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A good credit score gives you more loan options, lower interest rates, and even rewards and special offers. Eventually, it can even help you save thousands of dollars and get peace of mind from knowing you can take out a loan any time you need financing.
However, many Americans don’t have good credit. Surveys show that 30% fell into debt because of the double whammy of income loss during the pandemic and inflation. If you’re one of them, here’s some good news: you can rebuild your credit score. You don’t need a higher income—just careful, consistent financial decisions.
Key Takeaways
A robust credit score grants access to diverse loan options, lower interest rates, and exclusive rewards. It's a financial passport that can potentially save thousands and instill confidence in securing financing when needed.
With 30% of Americans grappling with debt due to pandemic-related income loss and inflation, the good news is that credit recovery doesn't demand a higher income. Instead, rebuilding hinges on careful and consistent financial choices.
Just like a doctor needs a physical exam or lab test to diagnose a disease accurately, you need to get your credit report to find out what’s pulling down your score.
Now that you’ve diagnosed the problem, you can make a plan. But first, follow the next steps to increase your score for each factor.
Payment history makes up 35% of your credit score, so you must prioritize paying bills on time to improve your rating.
What if money’s tight this month, and you need a couple of days to raise the cash? You have up to 30 days after the due date to settle the bill before it’s reported to the credit bureaus.
If you foresee needing more than a month, call the creditor to ask if you can adjust the due date—if you pay bills regularly and are a long-time customer, they may agree.
Your credit score may have been pulled down by 200 points because a creditor did not report a payment, incorrect accounts because of someone with a similar name or identity theft, duplicate accounts, outdated credit limit information, or closed accounts that remain open in the report.
Report errors to the credit bureau to improve your credit score.
Credit utilization is how much of your credit limit you are using. There are two possible ways to fix this:
Another common problem is when you don’t have any credit history because you’ve never taken out a loan or gotten a credit card. So, lenders don’t have any basis for your score. As a result, you may be approved for smaller personal loans but not for a car loan or a mortgage.
That’s why you need to establish your creditworthiness by taking out personal loans and then paying them off on time for your overall financial health. You can also sign up for programs like UltraFICO and RentTrack or apps like Altro that will report other financial factors—like banking history or rental payments—to bureaus.
Á lot of financial advisers will tell you to cancel credit cards you don’t use. While that is true, since you save on fees and prevent overcharging, don’t cancel your oldest cards. The length or age of credit affects your score. If you don’t want to use it, just cut up the card but keep the account open.
Plus, canceling a card that you’ve already paid off while keeping cards where you have a balance will affect your credit utilization ratio.
A credit mix is how many different credit or loan accounts you have. The types of credit are:
Credit mix accounts for 10% of your credit score. A good credit mix shows that you can handle different loan responsibilities. For example, revolving credit shows that you always pay on time, while installment credit shows that you can pay off bigger amounts.
While taking out a credit card or loan can improve your credit score, you mustn’t apply for several simultaneously. Credit bureaus may think that too much borrowing is a sign that you need money quickly.
Debt consolidation can help lower your credit utilization and allow you to pay off one lender. Just check to see if there are any fees for transferring the loan or if the lender has any penalties for ending a loan early.
If you know a friend or family member with a high credit score, ask if they can add you as an authorized user of a credit card they’ve used for a long time.
They don’t even have to give you the card (and you definitely shouldn’t take advantage of them). It helps pull up your score by improving your credit utilization ratio, payment history, etc.
A credit-builder loan is an excellent starting point for those looking to establish or rebuild their credit. These loans are designed to help you build a positive credit history. Lenders typically place the borrowed funds into a secured account, and as you make timely payments, a positive payment history is reported to the credit bureaus, gradually improving your credit score.
Secured credit cards are a valuable tool for individuals with limited or damaged credit. These cards require a security deposit, serving as collateral against your credit limit. Responsible use, such as making on-time payments, can contribute to a positive credit history and potentially lead to an unsecured card in the future.
Certain credit scoring models now consider alternative data, including your monthly bill payments such as rent, utilities, and subscriptions. Enroll in services that report these payments to credit bureaus, helping to showcase your responsible financial behavior and positively impact your credit profile. It is not guaranteed but adding utility payments and other regular payments to your credit can add up to 100 points, depending on your circumstances.
While it may be tempting to open new lines of credit, doing so can have a temporary negative impact on your credit score. Each new application typically results in a hard inquiry, which can slightly reduce your score. Be strategic about opening new accounts and only do so when necessary.
When shopping for a mortgage or an auto loan, multiple inquiries within a short time period are often treated as a single inquiry by credit scoring models. This recognizes that individuals may be rate shopping for the best terms without penalizing them for each inquiry.
Consistently carrying credit card balances can lead to accumulating interest and negatively affect your credit utilization ratio. Aim to pay off your credit card balances in full each month to maintain a low credit utilization rate, positively impacting your credit score.
If you've been responsible for your credit usage, consider requesting a credit line increase. This can improve your credit utilization ratio and potentially boost your credit score. Ensure that your income and financial situation support the request for an increase.
Credit cards that you haven't used in a while may be considered dormant. Periodically making small purchases and promptly paying them off can keep these cards active and positively contribute to your credit history.
If you have multiple credit cards with varying balances, prioritize paying off the cards with the highest balances first. This not only reduces your overall debt but can also positively impact your credit utilization ratio.
This may be considered a more extreme option, but credit counselors are professionals who specialize in boosting credit scores. If you really need to bump up your score to buy a house or refinance an asset, you can't do much worse than working with a legitimate credit counseling company.
Building and maintaining good credit is a gradual process that requires strategic planning and responsible financial habits. By incorporating these steps into your financial routine, you can take control of your credit and pave the way for a more secure financial future. Remember, consistency is key, and patience will yield rewarding results over time.
Browse through the Blog to read articles and tips on managing debt, improving your credit and saving more money!
