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How To Fix Your Credit Score
Have you checked your credit lately? If not, you definitely should. A 2015 study found that almost 30 percent of Americans had a credit score of 601 or lower, which indicates bad credit.
Why are so many people sitting with such low credit scores? This is likely due to the idea that there is a significant lack of education around credit and finance as a whole in America. Educating yourself on these topics could put you at a massive advantage in your financial life.
If your credit is bad, it can be difficult to qualify for major life purchases requiring a lender, such as a new home or car; bad credit can also limit your ability to rent the apartment you like, and in some cases may even prevent you from getting a job as well.
If you’re one of the millions of Americans with sub-par credit, don’t panic. It takes some work, but you can improve your credit score fast if you take small but consistent steps towards better credit.
Here are six steps you can begin taking right now to fix your credit score.
Assess Your Credit
If you want to fix your credit score by yourself, the first thing you need to do is figure out what it is. Most people don’t think about their credit until they need to make a major purchase and a lender runs a credit check; if your credit is not so great at that point, it can be difficult to fix it in time to make the purchase. However, it is really easy to check your credit.
You can order and download a free annual credit report once per year. Additionally, if your bank doesn’t allow you to monitor your credit score for free, there are dozens of apps that allow you to do so. After reviewing your credit score and annual report, you’ll have a better idea of what you need to work on to improve your credit.
It is very important to understand where you stand on the credit scale. Credit is monitored on a chart that ranges from 300-850 with 850 being the high end of the chart. This means that if you are looking at a score that is on the lower end then you are certainly in a situation where you will need to build some credit in order to be able to use it to your advantage.
Ultimately, credit breaks down into four categories that are based on your specific credit score. These categories are listed below.
- 300-629: Bad
- 630-689: Fair
- 690-719: Good
- 720-850: Excellent
Ideally, you should be shooting to get as close to 850 as possible. This will help you when you are looking to finance a car, move into a new home or apply for a credit card. In order to be able to propel yourself towards these numbers let’s take a look at the mindset that is needed for credit.
Cultivate the Mindset
The game of credit is a long-term commitment. If you are in a situation where you find that your credit score is either below average or not quite where you want it to be then you are going to have to create a plan that will allow your future self to thank you.
Make sure you are setting realistic expectations as this is not something that will happen overnight. Even if you pay off all of your credit in a day this will still take some time to build up points.
The best way to cultivate this long-term mindset is to simply look at the bigger picture here. Take inventory of your goals, do you have aspirations of making a big purchase like a house or a car? Those purchases are going to require a credit check and the better your credit score is, the easier the purchase will be.
This inventory of your goals will consistently remind you that what you’re doing is worth it and you should stick to building your credit for the long run because, as mentioned above, credit is a long-term game.
Start Paying Your Bills on Time
One of the best and fastest ways to fix your credit score for free is to consistently pay your bills on time. If you are frequently late paying key bills, such as your mortgage and car payments or utilities, it can have a significant impact on your credit. In addition to any late fees you may incur, the lenders and other companies you do not pay on time often report your late payments to the major credit agencies as well, which is important to know.
Your payment history, or how well you pay your bills, accounts for about 35 percent of your overall credit score. If you can improve your ability to pay bills on time – by utilizing something as simple as a calendar, or perhaps by using an automated bill-paying service – you can begin to rapidly improve your credit.
Pay Down High Credit Card Balances
The average American who carries a balance on their credit cards from month to month has over $6,200 in credit card debt. Those high credit card balances can be a real drag on your overall credit score. If you want to improve your credit score fast, work to reduce the balances on those cards. If you feel your credit card debt is too high to address on your own, then get some help.
In some cases, a debt consolidation loan can enable you to streamline your credit card debt, lower your monthly interest fees, and make that debt more manageable. In other cases, it may be helpful to discuss your situation with a nonprofit credit counselor and figure out the best way to address your debts. However you do it, lowering your overall credit card balances will definitely help you improve your credit score.
Utilize Your Credit
To fix your credit score, you have to use your credit regularly as well. While it may seem counterintuitive, the credit reporting agencies that designate your credit score need to see that you are currently using your credit effectively.
