Having a good credit score is the foundation of financial health. Over the last year, many have faced financial difficulties due to the pandemic but as the economy stabilizes there are some tactics to help stabilize your credit score as well.
If you’re hoping to make a major purchase on a house or car, your credit score is vital if you’re looking to take out a loan, and the higher your score, the lower your interest rate will be. For those hoping to rebuild their credit score here are a few tips to help you stay on track.
Check Your Credit Reports
Checking your credit history allows you to see where you are and plan for where you want to be. Assessing your full credit report will provide a visual for you to understand if late or missed payments, collections, or other factors are hurting your credit score.
Timely Bill Payments
Investopedia reported that there are five factors that lenders use to determine your credit score: payment history (35%), credit usage (30%), age of credit accounts (15%), credit mix (10%), and new credit inquiries (10%).
Payment history is the most vital aspect of your credit score so it’s important to stay on top of paying the minimum balance as soon as possible. Avoiding late payments on your monthly bills can be made easier if you set up automated payments, set up alerts when you’re expecting your bill as well as keeping track of how much your spending on your credit card.
Paying the full balance of your monthly bill is better your you in the long run to avoid interest charges but if that’s not possible, a minimum payment is better than nothing.
Aim for 30% Credit Utilization (or less)
Using all of your credit at once sets an unrealistic expectation to pay your balance off. It’s better to pay your monthly bills in full per month and limiting your spending will enable you to do just that.
“A good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit” Investopedia reports. This gives you a better chance to improve your credit score based on your utilization, there are also ‘high balance’ features available that will warn you when your monthly spending is too high.
Increasing your credit limit can benefit your score as well, as long as you’re able to pay off your balance when your monthly bill arrives.
Limit Requests for New Credit
It’s also important to avoid applying for new credit cards, mortgages, car loans or any other large inquiry that could damage your score in a small window of time. If banks assume you’re a risky candidate for loans you take on the risk of living up to their expectations. Be realistic in your credit approach in order to build your score back in a stable fashion.
Look into secured credit cards
If you don’t qualify for a credit card with a bank or credit union, secured credit cards are a great alternative to help build your credit score. A secured credit card requires an upfront deposit, and the amount of money deposited determined how much credit you’ll have. After you have successfully managed your secured card and your score gradually increases, you can look into applying for a credit card with your bank where more benefits are linked to your account.
Don’t close accounts
The longer you have a credit account the better you look in the eyes of lenders. Don’t close inactive accounts especially when you have other cards with a balance, this could cause your score to drop.
If there’s an account where you have outstanding debt, deal with collections as soon as possible and resolve any issues; “negative information can remain on your credit history for up to seven years—bankruptcies for 10.”
Taking out a debt consolidation loan from a bank or credit union provides you with the opportunity to deal with all your debt at once with a lower interest rate. This can help you pay down debt at a more manageable rate and improve your use of available credit.
There is also the option to consolidate multiple credit card balances with a balance transfer credit card. Some cards have promotions for 0% interest but there are balance transfer fees usually tied to this option, “which can cost you 3-5% of the amount you transfer.”
Monitor your credit and track your progress
Many banks and credit unions offer free access when it comes to monitoring your credit score and you can check as many times as you’d like without harming your overall score. If you go through a major national credit bureau like Equifax or TransUnion, you can review your credit history once a year.
Making a conscious effort to manage how to use your credit effectively will not only improve your credit score but also provide you with more financial stability in the future.
If you’re planning to make a major purchase that involves a loan, set a realistic timeline and take the steps to improve your credit score like paying your balance or minimum on time and avoid applying for too many credit cards at once. Your actions today are the ones that will define your financial health moving forward; take it one step at a time and take a diligent effort tracking your progress.
By Surina Nath