A low credit score can prevent you from qualifying for attractive interest rates on a loan and also limit your options when applying for a credit card. The great news is that just because you have a low credit score currently doesn't mean it will stay that way forever or take forever to re-build. As long as you become more responsible with your spending and take steps to below to re-build your credit report, it’s possible to give that low credit score a boost. Here are some essential steps to build credit the RIGHT WAY:
1. Make on-time payments a priority
Missed payments and payments that are more than 90 days past due take their toll on your credit score. Making sure all payments are made on time needs to be a high priority. Consider making use of auto-pay options with creditors and service providers so you never miss a due date and always make sure there are enough funds in the funding account to avoid overdraft fees.
2. Work with a financial advisor or credit repair specialist
I'm NOT talking about those "I'll fix your credit in 30 days for thousands of dollars" specialists (#TeamNoScammers). It does take time to rebuild your credit. A reputable credit repair specialist or financial advisor who has the knowledge and tools needed to help you build your credit can be the right way to go. He or she might make use of a credit repair business software program that makes it easy to order credit reports, analyze credit history, check your credit report for errors, and make recommendations to help build your credit.
3. Check the credit report for errors
Any mistakes on the credit report can lower your credit score. Make sure to check your credit report at least once a year to see if any creditors have been misreporting information and that balances are accurate. You can send dispute letters to have those reports to the credit bureaus changed so that your credit report is current and accurate (a credit repair specialist or financial advisor can assist with this).
4. Lower credit card balances
One of the factors contributing to your credit score is your available credit. This is used to calculate your credit utilization rate — the amount of credit you have compared to the amount of credit you have used. Lowering your credit card balances can help to improve your credit utilization rate which in turn affects your credit score.
5. Get a secured credit card
An easy way to prove that you can handle your credit responsibly is to get a secured credit card where you ‘pay’ to have a balance and then make your payments on time consistently. This type of activity tells the credit bureaus that you are being responsible with your credit and can be an effective way to rebuild damaged credit.
6. Limit applying for loans or credit cards
Outside of a secured credit card, you will want to avoid applying for any loans or credit cards since every inquiry will show up on your credit report — and lower your credit score by a few points. Applying for several loans or credit cards in a short period of time is also a red flag that you are in need of more credit. This could indicate that you are over your head in bills and are looking to credit cards and loans for financial support.
7. Don’t declare bankruptcy
Declaring bankruptcy is the ultimate credit killer since it will stay on your credit report for 7-10 years and make it much more difficult to get a loan. If you are struggling to make your payments on time and think you’ll never get ahead, declaring bankruptcy in an effort to start over might sound attractive. Unfortunately, it’s not the ideal solution for those who want that fresh start. Reprioritize your spending and talk to creditors to negotiate a payment plan so you can start making payments on time instead. This will help you rebuild and repair your damaged credit — even if it’s a slower process. A credit repair specialist or financial advisor can assist you in this process.
8. Maintain a good job history
Few people realize that their employment history shows up on their credit report. Some employers might use that information as part of the hiring process but many lenders will also look at this information to verify your income sources and determine whether you are trustworthy enough to borrow money. A clean job history can make you appear more creditworthy in the eyes of a lender which means you could qualify for a loan that helps you rebuild your credit.
9. Open a savings or checking account
You want to appear trustworthy in the eyes of lenders and be able to manage your money efficiently, no matter how much you earn. Since your savings and checking account information doesn’t appear on your credit report, some lenders may ask you for a bank statement or two to verify that you have paychecks coming in and are making regular deposits and withdrawals. Just keep in mind that bouncing a check or incurring other fees may end up showing on your credit report.
10. Create a Budget
I can not stress how important it is to develop a monthly budget. To make sure payments are being made timely and you understand what items are accurate (or inaccurate) on your credit report, you need a way to monitor these items. A budget is a great way to do this. In the simplest format list all income streams and subtract from this all your monthly expenses. You might even want to add due dates so you know exactly when money will come in and when money goes out. I live for my family's financial plan, to the point I reconcile to my actual bank accounts and have created separate pay off tabs to watch our debt drop (#CPA and #NumbersAreLife!!)