Concerned about applying for a loan? Worried about a lackluster credit score? Luckily, there are many different ways to improve your credit score.
Having good credit is essential for making big life-changing purchases but building credit can be daunting. Fortunately, we’ve compiled a list of some of the easiest and most effective ways to build credit. These methods can help people who are new to building credit as well as those who have poor credit that needs to be fixed.
- Fix Late Payments
This is perhaps the most crucial element of maintaining good credit – pay on time! A whopping 35% of your credit score is based on punctual payments, so if you have outstanding late payments floating around, you should take care of them before worrying about anything else.
Even if you close an account, late payments can still hurt your credit score. If you receive derogatory marks on your credit for late payments, you should contact your creditor immediately. Oftentimes, there are options available for getting late penalties removed.
The solution to fixing late payments is to catch up, learn from the experience, and move forward. Set reminders, set aside necessary funds, and pay everything on time in the future.
- Secured Credit Cards
If you are building credit from scratch, secured credit cards are a great place to start. These credit cards require a cash down payment that will equal the card’s credit limit to open the account. For example, if you get a secured credit card with a limit of $300, you will have to pay $300 upfront.
Because of the upfront payment, secured credit cards offer no risk to the lender. In the event that the cardholder does not pay his or her credit card bill, the lender can simply take money out of the initial payment and close the account, losing no money in the process.
Thanks to the low risk secured credit cards pose to lenders, it is very easy to get approved for one, even if you don’t have any credit or have a bad credit history. Other than the upfront payment, secured credit cards help users build credit like any other account. This is an easy way to start building credit from the ground up.
- Lower Credit Utilization
Credit utilization is another huge part of maintaining healthy credit, accounting for 30% of your score. If you are using too large of a portion of your available credit, it may reflect negatively on your credit score.
Most recommend keeping your credit utilization under 30% of your limit. If you have a limit of $1,000, keep your debt on the account under $300.
If you are having trouble keeping your spending low, you may be able to increase your credit limit. If you have a history of timely payments, talk to your lender about increasing your limit. That way, you can spend the same amount, but it will be a lower percentage of your available credit and lower your utilization.
- Keep Credit Cards Open
Having more than one active credit card can raise your credit score significantly. This is because creditors love to see diversity in a credit history; having a variety of accounts looks great on a credit report.
Multiple active credit cards also leads to a lower credit utilization. For instance, if you have three cards with a $1,000 limit on each, spending $500 is only a utilization of about 16% of your total credit limit. However, spending $500 when you only have one card with a $1000 limit is a credit utilization of 50%.
Many cards cancel automatically if they go a long period of time without being used, so if you have a credit card collecting dust in the back of your wallet, make sure to use it every couple of months.
Lenders like to see multiple types of credit. Having multiple credit cards open is great but having both credit cards and loans looks even better. Your mix of credit accounts for 10% of your credit score, so if you are looking for a way to bump your credit from “good” to “great,” taking a loan out for a car or mortgage can sometimes get you there.
However, you should try to be smart about your loans. Consider the interest rate of the loan and whether or not you can comfortably afford payments. If you end up missing payments or paying late, you’ll only hurt your credit further.
- Dispute Errors
If you see your credit drop for seemingly no reason, investigate. There is a chance that an error was made, harming your credit for reasons beyond your control. If you stumble upon a faulty credit report, report it to your credit bureau immediately. They have 30 days to review your request.
Be Proactive for The Best Credit Scores
There are many ways to build good credit, and these topics only scratch the surface. Credit, when managed responsibly, can offer a world of financial freedom and monetary peace.