Building credit is very much like losing weight – getting there takes a lot of time and work. On the other hand, quick solutions may lead you into a trap and leave you worse off than you were before. But if you are worried about your credit situation, that’s a start – a lot of Americans aren’t even aware that they are in trouble until they have to apply for a mortgage or get a car loan. But if you are determined to make things right, you’ll eventually succeed, and the process is not that complicated. If you follow these 4 simple tips, you may get from bad to excellent credit. Read on and keep in mind.
1) Check Your Credit Report
First things first, you need to know where you are now. Start by checking your credit report. You are entitled to one free credit report from each of the three major credit reporting agencies every year. Take note of the things that hurt your credit score. Be attentive – a credit report is not flawless, it just contains data used to calculate your credit score and it may contain errors. In particular, there may be false late payments or the number you owe on each of your accounts might be incorrect. If you see an error, dispute it.
The next thing is a careful analysis of what hurts your credit score, so learn your credit score (you may have to pay a fee for it). Bear in mind that your credit score consists of several things that affect it to a different degree. Some things have more weight than the others. In the pie chart below, you’ll see which things have the most impact.
2) Get Rid of Your Debt
If you’ve studied the chart thoroughly, you’ve probably noticed that credit utilization makes up a large portion of your credit score – specifically, 30%. It’s almost a third of the whole thing! Credit utilization ratio is the amount of your balance divided by your credit limit. In other words, it’s how much you owe. The more debt you have, the less likely you have a good credit score. The perfect utilization ratio should not be over 30%. So, how do you remove debt?
Pay more than the minimum payment. Paying the bare minimum each month lets you shake off the thought of your debt for another month without consuming a lot of resources, so in the short run it may seem like a good way. However, as the APR takes effect, the interest is added to your balance, enlarging it drastically. As a result, your balance grows like a snowball each month, and one day the interest may exceed your initial balance. However, you may easily prevent this if you pay more than the minimum each month and don’t let the interest grow.
Tackle your worst credit card first. As we already established, your credit utilization is a proportion. So if you take out the most affecting part of this proportion, it’ll change for the better. Try get the credit card with the most debt out of the way first, and your overall debt-to-credit ratio will lower. Besides, a large debt is likely to collect more interest.
3) Get a Secured Credit Card
With a bad credit score, you’re likely to face a dilemma: you need a credit card to build credit, but banks won’t approve you for a regular credit card with a bad credit score. But there’s a way around that. Secured credit cards are meant for building credit and are very easy to use. For a secured card you’ll need to pay a security deposit that is usually equal to your line of credit. That is, if you need to pay upfront $200, you’ll have a credit limit of $200, but once you close the card, you may get your deposit back. Not very attractive? Consider this not a real credit card, but a tool to improve your credit. Below you can see and compare a range of secured credit cards and choose the one for you.
4) Avoid carrying balance
Remember the pie chart? The second thing that affects your credit severely is your payment history. It takes 35% of the whole. Payment history is the information on how you pay all your bills and if you pay them on time. Until you reach at least fair credit, consider all your credit cards just means of showing credit bureaus and credit card issuers that you are a responsible consumer. You need to lead an exemplary financial life without any mistakes. Most importantly, once you’ve dealt with the old debt, don’t accrue the new one. Never carry a balance on any of your credit cards. Pay off all of the balance by the due date each month. Never be late with your payments, because that way you’ll lose a lot of points and bring a late payment fee on yourself. To make things easier for yourself, you may just charge a small amount each month and pay it off at once. Try to carry this style into your future life – even when you improve your credit you’ll gain a lot from your habit of not carrying your balance from month to month and escape a lot of problems. And while your credit is far from perfect, this is crucial.
5) Upgrade to an Unsecured Card
As soon as you are free of your debt and have improved your credit score, you can sigh with relief and move on to better opportunities. If you have a secured card of one of major banks, you may ask for an upgrade to a regular card. Or you can just choose another regular card for bad credit that won’t make you pay a deposit. Here are some of our picks:
This credit card allows consumers with all types of credit to apply. You can easily use it to improve your credit score hassle-free. It also reports to all three credit bureaus. It’s accepted virtually everywhere because the payment system it uses is Mastercard. What separates this card from the others is the big initial credit limit – it starts from $500 right after approval.
This card is an online store credit account. You can get approved for it even if your credit is bad or you are rebuilding your credit. The account will give you access to a quite high line of credit of $500. Of course, the card can only be used at an online outlet, but make sure you are using the account responsibly as your payment activity will be reported to Equifax.
This card is a good option for people with bad credit. It is an unsecured card meaning that you can use it right away without paying a deposit. It is a Visa card, so it is accepted everywhere Visa is accepted – so there won’t be any problems. It reports to all three credit bureaus and therefore it is good for building credit.