5 Easy Steps to Build or Repair Your Credit
Most people don’t know or care about their credit score until they need to make a large purchase and apply for financing. But, did you know that a good credit score can save you money through lower insurance premiums and lower interest rates?
If you don’t have credit or you are trying to rebuild your credit, it can seem like an impossible task. But there are some easy steps you can take that can make a big impact. Before you begin, find out exactly where you stand by getting your credit score. There are several places you can get a free credit score including your bank, a credit card, and Experian. Additionally, you will want to request your credit reports from each of the credit bureaus (Experian, Equifax, and TransUnion) and check them for errors. You can order a free copy of your credit reports from Annual Credit Report. If you find any errors, dispute them.
Then consider the following to build or repair your credit:
1. Pay your bills on time
Your payment history is the biggest factor that affects your credit score. Therefore, it is important to pay your bills and any lines of credit on time – every time. Pay at least your minimum payment, if that is all you can afford.
Because late or missed payments can stay on your credit report for up to seven years, it is important to contact your creditor immediately if you experience a financial hardship. If you have problems remembering when bills are due, consider using automatic payments or calendar reminders to help you stay on track. Paying your bills on time consistently will raise your score in a few months.
2. Keep your balances below 30%
Credit utilization is the piece of available credit that you are currently using. The amount of credit you use has a big impact on your credit score. Accordingly, it is recommended that you keep your utilization below 30% of your available credit limit.
Pay down high credit card balances and keep them below 30%. The lower the balance the better for your score. You will see an increase in your credit score once the creditor reports the lower balance to the credit bureaus.
3. Be cautious when applying for new credit
If you apply for or open a lot of new accounts in a short period of time your credit score can go down. Don’t apply for new credit unless it is absolutely necessary. If you have had difficulty getting a regular credit card, try a secured card instead of applying for a bunch of different credit cards and hoping one will say yes.
A secured card will require a deposit, but will act the same as a regular credit card. The deposit cannot be used towards your monthly payments. Therefore, you will receive a monthly bill and will need to make a payment. As long as you make timely payments your deposit will be returned and you will build credit. When selecting a secured credit card choose one that reports payments to the three credit bureaus. You can also check with your bank to see what products they might have.
4. Be added as an authorized user
Ask someone with good credit habits (parent, sibling, spouse, or close friend) to add you as an authorized user on a credit card. You don’t have to make any charges or even access the account, but your credit benefits just by being on the account.
Being added as an authorized user increases your credit history, increases your credit utilization, and increases the number of years using credit. Because you are not legally obligated to repay the debt the impact on your score varies. Additionally, if the cardholder maxes out the card or is late it will negatively impact your credit score. Be sure you understand what the card holder expects from you before making this type of arrangement.
5. Avoid debt that doesn’t help
Taking out payday loans or “buy here, pay here” auto loans will not help rebuild your credit. These types of lenders often do not report your on-time payments to the credit bureaus, but they will report when you miss a payment or default on a loan.
If you are having difficulties accessing credit, look for other options such as getting a co-signer before resorting to loans that do not report to the credit bureaus. Remember you will still need to pay the loan as agreed so be certain you can repay the loan.
It is possible to rebuild credit, but it does take time and some effort. Keep in mind late and missed payments, judgements, and collections stay on your credit reports for seven years. Therefore it is important to develop good money management habits and avoid taking on more debt than you can repay.
Contact your local Extension office if you would like assistance with developing a plan to rebuild your credit or pay down debt.