So, if you typically use cash or your debit card for most of your daily transactions, start substitution your credit cards for some of these purchases. Don’t buy any big-ticket expensive items on credit that you’ll have trouble paying off; this could lead to higher balances on your cards and drag down your overall credit score. Instead, consistently use your credit cards for small routine purchases and pay off the balance each month, and you should see a modest but steady rise in your overall credit score.
If you keep cash at hand while using your credit card, then you can simply pay the credit bill at the end of the month. All you have to do is make sure that you have cash in your checking account at the time of swiping your credit card. Put that amount to the side and make sure to pay it at the end of the month.
This is going to benefit you in the long run in two ways. For starters, you will be able to build a solid credit score that is going to help you with future endeavors. The second way is the ability to accumulate some cashback over time. When you swipe a credit card there is often a percentage of your purchase that can accumulate as cashback, or rewards.
Cashback is cash that you can save up over time and then transfer to your bank account to use as you please. So, if you only swipe your credit card with cash at hand then you will be keeping your credit utilization balance low while stacking up some cashback without spending any extra money.
Take out a Credit Builder Loan
If your credit score is so bad that you cannot even qualify for a new credit card, you can improve it by taking out a credit builder loan.
Many banks offer loans specifically designed to build up a borrower’s credit. In most cases the bank will issue a small loan to the borrower, then put the funds into a secure savings account as collateral.
The borrower then pays the loan off in monthly installments, usually at favorable interest rates. Once the loan is completely paid off, the bank releases the funds to the borrower.
This process can help to rapidly improve your credit score so that you can qualify for other types of credit. So, if your credit score is really bad, find a bank that offers these types of loans.
Bonus: Understand What Determines a Credit Score
There are a handful of things that go into determining a credit score. Though there are two of them that make up the majority of your credit score. These two would be the revolving utilization and the billing history.
Understanding what makes up your credit score is another way to gain an advantage in your financial life due to the fact that you are putting meaning behind these numbers which will ultimately make you think of them more consciously. It is easier to fix your credit score when you know how credit scores work.
Revolving utilization refers to the amount of credit that has been used and not paid back yet. Simply put, this is just how much money you owe the credit company. For example, if you have an overall credit line of $1,000 and your available credit is sitting at $750 then you have a revolving utilization of $250 or 25%.
This example is a good scenario, it is recommended that revolving utilization should be kept under 30%. Ideally, you want to keep it even lower than that, but you should never allow your revolving utilization to sit over 30% for an extended period of time as this will hurt your credit score.
Billing history is the history of all of the credit bills that you have paid. If you have a history of missing payments or paying late then this will have a negative impact on your credit score. In order to avoid missed payments do whatever you need to do, this could mean reminders on your phone, post-its on the refrigerator, or anything in between. Billing history makes up a significant portion of your credit score so it would be best to always make sure that those bills are paid on time.
There are some other factors that come into play when determining a credit score. One would be the length of your credit life. If you have had credit for an extended period of time then the credit companies can make a more thorough investigation of your numbers, like do you have a history of paying your credit bill on time? If you have a long history of paying on time, then this will benefit your overall credit score.
Another one that is a little more minute but certainly a factor is credit inquiries. This is essentially applying for any kind of loan. If you apply for an auto loan through a bank there will be a slight ding to your credit. This is certainly something to be mindful of but it’s not something that will really make or break your score.
Parting Thoughts: How To Fix Your Credit Score
A bad credit score can really hold you back from achieving your financial goals. If you are finding yourself in a position where your credit score is below average, you should take immediate action. Take action even if you are not looking to make any big purchases right now because as mentioned early in this article, credit is a long-term game.
If you start building your credit score back up, then you can be in a much better spot 6 or 12 months down the road. You can afford yourself the ability to move into a nicer home, sign on a car that isn’t breaking down all the time, or even affording yourself a luxury of your choice. Credit is often looked at as an afterthought to savings, but if you have savings and credit both working for you then you are on track to a successful financial life.
So, if you have a bad credit score, get on the right track as soon as you can. Use these tips to assess your credit and begin fixing your credit score today.
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