Five Steps to a Better Credit Score
You probably already know that less-than-perfect credit can make life difficult: Bad credit can make it difficult to buy a car or a home, and folks with bad credit can even have trouble getting a job.
They have fewer choices when it comes to credit and financing, and they often end up saddled with astronomical interest rates.
If you’ve ever struggled with credit issues, you also probably already know that it sometimes feels like there’s no way to recover. The good news, though, is that if you’re willing to put some time and effort into it, there are several things you can do to turn your credit around. These tips also work for folks with moderate credit, too (when it comes to credit, there’s always room for improvement).
Here are five ways you can put your credit on the road to recovery:
1. Check your credit report(s). Everyone is entitled to one free credit report per year from www.annualcreditreport.com. Your free annual credit report contains information from all three of the major credit reporting agencies — Experian, TransUnion, and Equifax. Your credit report is a useful tool that can help you zero in on problems like late payments – and it can also alert you to fraudulent charges or even errors. If your credit reports turn up anything fishy, contact the credit reporting agency right away to get things straightened out.
2. Get current on your payments – and stay that way. Credit problems often start small. A missed payment here, a late payment there. And then the late fees kick in. Your interest rate goes up – a lot. Pretty soon, you owe so much that you don’t even know where to start – and that’s where a lot of folks just give up. That’s a huge mistake, though. Contact your lender(s) and let them know that you’re serious about paying down your debt. Work out a payment plan that you can live with – and stick to it. If you need additional help, consider searching for a (reputable!) credit counseling service.
3. Get out of debt ASAP. Part of your credit score is determined by your ratio of available credit to credit used – this is why a maxed-out credit card can be so hazardous to your credit score. If you want to repair your credit, make a plan to start paying off that debt. Remember, if you only pay the minimum monthly payment, you’ll have trouble putting a dent in the amount you owe. Sit down with your budget and decide how much over the minimum you can afford to pay.
If you have multiple credit cards to pay down, check out my previous post on the popular snowball method of paying down debt.
4. Resist the urge to close accounts. Again, part of your credit score is determined by your ratio of available credit to credit used. Closing an account reduces your available credit, which can actually hurt your credit score.
Let’s say you have two credit cards: A department store card with a zero balance and a limit of $500. You also have a regular credit card with a limit of $2,000 – and it’s maxed out. In this example, you’re using $2,000 of your total $2,500 limit. That’s not ideal, but at least you’re not using all of your available credit. Now let’s say you close that department store card. Suddenly, you’re using your entire $2,000 credit limit – which looks much worse.
5. Consider a secured credit card. I’ve talked before about how responsible credit use can be very good for your credit. But what if your poor (or nonexistent) credit history makes it close to impossible to get a credit card? A secured credit card can be a helpful way to establish timely payment history and responsible credit card use.
A secured card works like this: You pay some sort of deposit (it could be anywhere from a few hundred dollars to a few thousand), which is held as collateral in case you are unable to pay your debt. Then you use your secured card just like a regular credit card. If you’re considering going this route, though, make sure that you opt for a secured card that reports to the three credit agencies. Shop around to find a card with lower fees and an APR you can live with.
And remember to use your secured card responsibly – you should pay off your balance in full every month. This should help you avoid paying any interest charges. You DO NOT need to maintain a balance to build your credit – the only thing that matters is that there is activity and timely payment on your card every month.