One of the most common financial issues that people face is having a low credit score, or simply needing to improve it. It is essential to understand that there’s no quick fix for your credit in most cases. The process of improving/repairing your credit takes time and persistence, but so does any major change in your life. Here are a few simple steps you can start with now to make a long-term impact on your credit.
1. Avoid Late Payments
Your payment history is the most critical part of your overall credit score, accounting for 35% of it. You might think that if your credit score is already pretty low, one more late payment can’t possibly do any more damage. However, you have to change this mentality and change the habit of paying late if you’re ever going to improve on this end. You have to stop digging if you ever want to get out of the hole, as they say.
2. Clear Up Old Debt
At 30% of your score, maintaining a low utilization rate impresses lenders and improves your credit score. This can have a greater impact than many people realize. A person with a $3,000 credit card that is maxed out, for example, is likely to have a lower acceptance rate than someone with $15,000 in debt who is still well below their credit limit.
Now, if your goal is to become debt-free, then start with your highest interest rate debts first. On the other hand, if you want a quick boost to your credit score, your priority should be paying off credit card debt to lower your utilization rate, which can have an almost immediate impact.
3. Try a Secured Credit Card
With lower scores, it can be nearly impossible to get a new unsecured credit card. In that case, a secured credit card may be the best way to reestablish your credit. A secured credit card uses your own money as collateral. For example, you could put down a 300 dollar deposit and get a credit card with a 300 dollar credit limit. As you continue to use this card and make payments on time over months, you can request gradual increases on your line of credit.
Using secured debt has the same positive impact as unsecured debt, so you are never completely without options. Just make sure that your secured credit card reports payments to all three major credit bureaus; otherwise, it won’t show up on your credit reports, and it won’t raise your credit score.
4. Only Take Advantage of New Credit When it Makes Sense
New credit opportunities arise as your score improves. You have to be careful here for many different reasons. Applying for new credit has a small but immediate effect on your score, and applying for too many lines of new credit can hurt your score. However, having a higher available balance can make it easier to keep your total credit use below that magic 30% that most lenders find ideal.
Also, having a good credit mix with many different accounts in good standing is better than having only credit cards, installment loans, etc.
5. Sub-prime Lenders
Most experts won’t tell you to go in this direction, and for good reason. The world of sub-prime lending is a tricky one. However, this is supposed to be where lenders seek to help people with poor credit, and for some, one of the only options for something like an auto loan. At the same time, keep in mind that they usually come with very high interest rates.
Unfortunately, we also live in a world full of scams and deceptive practices. Therefore, it is crucial to research any lender or entity you consider doing business with, especially those that are “second chance” or online. Look up reviews on every website you can find, call them, ask questions, and keep your own records of all documentation, including payments.
These tips are focused on the long term because there is no short-term, quick fix for credit. Instead, fixing your credit is a step-by-step process, and it takes time. However, if you are ready to commit yourself to stopping the old habits that resulted in bad credit, a better credit score is on the horizon with these five tips!