Most people experience a bad credit score at some point in their lives. Maybe it wasn’t your fault. Maybe medical bills wiped you out or the recession took a significant chunk of your money. On the other hand, maybe it was your fault. Maybe you were just young and careless with your spending. Regardless of the reason, you can fix it. It takes time, but it’s well worth it to make your future easier to navigate.
Follow these easy steps, in any order you want, and watch that score start to rise.
Don’t Put Off Paying Bills
When you start saving for a major purchase like a new car or house, your first instinct might be to cut corners on monthly bills, especially those that give you a “minimum payment due” option. Never forget that those options also mean paying a lot of extra money in interest on what you don’t pay, the likes of which just keep adding to your outstanding balance and prevent some people from ever paying off the debt. That growing balance also lowers your credit score, which usually (ironically) raises the interest rate on any loans you’d seek out for that large purchase. For those reasons, you should always pay the full monthly bill even if it hurts. Credit scoring systems love it when you pay the amount due on time. This may lower the amount you can stash in your savings account, but the higher score will serve you better in the long run.
Get Rid Of Outstanding Credit Card Balances
People frequently keep small balances on a variety of credit cards to keep them active “in case of emergencies.” Little do they know that getting rid of those nuisance balances is the real emergency. Your credit score can be significantly impacted by them, with many agencies giving you bad marks for each card with an outstanding balance, regardless of how small it may be. Pay off all the unnecessary cards and use only one or two for everything. Keep the cards with the lowest interest rates and the best cash back/rewards programs.
Turn Your Calendar into a Tool
Your credit score used to suffer from multiple credit applications. Luckily, things have changed a bit when it comes to vehicles, student loans, and homes, but don’t forget that you’ll still be punished for applying for retail or other credit cards that aren’t typically used for financing. Some more good news: your FICO score (the number generally used by lending institutions) now ignores multiple financing applications made in the 30 days prior to scoring, and multiple inquiries to the same company that are older than 30 days are only counted as one. The latest software uses a 45-day system, while the oldest ones use a 15-day system. Be sure to find out which system your reporting agency uses and track all your inquiries on a calendar so you don’t mistakenly hurt your rating.
Keep An Eye On Your Credit Card Limits
A good credit rating also depends on how much of your limit you’re carrying over from month-to-month. The lower the percentage you use, the better your score will be. Credit experts recommend that the balance on all your cards never exceed 30 percent, so if your limit is $3000, the most you should owe should be around $900. You can lower your balance by using one card to pay down another or by getting a short-term personal loan.
Even if you do pay your balances off every month, agencies might still come across a couple that you’re about to pay and consider them a part of your balance due. Ask your credit card issuer if you can make multiple smaller monthly payments to always keep that reported balance lower.
Keep Those Old Paid-Off Loans
Finally paying off a long-term loan is a reason to celebrate. Instead of rushing to remove that information from your credit report, leave it on there like a trophy for due diligence. Credit agencies view debts paid off on time as signs of commitment and responsibility. Even if an old debt was paid off 20 years ago, leave it on there. Do the same with any active accounts you have that reflect a steady, solid record of repayment.
Be Alert, But Don’t Fixate
Several months before you plan a major purchase, check out your credit score. Study all the codes on both your bank and agency scores. These codes explain why your credit score is lower than expected and provide specific steps you can take to increase it.
Know your rights and exercise them. If you are offered an interest rate higher than you think is fair, or if one of your credit card or lending requests is denied, the lender must show you the credit score that was used to make that decision. You are also owed free credit bureau reports every 12 months through AnnualCreditReport.com from each major agency: Experian, TransWorld, and Equifax. Mark your calendar to request a different report every four months, and you’ll stay up-to-date for free every year.
Avoid Red Flags
Even if your payment schedule is impeccable, you only have a couple credit cards, and your paid-off accounts are all impressive, you have to keep in mind what some credit analysts might consider risky behavior. For example, withdrawing large chunks of cash at casinos or other gambling venues doesn’t look good. Shelling out money to divorce attorneys could indicate some looming financial stress. Even frequent visits to pawn shops can make someone think you might not be the best person to risk a high credit line on.