How to Raise a Cellar-Dwelling Credit Score
Imagine a world where borrowers were never vetted and anyone could get a loan regardless of financial status or history. While that type of society may seem idyllic to consumers at first glance, its real-world implications wouldn’t be so rosy. As the financial industry learned in 2008, it matters whether a borrower is capable of repaying a loan. That’s where a credit score comes into play.
Think of a credit score as something akin to a blood pressure monitor. The latter uses numbers to give insight into the current state of your circulatory health. Similarly, a credit score uses numbers to provide clues about the current state of your financial health.
You need a good credit score to buy a home, rent an apartment, purchase a car, or get a business loan. Your score provides a snapshot of your creditworthiness. It also plays a significant role in the types of loans and interest rates you’re eligible to receive. Most lenders will use your individual credit score to determine the risk associated with lending to you. Without this information, lenders would have no way to gauge whether you are a low-risk or high-risk applicant.
If you have a poor credit score, don’t let it get you down. There are things you can do to improve your score and, with it, your power to borrow. While you can’t magically fix bad credit overnight, if you’re consistent and motivated, you can bring up a cellar-dwelling score over time. Here are a few tips for improving credit scores, starting today.
1. Establish a Solid Payment History
It can be overwhelming to build your score up once it’s been knocked down. But don’t give up because you fear the journey may be long. Instead, start today with small steps that will help boost your score and put you in a better financial position.
Your payment history constitutes 35% of your credit score, making it the single most important factor in your score. An obvious way to establish a solid payment history is to make regular, on-time payments on a credit card. The problem is, you may not qualify for one if you have poor or no credit — it seems like a Catch-22. Luckily, you can begin repairing your credit by getting a secured credit card.
Unlike a standard credit card, a secured card requires the applicant to make a deposit or funds transfer to open an account. This amount becomes your credit limit and, by reducing the risk to the issuer, makes it more likely you’ll be approved. Such cards can enable borrowers who don’t qualify for standard credit cards to develop a solid payment history.
2. Keep Your Credit Utilization Low
Once you get either a secured or standard credit card, your primary goal will be to pay your monthly bills on time, every time. As noted, payment history has the most significant impact on credit scores. Don’t think, however, that you can max out your card every month so long as you pay the minimum balance on schedule. Why not? Because the next most important component of a credit score is your credit utilization ratio. This accounts for 30% of the score.
Your credit utilization ratio is the percentage of revolving credit you’re using as against the total amount you have available. So if your new card has a limit of $1,000 and you charge $500, your credit usage will be 50%. That’s problematic because it suggests to creditors that you rely too heavily on credit for your day-to-day financial needs. Experts advise keeping your usage to 30% or less of your combined credit card limits.
3. Minimize New Credit Accounts
You need to have at least one open credit line to build your credit score. Furthermore, if you have more than one credit card, your total available credit increases. That will result in a lower credit utilization ratio — provided you keep your spending in check.
Nevertheless, neither of these facts means that you should go out and open as many new credit cards as you can. In fact, if you open too many new accounts in a short time period, it will harm your score. In the case of building credit, more is not always better.
In fact, the length of your credit history is arguably more important than the number of accounts you have. Credit history length makes up 15% of your score, so the older your oldest account is, the better your score will be. Therefore, put your efforts toward nurturing your oldest credit card accounts and keeping them active with low balances.
4. Talk to a Consumer Credit Counseling Agency
The above tips are helpful for most people who are trying to improve their less-than-stellar credit. But if you are facing bankruptcy, having trouble keeping up with monthly expenses, or confronting other credit-impacting difficulties, seek professional help. Consumer credit counseling agencies are there to provide assistance in these types of situations. They can help you create a debt management plan and work toward a healthier financial place.
To locate a reputable credit counseling agency, refer to the National Foundation for Credit Counseling. The NFCC is one of the longest-running nonprofit financial counseling organizations and has a trustworthy reputation. It can help you wade through the murky waters of your financial difficulties so you can find financial clarity.
Taking Control of Your Credit
Most people experience financial challenges or make poor financial decisions at some point in their lifetimes. If your financial history has resulted in a low credit score, you can take action to improve it. Implement the tips above to take control of your credit and boost your borrowing power.