–669 Fair Credit Score This is a subprime credit score. You might be able to get credit with this score, but interest rates will be high. You might be able to get a secured credit card to rebuild your credit. Buying a home is sometimes possible with this score, but I don't recommend it.
670–739 Good Credit Score When you have a good credit score, you can typically apply for home loans and other forms of credit. While you won't get the absolute best interest rates, you're on the right track.
740–799 Very Good Credit Score Go ahead and dance, Mama. Your very good credit score shows you've made smart financial decisions, and you pay your bills on time. Lenders will likely offer you excellent interest rates if you have this score.
800–850 Exceptional Credit Score Okay, now you're just showing off. With this score, you should be able to get the absolute best interest rates available and get approved for credit cards that have sweet perks.

Much like the Google algorithm or the Instagram algorithm, the exact way FICO calculates your credit score is a bit of a secret. But, the good news is they don't leave us completely in the dark. They've provided a rough formula—a general overview if you will—of the factors that make up a credit score and how much they weigh into it, which you can see in the following chart.

Payment History 35% of your credit score
Debt Owed 30% of your credit score
Length of Credit 15% of your credit score
New Credit 10% of your credit score
Diversity of Credit 10% of your credit score

As you can see, payment history is the biggest slice of the credit score pie. If there's anything you take from this chapter, take this: paying your bills on time, every time, is one of the best ways to earn and maintain a good credit score.

Think about it: If someone asked you to borrow money, but you had a piece of paper telling you that they were late on half their payments, would you want to lend them money? Nope. The banks feel the same way about customers who want to borrow money but have lots of negative marks in the payment history category. A little judgmental, I know. But, it's a reality nonetheless.

The amount of debt you owe in relation to the amount of credit you have makes up 30% of your credit score. This is also called credit utilization, that is, how much of your available credit you're currently using.

What credit utilization really shows is how much restraint and discipline you have when it comes to your money. If you have a credit card with a $5,000 limit, do you have a $0 balance, a $2,750 balance, or is it totally maxed out with no room to spare?

The gold standard (and the way to financial freedom) is to pay off your credit card in full each month. But, if you're just getting started paying down your debt and raising your credit score, a good first goal to have is to get the credit utilization of each of your cards down to 30% of your total available credit. So, if you have $5,000 of available credit on your card, try to get your balance below $1,500. This, in the eyes of creditors, shows that you have some restraint, the ability not to use all of the credit offered to you.

Oh, and for some reason, someone started this terrible rumor that in order to have a good credit score, you have to keep a balance of 30% of your total credit on your card. To quote Gwen Stefani, that is B‐A‐N‐A‐N‐A‐S. Keeping a balance on your card and paying interest to the credit card companies is never the way to financial success.

The goal, as I said, is to first get your credit utilization under 30% on each card. Then, the prize‐winning goal is to pay those babies off in full.

The part of your credit score that measures the length of your credit history is pretty straightforward and makes up 15% of your score. Having a credit file for a few years gives you a slight edge over someone who just got their first credit card. For many people, the first type of debt they incur is student loans. If you've never had a loan before, like a car loan or a personal loan, your student loans might begin your credit file, even if you don't have an actual credit card.

If you want to get a credit card but you've never had one or you currently have a poor credit score, you have some options. You can apply for a secured credit card. With a secured credit card, you give your creditor a deposit. That deposit becomes your credit limit. When you spend on the card and pay your bill on time, the creditor reports positive news to the credit bureaus. If you can't pay your bill, the creditor can use your deposit so they won't have a loss.

You can also apply for a basic, starter credit card. I got my first beginner credit card when I was 21 years old, and it had a $500 limit. I did have a credit file because of my student loans, but I had a low income (my graduate school assistantship paid only $12,330 per year!). Because I handled that credit card responsibly, I was able to get approved for other credit cards down the road with higher limits and more perks.

Next up is New Credit, which makes up 10% of your score. This part of your score indicates how many times you've pursued new credit or how many times lenders have made a request for your credit score or credit report to see if you're an eligible borrower. According to FICO, credit inquiries stay on your report for two years, but they only factor the last 12 months of inquiries into your credit score.

The reason inquiries matter is because if you have a lot of them, it could indicate that you're in financial trouble and looking for more ways to borrow money. Sometimes people worry that if they shop around for rates, like for a mortgage or an auto loan, this will reflect poorly on this part of the credit score. However, FICO is smart and the algorithm can recognize the difference between shopping for a mortgage and trying to get several new credit cards at once.

Types of credit used (diversity of credit) is 10% of your credit score. This is also called a “credit mix.” Again, it shows your ability to handle different types of credit. So, if you have a student loan, a credit card, and a mortgage, you have more of a credit mix than someone who just has one credit card. There's no need to overthink this or to take out a different type of loan solely for the purpose of improving this section of your credit score. It's only 10% of it, after all.

Ultimately, your credit score is only useful if you intend to borrow money in the future. To lenders, your credit score indicates how likely you are to pay back a loan on time. If your credit score is low, lenders consider you a riskier borrower. When your score is lower, lenders will likely charge you a higher interest rate. It's their way of insulating themselves against a customer who might not repay a loan.

