When most couples talk about money, the topic of credit scores usually isn’t one that gets them fired up. It’s much more fun to focus on a goal like buying a new home than it is to dwell on your credit score.
But, building your credit is one of the most critical steps to take in your 20s, since your credit score impacts most of the other parts of your financial picture. The interest rates on your future mortgages and car loans directly depend on your credit score. And, credit takes time to build, so even if you don’t need to take out a mortgage soon, the time to focus on this is now.
It’s very common to see a husband and wife have very different credit scores. What steps should the person with the lower score take?
Differing Credit Scores Can Be a Huge Challenge for Couples
There are a lot of decisions couples need to make about how they handle their finances together when they get married. Typically, these decisions involve deciding whether (and how) to combine financial accounts, how to manage monthly cash flows, and how to save and invest.
Credit scores aren’t one of the topics that tend to come up right away. Unless you’re in the process of buying a home, they just aren’t a topic that tends to be on the top of people’s minds.
But, this doesn’t mean that it isn’t an important topic for couples. On the contrary, being in a marriage where one partner has a significantly higher credit score than the other can be a huge source of stress on your relationship. And, it can complicate the process of taking out a mortgage, since you will need to use both of your credit scores when applying for the house.
It’s important, therefore, to be aware of your partner’s credit score and to get out in front of any areas for improvement before you actually need to use the credit score.
How Do You Fix It?
The good news is that this is a fixable problem. The bad news is that it can take a good amount of time to improve your credit scores significantly. Which is why it’s critical to start as soon as possible.
This isn’t an exhaustive list, but if you’re looking to improve your credit score, start with these strategies:
Download your Credit Reports Every Year
Knowing is half the battle. Use a free service like Credit Karma to pull your credit reports once a year. And, make sure to look at reports from all three credit bureaus- Equifax, Experian, and Transunion. It isn’t common, but sometimes there can be erroneous items on one report that aren’t listed on any of the others. You can also get your credit reports through the website of each of these credit bureaus.
Dispute Errors As Soon As Possible
We’ll touch on this in a bit, but it’s so important that I wanted to call it out right away. You’d think that the three credit bureaus are infallible, but unfortunately, they are far from it. I’ve caught three different errors on clients’ credit reports in the past couple months alone. If you see something that you know is a mistake on your report, use the link on the relevant credit bureau’s website to file a dispute immediately. These things can take some time, but it is possible to remove factually incorrect information from your reports. And, as I said, this is unfortunately a more common problem than you’d expect.
Recognize that Making Changes to Your Available Credit Usually Involves Taking a Step Backward Before You Take a Step Forward
This is crucially important. If you open a new credit card and use it the right way (more on that in a bit), over time your credit score will likely go up. But, whenever you request new credit, this creates what’s called a “hard check” on your credit that causes your credit score to drop for the time being.
Again, in the long run, this will be outweighed by you using your new credit wisely, but be aware that if you’re planning to take out a loan sometime this year, now isn’t the time to be opening new credit cards.
And as an FYI, “hard checks” typically remain on your credit report for two years.
Have Enough Credit Available…
This one is particularly important for those people fresh out of undergrad or a grad school program.
Double check how much available credit you have on each of your credit cards. Typically, most people new to the working world have credit limits in the $300-$500 range. Frankly put, that’s not enough to build a great credit score. Request a credit increase to give yourself more of a foundation to build your credit history.
…But Don’t Use (Much of) It
One of the primary drivers of your credit score is how much you use the credit you have available. A good rule of thumb is to always use 30% or less of the total amount of credit you have available on each credit card.
In other words, if you have one credit card with a $10,000 credit limit, never let the balance on that card get higher than $3,000. And of course, pay off the balance every month. Speaking of which…
It’s hard to keep track of your finances when you’re busy. So, make it easy on yourself! Set reminders to pay your bills every month.
One of the easiest ways to mess up your credit score is to accidentally miss a payment. Set calendar reminders to yourself to make sure you don’t forget!
Check Your Reports for Any Overdue Bills (And Either Pay or Dispute Them Right Away)
When you do your annual review of your credit report, pay close attention to any bills (medical bills are common examples) that have accidently or allegedly gone unpaid.
If you have a bill listed as in collection that has gone unpaid, first do some research to make sure the bill is actually yours, and if it is, that it actually wasn’t paid. John Oliver did a great report on erroneous credit reporting not too long ago that is worth taking the time to watch.
If you have a reason to contest the charge, do so as soon as possible. If you realize that you just forgot to pay the bill, take care of it ASAP.
Don’t “Shop Around” for Loans and Credit Cards….
…Or, at the very least, be careful not to get firm quotes from more than one lender at a time.
As mentioned above, every time a lender does a credit check on you regarding issuing you a credit card or loan, this creates a “hard check” on your credit that hurts your score. If you go to five different credit card companies requesting a credit card, that’s five “hard checks” that will appear on your credit report, even if you only open one card.
By all means, do your homework and shop around, but only begin the application process once you’ve made a decision.
Beware Retail Credit Cards
I’ll confess- I’ve goofed on this one myself.
Stores generally offer pretty good perks to entice you to open up a store credit card. But, having retail credit cards directly impacts your credit score, and not in a good way.
Lenders view retail credit cards as a negative indicator, so it’s almost always a best practice to say no to the discounts that the retail stores offer you in order to save money on your mortgage down the road.
Give it Time
In most areas of financial planning, we can usually implement a pretty quick fix. Whether it’s acting on a need to save more for retirement or to refinance a loan, usually the recommendations I provide to my clients can be acted on quickly and you can see immediate results.
Unfortunately, improving your credit score just doesn’t work that way.
Don’t get me wrong, there are things you can and should do today to improve your credit score.
But, it’s not a quick fix- it might be two years before you see substantial improvement. Trust the process and give it time, and your score will improve if you manage your credit the right way.