While this blog post focuses primarily on the American credit system, there may still be valuable insights and strategies that readers from other countries can adapt to their own financial situations.
Extremely lower interest. Better and favorable loan terms. More enticing credit options. Exciting financial rewards. Sure-fire housing and employment opportunities. More and more access to funds.
These are just some of the perks of having an excellent personal credit score. On the flip side, a poor score can leave you crippled with limited financial access.
It’s time to ditch the idea that ‘credit’ is a burden. The truth is, it can bring you more financial benefits than you can ever imagine. However, it takes deep financial education, strategic financial management, and a little self-control to make the most of it.
This article covers what it takes to improve your personal credit score. Read on to learn how to fix your poor score, starting right here and right now!
How do you improve your personal credit score?
To begin, what is a personal credit score? It’s a measure of your overall credit behavior based on metrics such as:
- Credit history
- Payment history
- Credit mix
- Credit utilization rate
Your credit score is essential because it gives you more access to cash, loans, lines of credit, and more.
Picture this: A good credit score provides you with unlimited funding opportunities. On the flip side, a bad one can drive lenders and creditors away from you.
What if you currently have a bad credit standing? How do you go about improving your credit score?
Don’t worry; we’ll share proven tactics for fixing your credit score.
Remember, there’s no fast lane to repairing bad credit. The best way to improve your credit score is to start now and be consistent with your good financial habits!
1. Reach out to the credit bureaus regularly
Asking for credit reports and checking your credit score isn’t difficult at all. Fret not, as you can access them for free. Yes, for free!
According to the U.S.A. government website, you’re entitled to a free annual credit report from the three major consumer credit bureaus:
- Experian
- Equifax
- TransUnion
All you have to do is request them from AnnualCreditReport.com. That’s simple and easy!
Jay (Yong Jia) Xiao, Co-founder and President of SuretyNow, suggests examining credit scores regularly.
Xiao said, “Regularly checking your credit reports yearly or more makes you aware of your credit standing. It also lets you double-check incorrectly reported financial data and correct it. Lastly, it lets you track your payments and stay on top of your finances.”
2. Stay on top of your payments
As cited, the most significant factor affecting your credit score is your payment history. This key criterion reflects how often, when, and how much you pay for your bills. The rule of thumb is simple (although hard to follow):
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Pay on time. This means paying on or before the due date. There might be a grace period, but it’s best to settle your financial obligations as soon as possible. Late and delinquent payments get automatically reported to the credit bureaus. And to stress, they cause dents in your credit score!
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Pay in full. You should know by now that minimum balance is a scam. Sure, credit card companies let you pay the minimum balance. However, you’ll still incur interest. These extra and unnecessary charges might pile up, making you unable to pay at some point.
Jim Pendergast, Senior Vice President at altLINE Sobanco, recommends staying on top of your payments. “While it is true that no one can be arrested just because they’re behind on loan or credit card payments, your creditors can give your information to collecting agents to follow up on your payment.”
Pendergast adds, “Late payments and account delinquencies will hit your credit scores the hardest. It is important to double-check your due dates and amount and pay them on time and in full religiously.”
3. Keep an eye on your report and dispute for errors
No one’s perfect, and this idea applies to credit bureaus. False and erroneous information reflected on credit reports happens way more often than we think.
Doubtful? Here are some of the common causes of credit report errors:
- Merchants incorrectly reporting details like personal data and financial information
- Accounts mistakenly reported to your account due to similarities in names
- Erroneous payment history
- Inflated balances
- Closed and duplicate accounts reported on your account
See? These are just a few examples.
That’s why we suggest requesting your credit reports regularly and checking all the reported financial transactions. Should you find some errors, be quick to dispute them. Submit a written report explaining the erroneous reports to any of these credit bureaus.
4. Keep your credit utilization rate as low as possible
For the uninitiated, the credit utilization ratio measures how much of your available credit you’re using.
