If your credit score is below 620, you know how tough it is to get a loan or a credit card with reasonable terms — that is…if you can even get them in the first place. It’s a well known fact that lenders will give people with good credit scores lower interest rates on mortgages, car loans and credit cards. Even if you swear you’ll never get a loan or use a credit card, a bad credit score could affect your life in many ways — for example, your ability to rent an apartment, get a good insurance policy with low premium, get certain jobs, and more.
There are millions of people in the United States that have bad credit scores, and if you’re one of them, you’re probably wondering what you can do to raise yours. Improving your credit rating is not as hard as you think. You can start your journey toward a better credit score by following these steps:
Review Your Credit Report and Fix Problems
First, request a copy of your credit reports from the three bureaus via AnnualCreditReport.com — this is absolutely free once per year per bureau.
If you find any error, write to the bureau and ask them to fix the problem. You might also want to contact the lender who reported the error. Some lenders will help you correct the problem on your behalf.
Pay Down Your Debt
If you owe a lot of money, it could negatively affect your credit score — not to mention the negative impact on your finances because of all the finance charges you’re paying.
To pay down your debt, first prioritize them base on the interest rate — also consider whether or not it is tax deductible. Your goal is to pay them off as quickly as possible, starting with the highest interest rate debt that is not tax deductible and work your way down from there.
Take a look at the Debt Snowball method for more information.
Do Not Close Your Accounts
One of the common myths is that you should close your credit card accounts once you pay them off. Unfortunately, one credit scoring factor is the length of your credit history. If you close your credit card accounts, especially ones that you have for a long time, you could hurt your credit score. A better solution is to put these credit cards away and keep the accounts open — assuming you’re not paying any fee to keep them around.
Do Not Apply for a Credit Card or a Loan
If you know your credit score is so bad that it’s unlikely your loan or credit card application will be approved, then don’t do it! When you apply for a credit card or a loan, the credit card issuer or lender will do a hard credit pull. Too many pulls and denials will hurt your score.
Just hold off on credit card and loan applications until your score gets better.
Build Good Financial Habits
As you work on your debt, make sure you pay all your obligations on time. This includes your rent and other bills. Although many service providers do not report the late payment to credit bureaus, paying on time is a good habit to get into.
Moreover, work on other good habits such as improving your career, building an emergency fund, starting and maintaining a budget, and so on. All of these things will help you improve your overall financial health.
Be Patient
Some problems are easier to fix than others. If your bad credit problem is severe — e.g., you declared bankruptcy or had a tax lien — it will take a long time for your credit rating to recover…sometimes, a decade or longer. The best you can do is practice sound financial habits and let the bad mark runs its course. In the mean time, just do your best to improve your finances and things will eventually come together.