Revealing The Best Tips For Growing Your Credit Score | NerdWallet

I'm Nikita Turk. And I'm Sally French. And today we're answering your Reddit questions about credit scores. So everybody knows the basics of a credit score will help you maybe get approved for a loan or things like that. But this is an interesting question. What are some lesser known benefits of a high credit score? Having a high credit score is really important if you want to get approved for one of those fancy travel credit cards with all the perks, especially even if you're applying for a mortgage or an auto loan, having a high credit score typically means you'll be approved for a loan at a lower interest rate, which can save you a lot of money in the longterm. But credit scores can have an impact in more than just getting you a lower interest rate. In fact, a lot of landlords will actually run a credit check before deciding whether to rent their property out to you. Even some employers will offer credit checks before deciding to offer you a job. Actually, when I was getting my utility set up and my power bill, they did a credit check on me to decide if they were gonna charge me a deposit or not, which I was kind of weirded out by that. You know, it's not totally uncommon, but it's an important reason to keep building up those credit scores, even if you don't think you'll ever apply for a mortgage or you don't even want one of those fancy travel credit cards. Fun fact, most folks don't only have one credit score. They have many, and the scores change all the time. Your scores also differ based on the scoring formula used and which of the three credit bureaus supplied the information used to create the score. If you want to track your credit score progress over time, monitor the same type of score from the same bureau. Here's an interesting question. Do I need a credit card? Specifically, I don't want a credit card, but do I need one to get a good credit score? Yeah, so I would question why you don't want a credit card, because I will say a credit card is an excellent way to build credit. If you make those on-time payments in full every month, then you can build credit without ever owing any money in interest. That said, there are reasons why people don't want to have a credit card. There is that temptation to overspend, and there are other ways that you can build up your credit scores without necessarily a credit card. You might have other outstanding loans like a car payment or student loans, and those all factor into your credit scores as well. And sometimes even you can apply to have things like your electricity bill count towards your credit scores as well. So those can all play into improving your credit scores when paid off on time. Thinking about maybe not wanting a credit card, this next question is perfect. Is there any logic on when to use a debit card versus when to use a credit card? Yeah, so sort of piggybacking off that same question, a debit card can be really good if you don't want to have that temptation to overspend. Ultimately, you don't want to find yourself in a situation where you've maxed out your credit cards because that big credit limit tempted you to spend beyond your means, in which case a debit card can be a really good tool. That said, NerdWallet actually recommends in general spending on that credit card. It's a great way to build up those credit scores if you can pay in full on time. And there's also other protections that come with credit cards. Often you have better protection against fraud when you pay off your credit card. If you charged it to a debit card and then there's some sort of fraudulent activity on your account, it'll come out of your bank account and you can often get it resolved, but it tends to be a much bigger headache to get it resolved than if you go through a credit card. Those extra protections are huge. Absolutely. If you're thinking about credit versus debit. One important thing to remember is that you don't have to pay for a score. You may be able to get a FICO or Vantage score for free from your credit card issuer or your bank. Financial sites such as NerdWallet also offer a free credit score, typically Vantage score 3.0, which measures the same behaviors that a FICO does. So Sally, let's talk about the part of having a credit card that isn't the most fun part, which is actually paying it. So here's a cool question. Yeah, well, there's a few reasons why you should pay off your credit card in full. One is lowering that credit utilization, which is a huge factor in your credit scores. So if you have an outstanding limit of $1,000 and you have $100 on your credit card, then that's a 10% credit utilization ratio. It's always better to have a lower ratio. In fact, a lot of the issuers say you should never have more than 30% outstanding. Another reason why you want to pay it in full is simply so you won't owe any money in interest. Of course, situations happen where maybe one month you can't afford to pay your credit card in full because maybe you had some sort of emergency, but if you can afford to pay it in full, then that means you won't owe any money to the bank in interest. I think about like if I'm buying something on a good sale and then I buy it on a credit card, if you don't pay it off right away, that interest wipes out. It negates the sale. Exactly. So kind of along those lines, should I pay a high balance, low interest or low balance, high interest credit card first? Ooh, that's a good question. So there's two ways of looking at it. And the reality is as long as you are paying off your debts in one way or another, that's the best thing you can do. But there's basically two approaches that people take. So number one is called the snowball method. And that's where if you have a bunch of outstanding credit card debt, you pay the credit card with the lowest debt first. That way you knock out that credit card, it's gone. Then you knock out the next credit card and it's gone. And it feels really good, especially at the beginning to knock out all of those outstanding credit card debts. That's a great way to pay off your debt. But in fact, Nervola actually recommends for most people, they go with what's called the debt avalanche method. And this is where you tackle the credit card with the highest outstanding interest rate first. The reason why you would do this is because it actually means you're paying less money to the bank in interest over time because you've paid off that credit card with a really high interest rate. Then you can start tackling that and go to the credit cards with the lower and lower interest rates. Again, this will save you more money in the longterm in terms of how much interest you owe. But for some people, the snowball method is just psychologically nicer to knock out all those outstanding credit cards. So ultimately, whichever decision you go with is a good one. Millions of people don't have credit scores because they haven't used credit or haven't used it recently enough to generate scores. Two ways to build credit include, one, apply for a credit builder loan, which places the money you borrow into a certificate of deposit or savings account that you can claim after you make 12 monthly payment. Or two, apply for a secured credit card, which gives you a line of credit equal to the amount you deposit with the issuing bank. Once you have a score, you can use a credit score simulator to see what actions might help and hurt it. So those are your Reddit credit score questions answered. Sally, break it down for us. What are the most important things that people should keep in mind when it comes to their credit score? Yeah, so there are all sorts of components that go into your credit scores, but ultimately, payment history is the most important. This is whether or not you have paid off your balances. So it's most important that you make those on-time payments to build up a positive payment history. Of course, other aspects of your credit score include the length of how long you've had your credit. And a lot of people who are younger might be worried that this is negatively impacting their credit scores. Of course, having a longer length of credit history is always good, but it's not as important as simply having that positive payment history. So the most important thing you can do in building up those credit scores is paying those bills on time. Sally, thank you so much for hanging out with me today. And thank you guys for watching. I'm Nikita Turd. Thanks so much for joining us on Controlled Finance. We talked a ton about credit scores, but identity theft can actually really impact your credit score if your identity gets stolen. I did a video on identity theft and how to protect yourself. Make sure you check it out right here on YouTube. I'll see you next time.