Here’s the thing: Credit utilization can take up to 30% of your credit score. As such, you should keep it as low as possible. This means maximizing your credit and not leaving any available credit behind.
In essence, a low credit utilization rate reflects how good you are at managing your finances and paying your debts. However, it’s safest to go as low as 10%, but never zero. A zero rate means you aren’t making any credit purchases at all, which isn’t good for your credit as well.
Anthony Martin, Founder and CEO of Choice Mutual, suggests maintaining a low credit utilization rate. “A low rate often indicates that you’re properly managing your finances. This means that you don’t overspend and that you’re able to settle your bills on time. That gives you a good credit score.”
5. Put all your debt eggs in one loan basket
You may have heard of the famous line, “Don’t put your eggs in one basket.” Nope, it doesn’t apply to your credit score!
In this context, putting your eggs in one basket means debt consolidation. As the name implies, it entails taking a personal loan to pay off all your existing debts. It’s one of the best tactics for fixing your bad credit score.
Suppose you have multiple credit cards, mortgage debts, and house-flipping loans. In this case, you can apply for a personal loan for debt consolidation. Once approved, you can use the money to pay all your debts. Then, moving forward, you’ll repay your loan to only one lender until its maturity date.
Keep in mind that a debt consolidation loan does not necessarily get you out of your debt. Continuing lousy spending habits will make you acquire even more debt. So, financial discipline is key!
6. Don’t ditch your old credit card accounts
It’s easy to close your credit card accounts once they have zero balance and when you feel you don’t need them. But hold your horses; think twice before doing so!
Consider this: Closing an old credit card after eliminating your debt will likely hit your credit scores rather than improve them. Here’s why:
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Credit history matters. FICO considers the length of your credit history as the third highest factor in computing credit scores at 15%. The longer you have your credit card balances, the better your credit history looks to creditors. This is especially true when a credit card account is settled regularly without defaults.
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High credit utilization ratio. Closing your old credit cards will increase your credit utilization ratio by reducing your overall credit limits. This is especially true for those with higher credit limits. Therefore, crunch the numbers before you decide to close your credit card account.
Stephan Baldwin, Founder of Assisted Living, offers a few recommendations regarding closing credit card accounts. “If you have no choice but to close credit cards with zero credit balances, choose new ones and those with low credit limits so they don’t significantly affect your credit score.”
7. Knock on credit agencies’ doors for help
A bad credit score can affect almost anyone. When this happens, you have no choice but to seek help from financial professionals and experts. They can help you rise above your situation. Below are two agencies you might want to consider:
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Work with a credit repair agency. A credit repair company is a team that fixes your poor credit score on your behalf, particularly by removing inaccurate information from your credit reports. These credit repair companies communicate with the credit reporting agencies on your behalf.
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Seek help from a credit counseling agency. A credit counseling agency houses a non-profit credit counselor to help you get to the bottom of all your debts. Whether you’re spending way more than what you’re earning, they can help. For example, they can help you lease your car with bad credit or as simple as creating a realistic budget for you.
There’s no quick fix for your credit score
Striving to achieve a high credit score is a key part of financial stability. However, getting a better score requires discipline in developing good paying habits. But first and foremost, you’ve got to address your bad score first!
That said, heed our practical advice for fixing your personal credit score. Start with checking your credit report and filing for credit disputes. Likewise, consider lowering your credit utilization rate and consolidating all your debts.
If worse comes to worst, work with credit repair and credit counseling agencies. They can help you manage your finances and improve your credit score. However, it all boils down to paying your debts in full and on time!
Remember, there’s no fast lane to repairing bad credit. The best way to improve your credit score is to start now and be consistent with your good financial habits!
Shawn Plummer is CEO at The Annuity Expert. He has been a licensed financial professional focusing on annuities and insurance for more than a decade. His former role was training financial advisers, including for a Fortune Global 500 insurance company. He’s been featured in Time magazine, Yahoo! Finance, Entrepreneur and Bloomberg.