The worst place I see this is with car loans. If you don't have a good credit score, you can get hammered with a very high car loan interest rate. I get so angry when I hear car loan advertisements on the radio offering to get you into a car regardless of your credit score. Sometimes, these car loan interest rates can be 20% or more. In fact, if you have a subprime credit score, your car loan interest rate can be 5 to 10 times more than someone who has a prime credit score.1 This is a huge issue because, as I mentioned in the last chapter, cars are one of the three anchors in any budget. They also depreciate in value quickly, which can create a situation in which you have negative equity in your vehicle. This is a very difficult cycle to get out of and can put you in debt that seems never ending—all for a car! This is one of the many reasons why it's important to understand how to raise your credit score.

The interest rate you get could mean the difference of thousands of dollars over the lifetime of a loan. This is especially true when it comes to borrowing money for a big‐ticket item, like a home. Even a 1% higher interest rate on a mortgage could mean paying tens of thousands more dollars over the course of a 30‐year mortgage loan. So, it really does pay to have a high credit score.

I should mention that you can totally be a trustworthy person who pays your bills on time but still have a low credit score. This could happen for a variety of reasons, such as if you have a very short or nonexistent credit history. For example, if you never took out a student loan or have never had a credit card, you might have a very thin credit file. Your score might show up as low in this instance simply because the credit bureaus just don't know much about you yet. But, there are all sorts of ways to build your credit and improve your score if you have a big financial goal, such as buying a house someday.

You can start by applying for credit, getting approved for credit, and paying your bills on time. You can start small with a starter credit card or a secured credit card, for example, and then build from there. The more responsible you are with your accounts, the more opportunities you'll have to build your credit profile in the future. Time helps too, since the FICO score measures the length of your credit history.

Credit scores usually go down if you are more than 30 days late on a payment, have credit utilization that's too high, or if you have too many hard inquiries on your account. A hard inquiry is when you apply for a credit card, a loan, or request a rate line increase on a credit card, and the lender checks your credit file. A soft inquiry doesn't affect your credit score. A soft inquiry might happen if an employer does a background check or if you get pre‐approved for a loan. Some things, like applying for an apartment or opening a savings account could be either (it depends on the institution and you can always ask before applying).

Too many hard inquiries can negatively impact your score, but being late on a payment or having too much debt in relation to the credit you have likely has more impact on your score.

Also, it's important to keep monitoring your credit. That way, if you have a huge, unexpected drop in your credit score, you can immediately go and make sure it's not the result of identity theft.

The fastest way that I know of to raise your credit score quickly is to pay down your debt. The goal is to try to achieve less than 30% credit utilization before your creditors send their report to the credit bureaus, which happens monthly. Additionally, take care of any adverse accounts on your credit report by speaking to each account's collections department, getting current, and asking them to remove the adverse account from your report once you are. The phone number of the person you should contact should be right next to the adverse account notice on your credit report.

Once, I got denied for a credit card, and they said it was because I had an adverse account on my credit report. I was really alarmed since I always paid my bills on time, so I pulled my credit report to make sure everything was okay. Sure enough, in the adverse accounts section, there was a collections notice from the public library. I'd recently graduated from grad school, moved apartments, and in the process failed to return an audiobook to the library. (This was back in the days where we put CDs in the car on long drives. Remember those days, millennials?) I called them and they said they mailed me several notices, but they all went to my old address. They told me if I mailed the audiobook back, they would take it off my report. So, I went digging through all my moving boxes, found the audiobook, and mailed it back. In just a month or so, the collections notice was gone.

If you have a collections notice, sometimes you can negotiate with the lender and offer to pay a lump sum that's less than what you owe in order to get the collections removed. But you should always get this agreement in writing and never give them access to your checking account.

One of the biggest reasons people monitor their credit score or become interested in eliminating their debt in collections is because they want to buy a house.

Technically, you could buy a house with a subprime credit score (one that's below 670). But this really isn't the best idea for you (and you're the one I'm looking out for here). Many experts point to subprime mortgages as the leading cause of the 2008–2009 recession. Because of that, in the years after the recession, it was nearly impossible for subprime borrowers to get a mortgage again.

But, over the past few years, subprime mortgage loans are starting to be available again. These mortgages go by a few nicknames like “alternative mortgage programs” or “another chance mortgages” or “dignity mortgages.” They often come with high interest rates.

To be honest with you, when it comes to something like owning a home, it really pays to take your time and do it right. That means working hard to learn how to manage your money, improving your credit score, saving for a down payment, and then applying for a mortgage.

Although it might be tempting to buy a house with a low credit score, especially when a lender makes a compelling case for it, try to wait. Shortcuts might get you to the destination faster, but you won't have the same level of satisfaction and security that you'll get by running the longer race.

