Having good credit is an integral part of building financial security. Good credit helps you more easily purchase a home or car, makes you a better job candidate and gets you better rates on future credit.
Unfortunately, credit scores take into account years of past bad behavior, which makes it hard to immediately improve your score. Here are some tips that might help.
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Simple Tips to Improve Your Credit
- Pay off past-due accounts. Your payment history accounts for 35% of your credit score. The more often you make on-time payments, the better your score will be. Even paying the minimum on an account will help to improve your score so long as the payment is on time. You should check your credit report for any past-due payments. Accounts that are more than 90 days late have the biggest impact, so pay off those first, and then work on the 60- and 30-day late payments. Also, if you usually pay a bill on time but mistakenly missed a payment or two, you can ask the credit card company for a “good-faith adjustment” to remove the late payment from your credit report. Once you have your accounts up to date, make sure to pay your bills on time to avoid future problems.
- Keep your balances low. Another major factor in your credit score is your ratio of total revolving credit to how much of it you actually use. Keeping your debt-to-credit ratio 30% or lower on each card is a good rule to have. Double-check that your credit report is accurate in reporting your limits. Also keep in mind that your monthly balances count in this ratio and can make your credit score vary every month. If you pay off your balances every month but have only a few cards with a low credit limit, consider increasing your limit on existing cards or opening additional credit cards to increase your total revolving credit. Just make sure not to use them.
- Eliminate small balances. Another factor in your credit score is how many of your accounts have balances. If you have several small balances on a lot of different cards, consider paying off those balances and start using only two or three cards max for your purchases.
- Dispute errors. Sometimes mistakes happen, and oftentimes fraud happens. Check your credit report regularly (you can download an app like Credit Karma to easily check your score) for any discrepancies in your accounts or payments. You can dispute errors online through Equifax, Experian or TransUnion. Once you fix the errors with one credit bureau, it should report the information to the others.
- Be careful when applying for credit. Every time you apply for credit, it makes a small dip in your credit score that lasts one year. Therefore, you should avoid applying for multiple credit cards at the same time. An exception is when applying for a mortgage, auto loan or student loan. Your FICO score will allow a shopping period of 30 days for these types of loans, so you should do this type of loan shopping in a short period of time.
- Strategize on collections accounts. Paying off your collections accounts can actually cause your credit score to drop at first, since the last activity becomes more recent. The best way to avoid this is to have the collector erase the account from your credit file when you pay it off. Make sure you ask for a letter stating this agreement upon receipt of your payment.
- Be responsible. It may be common sense, but it’s important to point out to make your payments on time, and pay your balances in full. Paying less, taking cash advances and using credit cards at businesses that indicate you are a financial risk (for example, pawn shops) could all impact your credit.
The Bottom Line
Building good credit can take years, especially if you already have bad credit. Utilizing the above suggestions will jump-start your credit and allow you to build a foundation for maintaining good credit for life.