A Step-by-Step Guide to Improving Your Score
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A bad credit score can feel like a dark cloud you just can’t shake. Whether you want to buy a home, get a student loan, apply for a credit card or even apply for a new job, bad credit may get in the way of achieving your goals. The good news is there are plenty of things you can do to improve your credit score and dispel that dark cloud. Follow these steps to get your credit back on track:
Step 1: Assess the Situation
It’s all too easy to toss bills aside and ignore your debt problems. But the first (and most important) step to financial responsibility is facing the facts. Request your free annual credit report from the FTC-authorized website AnnualCreditReport.com (or call toll-free 1-877-322-8228) to receive a report from each of the major agencies: Equifax, Experian and TransUnion. Compare the reports and note any discrepancies or errors. 1
Step 2: Understand Your Credit Utilization Ratio
Once you’ve identified all open lines of credit, determine your credit utilization ratio (also known as debt to credit ratio) on each card. Take your current credit card balance and divide it by your credit limit, then multiply that number by 100. If you owe $1,000 on a card with a $10,000 limit, your credit utilization ratio is 10%.
High credit utilization ratios may have a negative impact on your credit score. 1 One goal could be to have under 25% utilization on every line of credit in your name. If one of your credit lines has a 90% utilization rate and others are much lower, you could focus on paying down the one with a high utilization rate first (assuming all lines have a similar interest rate). 1
Step 3: Apply for a Secured Credit Card
Sometimes past mistakes can keep you from building a positive credit history with regular credit cards. In this instance you can consider a secured credit card. With a secured card, you deposit an amount of money up front as a form of collateral to the lender. As you use the card and make regular, on-time payments each month you can establish a better credit record. 2 When choosing a secured credit card be sure the company reports to each of the major credit bureaus. 1
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Step 4: Avoid Missed Payments
Payment history is an important factor in your credit score, so do your very best to not miss payments on any existing or new debt 3. Utilize your lender’s online reminders and consider setting up automatic payments if you have a set amount budgeted for debt repayment each month.
If you’re in a real bind with making a payment, make sure to make at least the minimum payment due or contact your financial institution and talk with them about the possibility of extending the due date. While it is important to not miss payments, avoid borrowing from high-interest lenders as this may ultimately compound your debt problems rather than resolving them.
Understand that finally paying off a debt does not remove the payment history from your credit record. When you pay off a debt, keeping the credit line open can demonstrate long-term responsible use (but maybe stash the card in a drawer if you do not want to use it).
Step 5: Establish Diverse Credit
Once you’ve gotten a handle on responsible spending habits and given your credit score a boost, consider diversifying your credit accounts. Switch from a secured to an unsecured credit card and apply for a school or car loan if you need one. Demonstrating your ability to manage different types of credit can have a positive effect on your score.
That said, avoid opening multiple lines of credit all at the same time. Each time you apply for a line of credit, it creates a “new credit inquiry” on your credit file and too many of these in a short period can have a negative impact on your credit score 3. Keep this in mind, for example, with multiple store credit cards at each place you shop frequently.
Rebuilding your credit takes time and dedication. Most credit reports go back seven years, so it can take a long time to make major improvements to your score. But, by requesting your credit reports today and following these steps, you can stop letting bad credit hold you back from your goals and dreams.