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There are multiple strategies you can use to build your credit from scratch or to rebuild it after your scores have taken a hit. The first thing you should learn before you start working on your credit scores is how your scores are calculated. Credit scores show how risky you are for lenders (how likely you are to repay your debt and pay bills). A good credit score means lower interest rates and a bad credit score means higher interest rates and hard times to get approved for new loans.
When you understand credit scores, you can start taking specific steps that can help you improve your scores. Of course, your strategy should be based on your unique situation. But there are some general steps that can help almost anyone's credit:
- Build your credit file: no credit history, thin credit file or damaged credit can be improved to good and even excellent credit. To do that you will need to open a new credit account that will report to major credit bureaus: credit builder loan, secured credit card, or an unsecured credit card that is right for your credit rating. Try to look for no annual fee credit cards to minimize your expenses.
- Don't miss payments: your payment history is extremely important, therefore it's crucial to always be on time with all your monthly loan or credit card payments on all your credit accounts. You can set up automatic payments or reminders to make sure you don't miss a single payment.
- Catch up on past-due accounts: if you have credit accounts with late payments, try to catch up on all payments. Having all your accounts current can be good for your credit scores.
- Reduce revolving account balances: high balances on credit card accounts can lead to a high credit utilization rate, which can hurt your credit scores. It is recommended to use less than 30% of available credit on each revolving credit account. Those with high credit scores tend to keep their credit utilization ratio below 10%.
- Limit new accounts: it does not mean you should not open new credit account when you need them, you just need to limit how often you submit credit applications. Each application results in a hard inquiry in most cases, that may hurt your credit scores. Opening a new account will also decrease the average age of your credit accounts, which can also lower your credit score.
If you already have active credit accounts, use them to improve your credit score.
While you are following these steps and use your credit accounts responsibly, keep in mind that it takes time to build or rebuild your credit. Do not expect fast results, but you may notice some changes in three to six months. As you rebuild your credit, you will need to monitor your credit reports and credit scores to make sure you do everything right and act fast if something goes wrong.
