How To Raise Your Credit Score For $25

There’s no doubt that credit scores are a big deal when you need to get a mortgage, finance a car or even get a job or an apartment. But did you know there’s a simple, easy and cheap step you can take to get a better credit score?

Nope, I’m not selling anything. And please, don’t send any money. Instead, consider spending $25 or so with your checking account. Here’s why:

How Credit Scores Work

Your credit score is a reflection of the way you handle debt. It is NOT a measure of your income — rich people often have lousy credit and the poor can have great credit.

Fair Isaac, a major credit score developer, says on its MyFico site that there are five major considerations which go into determining a credit score.

  1. Payment history — 35 percent
  2. Amounts owed — 30 percent
  3. Length of credit history — 15 percent
  4. New credit — 10 percent
  5. Types of credit used — 10 percent

The list above is like a credit scoring road map. It tells you that the greatest good comes from paying bills on time and in full. You get points for having credit that you don’t use — that is, if you have $10,000 in credit and use $3,000 that’s good, if you have $10,000 in credit and use $9,800 that’s bad. The longer you have accounts the better.

Credit Reports

An important point about credit scoring is that it reflects only the items shown on your credit report. For this reason it’s important to check your credit report to assure that all entries are factually correct and not out of date. Generally, items stay on a credit report for seven years but some items — such as a bankruptcy — stays on a credit report for 10 years.

You can get three copies of your credit report every 12 months, FREE, and without the need to purchase any kind of add-on service by going to AnnualCreditReport.com. If you go to this site every four months you will be able to check your credit status easily and without charge by using a different credit reporting service each time. This site has been, er, encouraged by the Federal Trade Commission and is worth looking at for credit report information.

The Real World

Credit scoring and credit reports reflect factual events — what you owe, when you pay, etc. The catch is that you are not always the master of your financial universe and the credit system does not reflect how credit events occur, especially negative ones.

Imagine that you pay bills with checks. You pay bills knowing that there’s a given balance in your checking account. But suppose one of your deposits bounces. As a result several of your checks are returned. You now have bank fees to pay AND you may have missed due dates for several bills. Those missed due dates can set off a separate bunch of late fees and charges, especially with credit cards.

In terms of credit reports this is not generally an problem. Why? Because credit reports only show items which are at least 30 days late. However, if the bounced check was big enough and remains unpaid for enough time it could impact your account for days if not weeks — and perhaps trigger a 30-day late.

A Credit Strategy

So, what to do? The answer works like this: Go to wherever you maintain your checking account — your bank, credit union or S&L — and get overdraft protection. This is essentially a line of credit attached to your checking account.

It will likely cost some money, say $25 a year, and the amount you can get will vary depending on your credit status and relationship with the depository institution.

If you then have a situation where a deposit to you bounces or a payment is delayed, any unexpected shortage in the account up to the limit of the line of credit will be instantly and automatically covered. This means no late charges for credit cards or mortgage payments, no bounced check fees from the bank, etc. You pay back the line of credit with interest as soon as the bounced check is covered or a payment to you is received. Because the line of credit advance is only outstanding a short time the interest cost is likely to be minimal.

Equally important, once you get a line of credit for your checking account be sure to never use it. Think of it as a life raft, something needed only if you’re drowning.

The result of having a line of credit for your checks is that you now have a new credit account — and you have credit that you’re not using. That should be very good for your credit score over time.

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