Understanding and maximizing your credit score, part 2
Last week I promised I would give you some tips and tricks to "game" the credit scoring system. In case you haven't noticed, the system is pretty messed up and at times very counterintuitive. It's meant to be designed to quickly summarize a person for a lender in order to evaluate riskiness, but instead it can encourage poor financial behavior. For example, closing a credit card will negatively impact your score, at least in the short run. That's right, opting OUT of this crazy consumption focused culture and deciding NOT to have a piece of plastic that will let you consume way past your means is looked upon negatively. It makes me want to say "Yeah, Federal Government and Credit Bureaus, that's a good idea, yeah" in the voice of the awesome Adam DeVine from "Workaholics."
It would be one thing if closing cards only hurt your score if the cards were under a certain age to discourage people from opening cards just to get a quick benefit such as 30,000 free miles on American and then closing them. But no, no matter how old the credit card, you will get dinged for trying to consolidate your cards and reduce your participation in an insane consumer driven society.
So what's a Hard Saver to do? Answer: (legally) game the rigged system however you can. Here are a few neat, and some really boring, tricks I've learned that you can apply:
Always check your credit score before shopping for a new credit card. Figure out what range your score falls into and only apply for cards that match your range. If you shoot for the sky and apply for a card marketed to excellent credit scores (like that American Airlines card I linked above) but your credit score range is Average, you're going to get rejected and then the genius system is going to knock your score even lower for attempting that.
Never pay the minimum balance on your credit card, and never pay the full balance. Paying the minimum means you are going to take a mini loan out from your credit card company that is serviced by this small payment. The statement balance will carry and you will pay interest for ages until it's paid down. Paying the full balance is for Baby Savers because you are paying more than what is due. Why pay the credit card company a month early when you can invest the money? Just pay the statement balance on time.
If you have excellent credit (or if you are a teenager with parents with excellent credit then have them read this), put your child on your credit card in their name. This means they get a card linked to your account that you pay. By doing this, your child will benefit from your credit score and begin earning credit and developing a credit history before they even finish high school. I am not suggesting that you give them the credit card (which you may want to do for emergency's only anyway), all you need to do is put them on and occasionally make a payment on that card. This is what my parents did and I graduated college with a credit score of 800, having never had a job longer than an internship or a summer and having never opened a credit card on my own.
For the advanced, you can learn when your bureau's take a snapshot of your credit card accounts and adjust your payment date so that you pay down the balance before the snapshot is taken. This will make it appear as though you utilize less credit than you actually do, which as discussed in my previous post, is a good thing. To do this, sign up for a service like CreditSecure (I've been using this for years) which, for $15/month, allows you two pulls of your credit report each month. Compare the balances shown in the pulls to your credit card online statement and back into roughly the date where the snapshot was taken. Then adjust to pay the statement a day or two prior each month. EDIT: I received a message from a reader about two websites, CreditKarma.com and CreditSesame.com, that will let you see your credit score for free. I subsequently cancelled my CreditSecure service and plan to try one of these sites out soon. While these are less flexible (one check/month instead of two; only one score instead of all three), I am always for good ideas to save money, and this looks like one of them.
Never cancel your oldest credit cards. History is very important with your credit score and keeping the older accounts active will maintain and build on this. This is why you should think long and hard before opening a card.
Find mistakes in your credit report and take the time to report them to the appropriate bureau. Here are the three dispute links for each bureau to save you time:
Transunion: Dispute via phone or mail.
Experian: Dispute online.
Equifax: Dispute online.
Got anymore clever ideas? Slap 'em down below in the comments.