Additionally, there's no need to try to get an 850 credit score if you want to buy a home. We're not aiming for perfection here. All you need is to work toward an excellent credit score to show banks and future lenders that you know how to handle money like a boss. Most financial experts agree that once your credit score gets to 750, you're at a place where you'll receive some of the best interest rate offers. And, you can get to a 750 credit score by paying your bills on time, having a long credit history, low credit utilization, a low number of hard inquiries, and a good credit mix.

Keep in mind, too, that when you're buying a big‐ticket item like a home, lenders are looking at a lot more than just your credit score. They're also looking at your job history, your income, the amount of debt you already have, and more. A good credit score helps, but they're going to be looking at the bigger picture too.

Once you attain an excellent credit score, the best way to maintain it is to focus on payment history and utilization. Paying your credit cards on time is the most important thing you can do to keep and improve your credit score. The next best thing you can do is keep that credit utilization below 30% on each card (and ideally, at 0%.)

It's also important to continue to monitor your credit because of the increase in data breaches. Unfortunately, those happen pretty often, and if your personal information is involved in one, you could be vulnerable to identity theft.

In fact, I've been affected by those data breaches a few times, which is why I regularly monitor my credit. I actually just got an email about my information being a part of a data breach from a home design website I subscribed to. It seems like you can't even browse for living room rugs these days without your personal data being at risk.

While your first reaction might be to never trust a website again, the truth is that it's impossible to insulate yourself 100% from data breaches. What you can do, though, is be vigilant about monitoring your credit.

There are two websites I use that offer free credit monitoring: Credit Sesame and Credit Karma. These websites also allow you to see your credit score in the form of a VantageScore. Although it's not your official FICO score, the number is usually in the same ballpark and can help you keep tabs on whether your credit is improving, declining, or staying the same. What I really like is that they'll email you whenever there's a data breach involving your personal information. They'll also email you to make sure new lines of credit on your account belong to you.

So, if you get an email from one of these companies announcing that you have a new line of credit, but you didn't apply for one, you can immediately log in and dispute that change to your credit report. Sometimes these websites will offer advice on how to improve your credit score, like suggesting you apply for a new credit card or reduce your balances by a certain percentage. All of that is good information to have if you're currently monitoring and working toward improving your credit score.

If you already have credit monitoring and you're just interested in finding out your credit score, don't buy a credit score online. Surprisingly, your credit score is not listed on your credit report. They are two separate things. But, there are still many ways to find out your score for free. As I mentioned, you can get a ballpark idea of your score from Credit Sesame or Credit Karma. However, if you want your actual FICO score, which is the most well‐known and used score by lenders, there are a few ways to get it.

A common way to find out your FICO score and monitor it is to get a credit card that offers this as a benefit. One of my cards emails me every month to let me know my updated FICO score is ready for me to see. Also, if you get declined for credit, you'll usually get a letter explaining why. This letter often has your credit score on it somewhere, which is a free and easy way to find out what it is.

Keep in mind there are many different versions of a FICO score. So, if you apply for a car, your auto lender will likely pull a FICO Auto Score. If you're trying to buy a house, there's something called a FICO Score 5. The FICO 8 score is still the most general and widely used score, even though a new version called FICO 10 came out in 2020.

You really don't need to know or memorize how many different types of credit scores there are, though. I only tell you that to explain why you might see your credit score as 730 in one place and then get declined by a card because they said you had a 699 credit score somewhere else. This can be confusing and frustrating when you're working hard to improve your score. But, try not to get too caught up in the exact number of your credit score.

Instead work hard to improve your habits, your debt‐to‐credit ratio, and paying your bills on time every time. Those are the elements that will ensure you have an excellent credit score all around, even if the numbers vary slightly from lender to lender. And, once you're in that A+ excellent range, you won't have to worry as much about getting a good interest rate. That's the goal here—for moms to worry less and feel empowered about their finances.

Remember, a credit score is just a number. You can be a good person and an amazing mom and still have a bad credit score. This number doesn't define you or say anything about you. And the best news is that, if you're not happy with your credit score, you can fix it. It's not permanent. It's not a life sentence. In fact, there are only seven years of data on your credit report. If you made a mistake eight years ago, it won't be on your report anymore.

And yeah, there's a formula and there's a bunch of different factors that impact your credit score, but you can figure that out. You're smart—and as you know, you're a mom so you can do anything. Don't let the language and the rules of improving a credit score intimidate you. Frankly, I've yet to find something harder than raising my twins, so I tend to look at most things as learnable and achievable.

Lastly, remember that improving a credit score might take some time. It won't happen overnight. But, getting the courage to call creditors and negotiate is one step. Then, little daily changes to your spending is another step. Throwing an extra $50 to a credit card debt right when you get paid helps too. All these little, tiny, seemingly insignificant steps can really make a big change when you look back a year from now—or even six months from now. So, just get started, Mama, and you'll be surprised at the progress you can make if improving your credit score is one of your financial goals.

NOTE

  1. 1.  Yowana Wamala, “Average Auto Loan Interest Rates: 2020 Facts & Figures,” ValuePenguin, October 29, 2020, www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates.
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