Credit is a function that is used by millions of people each and every day. Individuals who do not have good credit have a difficult time purchasing a home, financing a new or used vehicle loan, accessing credit cards at affordable rates and even being able to live in an apartment. It is amazing all of the everyday services and products that are tied to my credit score. No matter how I look at it, the economy is not as good as it once was. I am scrimping and saving and looking for ways to improve my credit score. One of the biggest things keeping many of us in the red is credit card debt. Not only is credit card debt expensive and difficult to get out of, but having a bad credit score makes it harder for you to get any other loans. A bad credit score affects virtually every aspect of your life, and only you can get yourself out of it.
With that in mind, here are a few tips to improve your credit score and get your financial life back on track:
- Pay off your credit card debt first. While eliminating mortgages, auto loans, and student loans can all have a positive effect on your overall credit score, nothing affects the score as dramatically as credit card debt. You are more attractive to lenders with a large gap between your available credit and the amount of credit you’re using – that is, between how much you can ask for versus how much you’re actually taking.
- Use your credit cards sparingly. Even if you always pay your bills on time, large balances can negatively affect your credit score. Don’t overuse your cards.
- Use fewer cards. Having more cards can make you more likely to spend more money than you can afford, and less likely to pay off all the debt. Debt spread across several cards adds up and doesn’t look good to lending institutions. Limit yourself to only a couple cards, and keep track of them.
- Know your credit limits. Sometimes people don’t realize when their credit limits change and accidentally go over their limit without knowing it until the bill arrives. This is a stupid, costly, and easily preventable mistake. Don’t let it happen to you.
- Take advantage of credit reports. The major credit bureaus offer free annual credit reports. Take advantage of this and look at your credit history. Errors they’ve made end up costing you. Look it over carefully.
- If you have no credit history – open an account and use it. Unfortunately, if you’ve paid cash all your life and have no debts your credit score (or lack thereof) can hurt when applying for a home mortgage.
- Stop applying for new credit cards every few months. When you do shop for credit, do it within a short time.
- Once you know what factors affect your credit score, you need to look at your credit report. You can get a free report from each of the three credit agencies once per year. Some like to do this all at the same time. I prefer to get one report once every 4 months. If something drastic changes, you are more likely to see it sooner if you spread out when you receive the reports.
- When you get your credit report, spend time examining the details. Since you know what criteria Fair Isaac uses, look for clues in the report.
- Check that the reports show the correct amounts owed. If there are any delinquencies, note them. If there is any information over 7 years old make a note as well (except for bankruptcies, that information should not be reported).
Paying your bills on time could not be any simpler. While it was much more difficult in the times before computers, online bill payment services are offered by almost every bank that is in business. Account holders must have enough money in their account to cover their bills but can set up the bill payment software to pay their fixed cost bills every month. They also can input the variable cost bills and tell the bank to pay them on a certain date. Paying your bills on time can drastically improve your credit score.
There are millions of people who have high-interest credit card debt, student loan debt and other debt. Reduce the debt down as much as possible! A large amount of debt can raise your debt to income ratio, which is not calculated in your credit score. However, it does show that you have a high credit utilization which will bring your credit score down. Paying off some of the debt will bring your credit score back up. Never use more than 30-40% of your available credit unless it is necessary to do so.
Watching your credit report is extremely important. Many people have fraudulent information or mistakes added to their credit report. Order your credit report on the government’s free website. You can also request a copy throughout the year for a nominal fee.