If you’ve made some financial mistakes or experienced life-changing hardships, your credit has probably suffered. The journey of rebuilding your credit score may seem long and difficult, but it is possible. You just need to know what factors go into your credit score and how you can impact them in a positive way.
Five components determine your credit score: credit utilization, payment history, length of credit history, credit mix, and new inquiries. Employing the right strategies based on your situation can put you back in control. Keep reading for tips on how to get your credit score back on track.
Diversify Your Credit
Taking a balanced approach to your credit portfolio can help improve your credit score. This combination is commonly referred to as a credit mix. Credit scoring models look for credit diversity, including installment loans, credit cards, mortgages, and retail store accounts. Having different types of credit shows you can manage accounts with a variety of terms. Both short- and long-term credit commitments provide more than just a snapshot of your repayment behaviors.
It can be a challenge to obtain new and diverse forms of credit when you are rebuilding your credit score. Some good options worth exploring are credit builder cards and credit builder loans. These financial products are designed for people looking to establish credit for the first time or those who need to recover their score. Credit builder cards and loans have terms that set you up for success and help you avoid common credit pitfalls.
Pay Loans and Credit Cards on Time
The first rule of credit score improvement is to pay your existing creditors on time. This simple action accounts for 35% of your credit score, making it the most significant factor. One way to ensure you’re on time is to set up automatic payments. Generally, revolving and secured debt creditors prefer that their clients pay this way.
Recurring payment options offer flexibility, often allowing you to choose your payment date and change the amount as needed. Of course, you’ll need to make sure you have the necessary funds in your account to avoid an overdraft. But the pros of making automatic payments generally outweigh the risks involved.
If you are currently behind on monthly payments, don’t ignore them. It may feel embarrassing to reach out to your creditors, but getting past your ego will pay off. After all, late or missed payments can stay on your credit reports for up to seven and a half years. So contact your creditors, even if you can’t make the minimum payment. Most will be willing to work with you on getting caught up, thus preventing further negative payment reports to credit bureaus.
Keep Your Balances Low and Available Credit High
How much you owe compared to your available credit — aka your credit utilization ratio — is critical to your credit score. The standard recommendation is to keep your balances at less than 30% of your combined limits. If your utilization rate is higher than 30%, create a strategic plan to pay down your balances. For the quickest results, pay as much as possible on the account with the lowest balance first. When applying this approach, remember to leave enough in your budget for life’s essentials.
Another quick way to make a dent in your utilization ratio is to request higher credit limits. If you have established a good payment history with a creditor, they may give you a higher spending limit. Most creditors make it easy to do this; you can typically request a higher limit online or by phone. Increasing your limits is one of the quickest ways to see a difference in your ratio — provided you don’t then increase your spending. If you want to move the needle on credit utilization, you need to maintain high limits and low balances.
Consider Piggybacking on Someone Else’s Good Credit
The concept of credit piggybacking involves tapping into the benefits of someone else’s good credit. You can pursue this strategy by asking a financially responsible person to be a co-signer on a loan. Lenders are more likely to approve a loan if it’s backed by someone else with strong credit, and you may receive better interest rates. Another way to piggyback on someone’s good credit is to become an authorized user on a credit card. Many credit cards also offer incentives to cardholders for adding an authorized user.
Only collaborate with trusted family members or friends and make sure they have an excellent credit history. It does you no good to associate your credit with theirs if their credit score or financial habits are also subpar. Because an authorized card user remains responsible for payment on the account, your collaborator will have to trust you as much as you trust them. Piggybacking only works when you keep up your part of the deal and partner with the right person.
Improving Your Financial Standing
It can be tricky to achieve a balance between taking care of daily essentials while working on your credit. Fortunately, you can use the strategies shared in this article for quick boosts and long-term improvements to your score.
Everyone’s situation is unique, and your credit score revamp plan should be, too. It may be wise, for instance, to add working with a professional to your plan. Credit counselors and financial advisors are trained to help you achieve your goals. The time you spend now carefully considering your options will pay dividends in the future.