7 Tips For Improving Credit

Approximately one-third of Americans have what is considered poor or fair credit.  While the easiest way to repair your credit score is to avoid situations that can cause your score to go into disrepair in the first place, it’s quite easy to fall into the debt trap.  

Starting with one credit card at a young age can quickly get out of hand if you don’t practice good financial management.  Retailers, in particular, like to market their purchase discounts if you apply for their credit card.  And if you rack up a large balance and only make minimum payments, those discounts will be outweighed by interest costs, making the balance hard to pay off. Then one day, when you’re older, you may find yourself wanting to buy a new home or a new car, and you’ll be turned down, or you’ll be offered a loan with an exorbitant interest rate.

Avoid What Causes Credit Scores To Fall

Before we explore the ways your credit score can go higher, it’s important for us to point out the four main activities that highly plague this important number.  In fact, if you have a young family member or a friend, you might want to share this information with him or her, so the American dream of homeownership can be theirs one day.

1. Missing Payments – Making and missing payments is the largest factor that affects your credit score.  On-time payments will help your score rise, but making payments 30 days past their due date can drop your score as much as 100 points.  
2. Using Too Much Available Credit – Just because you might have a large line of credit, that doesn’t mean you need to max it out.  In fact, a lot of unused available credit helps your score.  The magic number is 30%, so if you are using more than 30% of your available credit, you’re not doing your credit score any favors. If you use a card to take advantage of points or cash back, that’s fine, but be sure you’re able to pay off the balance in full each month.
3. Applying For a Lot Of Credit In a Short Period Of Time – The easiest way to build your credit score is to apply for one credit card, and then only use 30% or less of your available credit.  But if you apply for multiple credit cards in a short span, that could suggest you are a riskier borrower.
4. Defaulting On Accounts – Missing enough payments on an account to where the lender cancels your agreement can be catastrophic to your credit.  In addition, the default could have legal ramifications.  And even if you do pay the account in full, the payment history will still be reflected on your report for several years.

Be Proactive In Improving Your Credit Score

Unfortunately, “if you ignore it, it will go away” is not a phrase that applies to credit scores.  If you find yourself in the one-third of Americans with a credit score that is undesirable to lenders, don’t fret.  There are ways of improving your number, but it’s going to take some work on your part.  

1. Check your Credit Score & Report – Your credit report contains information about how you’ve used credit in the past 10 years.  You have one credit report at each of the three bureaus: Equifax, Experian, and TransUnion.  Most creditors report to all three, but not all, so it’s worth checking the information on all three of these reports.  Your credit report is used to calculate your credit score, and it’s important to check this too.  You can check your credit score for free through credit score websites or some credit card providers.  Checking your own score only requires a soft credit inquiry, which doesn’t damage your score. We recommend checking your score once per month…especially if you’re anticipating a purchase where financing will be needed.
2. Fix or Dispute Any Errors – Unfortunately, credit bureaus sometimes make errors. According to one study by the Federal Trade Commission, one-fourth of the reports included errors, which caused more costly loans for some people.  So while knowing your credit score and what’s included on your credit report is a good first step, it’s also crucial to look for errors.  If you spot any, it’s a relatively simple process to dispute those errors and have them removed.
3. Always Pay Your Bills On Time – Your payment history makes up 35% of your credit score.  So if you want to fix your credit, you should focus on ironing out your monthly payments.  While it may feel like a challenge to pay all of your bills on time, you might look into autopay.  For bills that don’t permit autopay—like one-off medical bills—pay them as soon as you get them.  If you can’t, contact the office and work out a payment plan.  Worried about overdrawing your account?  We recommend setting up a budget and/or scheduling your autopay for the same time you get paid.  In fact, you may be able to get your due date changed to better align with your income.
4. Keep Your Credit Utilization Ratio Below 30% – Your credit utilization ratio is measured by comparing your credit card balances to your overall credit card limit.  Lenders use this ratio to evaluate how well you manage your finances.  As mentioned earlier, a ratio of less than 30% and greater than 0% is generally considered good.  For example, let’s say you have two cards with individual credit limits of $2,000 and $500 of unpaid balances on one card. Your credit utilization ratio would be 12.5%. In this case, total your debt owed ($500) and then divide that by your total credit limit ($4000).
5. Pay Down Other Debts – If you have outstanding debts, paying them off can help improve your payment history and reduce your credit utilization ratio.  When planning to repay your credit card debt, consider the debt avalanche or snowball method.  The debt avalanche method focuses on repaying your high-interest cards first while the snowball method focuses on repaying your smallest balances first.  Evaluate both to determine which method is best for your situation.  If you plan to repay loan debt, it’s important to note that you might see a temporary dip in your credit score.  But rest assured, this will improve your credit score in the long term, according to Experian.
6. Keep Some Old Credit Cards Open – You might be tempted to close old credit cards when you’ve paid them off.  However, don’t be so quick to do so (unless it charges an annual fee).  By keeping them open, you can establish a long credit history, which makes up 15% of your credit score.
7. Don’t Take Out Credit Unless You Need It – Each time you apply for credit, your creditor will run a hard credit check.  This can drop your score by one to five points.  In addition, it will lower your average account age, which can also drop your credit score.  So, as a rule of thumb, try to avoid applying for credit unless you really need it.

For all of the latest information on our local real estate market in Southwestern Indiana, you can always trust the professionals at F.C. Tucker Emge. Our agents have superior training and resources at their disposal so they can better educate you about the road to homeownership. Even if you are 6-12 months (or more!) out from making a change, there is a lot to learn about the home buying and selling process, and our agents can help you learn what you need to know so that you can be confident in your decision and have a smooth experience when the time comes. Let’s Talk!