In the world of personal finance, credit is king, and if you don't have a good credit score or history, your options when it comes to loans, credit cards and other financial products will be substantially limited. Not only do you have access to fewer loan products, but your interest rates are almost always higher – and there will be some products for which you simply won’t qualify, regardless of the interest.
So if you don't have great – or even good – credit, does that mean you should just throw in the towel and forget about ever buying a home or car, refinancing a mortgage or taking out a personal loan? Definitely not. There are plenty of things you can do to boost your credit score for the long term, and even a few things you can do to raise your score in the short term, too.
Know what influences your score
There are several factors that affect credit scores, some more than others. Knowing what they are and how to fix them is an essential part of improving your credit. Here are the top factors and what you can do to improve in each area:
Payment history – This is one of the most important factors in determining your score. Lenders want to see you take your obligations seriously, so be sure to pay on time, every time. If you are just beginning to build your credit, start small but and keep it under control. Pay off what you charge as quickly as possible.
Derogatory marks – Derogatory marks refers to collections and court actions, like bankruptcies or other legal action regarding your finances. The best way to avoid derogatory marks is to fulfill your obligations, which means paying on time and not going over your credit limits. If you already have a derogatory mark, contact your creditor and ask if they'll delete the entry if you pay off the amount in full. Get the response in writing.
Credit utilization – Your utilization refers to the amount of available credit you're using. Generally, the higher your utilization rate – that is, the more of your available credit you're using – the lower your score, so get those high balances paid down. Also, if you do pay your cards off, don’t automatically close the accounts because your utilization percentage will go down if you have no available credit showing.
Types of accounts – Having a mix of different types of accounts – a mortgage or home equity loan, personal loan and credit card for instance – is looked upon more favorably because it shows you can qualify for and handle different types of financial obligations.
Two steps to better credit
Improving your score in all four of these key areas requires just two simple steps:
First, automate your account payments for all your loans and credit cards for at least the minimum amount due so you never make another late payment. Just be sure to keep an eye on your payment date and amount as well as the amount you have in your bank account so you avoid potential overdraft fees.
Second, do what you can to consolidate your debt. If you get your debt into one manageable payment, you are far less likely to have accidental late payments or over-limit issues. Don’t close all your accounts once you pay them. If you have no available credit, your credit utilization percentage will still be very high even though you closed the accounts voluntarily. Commit to not using those accounts, or use one, but pay it off without fail every single month.
Commit to the change
There's one more really important step in improving your score, and it's this: Stop beating yourself up over your less-than-perfect score. Lots of people have credit issues for lots of different reasons, and you're certainly not alone. Remember: A credit slump is temporary, and with just a few simple changes, you can take control of your financial destiny. Don’t let the negative feelings attached to your score prevent you from doing what needs to be done to fix it.
Published February 10, 2016
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