If your credit score isn’t where you’d like it to be, you’re probably dealing with some nasty side effects of bad credit:
- Painfully high interest rates on loans and credit cards
- Trouble getting a cell phone contract
- Difficulties securing an apartment without a cosigner
- Pricey insurance premiums
The list goes on. Happily, there’s a well-worn path out of your credit rut. It won’t happen overnight, but following these six commonsense tips will improve your credit score over time.
1. Regularly Check Your Credit Score
You don’t have to know your exact credit score to know that your credit probably isn’t the greatest.
But it’s still crucial to know exactly what you’re working with. So, your first order of business is to order credit reports from each of the three-major consumer credit reporting bureaus: Equifax, Experian, TransUnion.
You’re entitled to one free report per year from each bureau — don’t let anyone tell you you have to pay for your first. Your reports will outline key areas of concern, such as high credit utilization or spotty payment history. Note them, then work toward addressing them.
2. Apply for the Right Credit Card
Next, apply for the right credit card: one designed for people with less-than-perfect credit. Check out lists of credit cards for bad credit, then choose the product that best fits your needs. Use it judiciously, making sure to pay off your balance in full and on time each month.
3. Pay Your Bills on Time
Don’t stop the on-time payments with your new credit card. Pay all your obligations by their respective due dates: rent or mortgage, car notes, utilities, phone plans, and so on. A pattern of delinquent payments can significantly affect your credit for the worse, so set payment reminders or enroll in auto-pay to ensure that you don’t fall behind.
4. Reduce Your Debt Load
In the business, your debt load is known as your credit utilization ratio. Credit issuers and reporting bureaus calculate your credit utilization ratio by adding up your outstanding revolving credit line balances (e.g., credit cards) and dividing the sum by your total credit limit.
Credit issuers prefer credit utilization ratios below 35% to 40%, and adjust interest rates accordingly. To reduce your ratio, increase your monthly payments to a level well above the minimum, but low enough to be manageable and sustainable.
5. Apply for New Loans Sparingly
Every time you apply for a loan, the issuer “pulls” your credit. Each pull reduces your credit score by a small but still significant amount. It’s therefore not wise to apply for too many new loans at once.
On the other hand, when you’re approved for new loans or lines of credit, your credit utilization ratio falls. This has a positive effect on your credit score. The trick is applying for new loans slowly enough to counteract the applications’ negative impacts.
6. Keep Older Credit Accounts Open, Even If You Don’t Need Them
Even if you no longer use a particular credit card or home equity line, you should keep it around. That’s because your average account age is an important factor in determining your credit score. The older your average account, the better your credit profile appears to potential lenders. So, keep those old credit cards around a while longer.
What are you doing to turn your credit issues around? Please share in our comments box below.