There are a number of reasons you might have a bad credit score, from the loss of a job, unpaid medical bills, or just plain old bad luck. One you get back on your feet financially, you will want to build you credit again. But when you are starting from the bottom, how do you improve your credit score?
Simple Ways to Boost Your Credit Score
It’s actually not that hard when you understand how the credit systems work and how credit scores are calculated.
It’s a simple formula really that involves how much you make, how much you owe, and whether or not you pay your bills on time. So once you are climbing your way out of trouble, here are seven easy ways to improve your credit score.
1] Pay Down Debt
The first key is to pay down debt. In other words, take what you owe now and pay it off. There are a few methods for doing this. One is to take your oldest debts first and tackle those. The second is to work on smaller debts first, and “snowball” the money you have to pay debt off each month into getting rid of larger debts.
Either way the key is to have a plan, have clear goals, and stick with working toward paying down your debt to a reasonable level.
2] Get A Secured Credit Card
Depending on your credit situation, you might not qualify for a regular credit card, but you can get a secured card. What this usually means is that you have money in either a savings account or a certificate of deposit (CD) and the bank gives you a card with a limit equal to that amount.
If you use this card properly, often the issuing company will then issue you a card with an actual limit that is unsecured. This is a good way to start building your credit score again, and these cards are relatively easy to get.
3] Take Out a Small Loan
Once you have enough credit established, you can often get a small loan. At first, if you have bad credit, this loan will carry with it a high interest rate, but if you shop around you might find a personal loan that is reasonable.
Take out a small loan at first and pay it off on time. Start with something easy with low payments that you can afford. That way you are sure not to make payments late or worse to have to default on the loan and hurt your credit more.
4] Pay Bills on Time
The other rather simple way to build your credit is to pay your bills on time. This includes everything from utility bills to car payments, rent to credit card and loan payments. Stay current with student loans because those are just as important as other debts.
All of these can affect your credit score, and if you are conscientious, they can make a big difference in what you pay for deposits, future interest rates, and even buying a home or finding a place to rent.
Remember, besides paying down debt, a good payment history is one of the foundations of your credit score, so be especially careful to pay your bills in a timely manner and early if possible.
5] Don’t Over Apply
Did you know that your credit score takes a hit every time you apply for credit? Too many applications can make your credit score drop, and some companies that do a hard credit check will cause your score to drop as many as 30 points with a single application.
This means that you should only apply for the credit that you need and can afford, or credit you know will help build you credit score. Don’t apply just because an application shows up in your mailbox or email. In fact, when possible opt out of these offers to avoid temptation.
6] Pay Attention to Debt Thresholds and Income Ratios
There are two things that make for an excellent credit score and can help you boost yours. They are debt thresholds and income to debt ratio.
Income to debt ratio is pretty easy to figure out. Your monthly payments on credit card and other debt should not exceed 25% of your income, just like your housing costs should not be more an 1/3 of your monthly income.
If you stay under these ratios your credit score will be stronger because you can show that you have more disposable income, enough to cover your debts.
Debt threshold refers to how much of your available credit you are using. This should not be more than 30%. So if you have a credit limit of $1,000 on a credit card, your balance should stay at or below $300.
This means you should be very careful about “maxing out” cards or even being close to the limits. This practice can actively harm your credit score but paying attention to it can make your score increase exponentially.
Improving your credit score is not hard once you understand how the system works, and if you use it properly. Just be careful to not borrow more than you can afford, and keep your payments reasonable. You don’t want to go backwards with your credit score, but only work to make it better.