non-existant credit history. What are the best practices for credit scores?

Question

I've done a lot of reading recently around improving credit scores here and across the web. There's a lot of info out there, sometimes contradictory, sometimes with varying rates. I understand that scores are calculated differently depending on who's doing it but some clarification on a couple of points would be great.

Context : I have only recently started living in the US (although I'm a US citizen) and I'm trying to get as good a credit score as I can as I'm looking towards buying a house in ~1-2 years time. I will add that credit cards are a totally new concept to me as I've only lived in countries that did without. I currently only have one credit card with a limit of $500. No debt and haven't ever taken up a loan of any sort in the US (only loan I've taken was a student loan abroad which I payed in full without ever defaulting). My current FICO score provided by my bank is 772.

Bellow are a few questions and what my understanding of the correct answers are. Clearing things up and correcting me where I'm wrong would help greatly :

• How often should I use my credit card? I understand it should be every month?
• To what extent? I hear that keeping it between 1-10% is best? and not to go above 30%. So if my card allows for $500 I should not put more than $150 onto it.
• Should I apply for other cards (how many), or apply for a higher limit on my existing card? There isn't much info in regards to how increasing your limit affects your score (or I missed it). I read that too many cards is detrimental, and that 3-ish is a good spot to be. Is this correct? I also understand that I shouldn't apply for several cards at once but a couple of other points still elude me. Namely : 1) Is there any way of knowing if I'm eligible for another card since applying can hurt my credit score? 2) What would be a good time period to wait before applying again, and is raising your limit on existing cards also something that should taken into account here (time wise)?
• Bonus: How much would a 24 month ($4-5k) car loan plan affect my credit? And how long would it take to register? Would it have to be payed in full before a positive report was sent in?

Thanks in advance for your help.

Answer 1

First, learn what is in your credit files, which is considerably more detailed than a score. There are three major credit reporting bureaus in the US: TransUnion, Equifax, and Experian. Each maintains their own file on you. Hard inquiries (requests for credit) are typically initiated with your consent by any given creditor to a single bureau, but this information as well as accounts opened are typically known to all three.

The cheapest way to keep track of what is in your TransUnion and Equifax reports is to sign up for an account on CreditKarma.com (please note that this is not an endorsement of this service), which, in exchange for receiving online recommendations for various credit cards, you are able to view your credit files from these two bureaus (refreshed on a weekly basis) for free. Experian is not a participant.

You are also entitled to an annual report for free from each of the three agencies. If you opt for this route, many recommend spacing each free annual request by four months, but you are able to request them at the same time as well. That said, however you decide to review your credit files is up to you.

For credit cards, it is important to keep the utilization ratio as low as possible. This is the ratio of the sum of outstanding balances as reported by each creditor at the end of each billing cycle, to the total amount of credit available. For example, if you have three cards, with limits $500, $5000, and $10000, and the first card carries a balance of $300, the second $0, and the third $1000, your utilization ratio is (300+1000)/(500+5000+10000) = 8.3871%.

Since your total amount of credit extended is very small, you run the risk of having a high utilization ratio from time to time even if you pay off your card every month, since you could pay off a balance before the due date, but large purchases (relative to the limit) might be posted between the time you pay off the previous balance and the end of the billing cycle. For example, if you carry a balance of $150 which is due 19 August 2016, and you pay this in full on 10 August 2016, but another transaction posts on 17 August 2016 in the amount of $400 which you do not pay until 21 August 2016, you are still on time but the balance reported to the credit bureau will be $400 for a utilization ratio of 80%. Having a larger amount of total credit available will minimize this effect so long as you keep your monthly expenditures in the same range.

It is not necessary to use every card each month. The only problem is if you have an open account but it is not used in a very long time (certainly longer than a month, probably on the order of several months). Account inactivity is only a minor negative.

Increase the number of active accounts and request a limit increase. The short term impact of a hard inquiry on your credit score is small; the impact of reducing the average account age is greater but will not be as much an issue after a year or two. The reason for doing both is not just for your credit score but for your safety: if an identity thief steals your only credit card, this can seriously complicate your life.

Applying for a car loan will improve your score in the long term, but how much is uncertain. You can use a variety of score simulators (CreditKarma, mentioned above, offers such a service). The idea is that the ability to handle different types of credit shows greater responsibility. As you already paid off a student loan successfully, this should already be positively reflected in your credit files.

Avoid services that purport to improve your credit for a fee. These are almost always fraudulent or of questionable value, since you can just as easily do for yourself everything (and more) that these third parties claim to do on your behalf. In a similar vein, avoid credit offers that require an annual fee; avoid balance transfer offers; and avoid cards that do not offer rewards. Look for cards that offer cash back rewards of at least 1% on all purchases and 2-6% on pre-specified purchase categories. And of course, always pay the balance to avoid interest charges.

Answer 2

I was in a similar boat except for student loans. I got my credit card and my credit score increased exponentially. My credit limit is $500 but I never go above $200. If your bank has an app, I would recommend paying off whatever you spent the second it posts to your account. I try to use mine at least once a month for small things like gas or a short grocery trip. Having minimal accounts can actually hurt your credit score however I would not apply for multiple cards until you are sure that you can handle it. The more accounts you have in good standing, the better your credit score will be. If you use Credit Karma (I highly recommend this), they show you what cards you are eligible for based on your credit score. A couple of credit inquiries will not seriously impact your credit score and banks can see what the inquiries are and make a decision based off of that. Hope that helped!

EDIT: A similar question was asked regarding the addition of multiple credit cards and it has a very good answer: Is it better to wait until one credit card shows up on my report before applying for any others?

Answer 3

For the most part: Applying for credit cards or loans hurt your score in the short-term, and helps your score in the long-term. (I am assuming you will pay in full on time every month.)

Getting a car loan or secured loan will help your score by having multiple "Types of credit". However your credit is already considered very good.

If you simply want to "improve for the sake of improving" At this point the solution is to "keep up the good work." (Keep balance paid off every month. I prefer Auto-Pay.) As your credit card ages your credit will improve.*

If you are trying to achieve a good rate on a mortgage or loan, a 20% down payment is the answer.

*If your current card has an annual fee, I would consider getting another card. You will likely want to cancel that eventually, which means you would need a replacement. Otherwise, I would suggest another card only if the card itself would benefit you. (Like higher cashback % or frequent flier miles for a company you wish to patronize.)

Frequency for card use: You only need to use the card frequently enough that the issuer doesn't cancel your account. I use mine at least once every 12 months, as sometimes cancellations occur if dormant 18-24 months. I have multiple cards , so the one with the best cashback sees all my spending. (Again, spending doesn't effect your credit. I do that for the cashback.)

Car Loan: As mentioned above it would primarily hurt your credit in the short-term and would help you in the long-term. - I would mention to be very careful about dealing with car lots. - They will run your credit without your permission to multiple places and hurt it. Unless you are buying new it's best to shop your local (and online if applicable to you.) banks prior to car shopping. For a car in your price range I would probably pay cash or at least have a good down payment, because banks give better rates on newer cars.