A credit score is a reflection of your creditworthiness, and a good credit score is indicative of financial health. It serves as a benchmark for a lender to assess how you are with credit and what risks they’re willing to take based on your history. A good credit score can increase financial opportunities and savings, leading to easier approval for loans or lines of credit with lower interest rates.
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But what if you don’t have a good credit score? Sometimes unforeseen financial difficulties can take a toll on your credit score, leaving it less than ideal. Or maybe you’re just starting out and don’t have a credit history yet. These factors can lower your credit score, making it harder to obtain loans or get out of debt. Though it can seem difficult to correct this, there are simple steps you can take to improve your credit score and be on the road to financial health.
1. Make Payments on Time
Payment history is a key factor in determining your credit score. Your score is comprised of five components:
- Payment history
- Credit usage (current level of debt)
- Age of credit accounts
- Credit mix (types of credit used)
- New credit inquiries
Payment history accounts for the highest percentage of your score. If you’re late or miss payments, this will lower your overall score.
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If you want to improve your credit score, make a plan to make payments on time. There may be various factors leading to late payments, from having more expenses than income to difficulty in managing various monthly bills with different due dates. Whatever the reason, avoid late payments as much as possible. If you’re having difficulty remembering which bills are due on which days, consider setting up automatic payments from your checking account. If you prefer to make payments manually, program alerts on your phone as a reminder.
Of course, bill management may not be a simple solution if a bill is due and there isn’t enough money in the account to cover it. In today’s economy, it can be difficult to afford daily expenses. If you’re struggling to afford payments, contact your lender about hardship options.
2. Build Your Credit File
Not everyone has an extensive credit history. If you are at the beginning stages of financial independence, live mostly on cash, or buying outright, you will have little to no credit history. Someone just starting out has a “thin credit line” because they may have never taken out a loan or used a credit card. Without past activity of using credit, you won’t have enough credit history to receive a credit score.
If this is the case, you will need to begin building a credit file, which will boost your score. A good place to start is by opening several accounts and keeping them active while making timely payments. Keeping a card active doesn’t mean you need to start overcharging the accounts with money you don’t have. Instead, you can take your usual monthly bills and start charging them to your credit cards. Then, pay the balance in full each month so you’re not charged any interest. This works best if you’re spending money you already have—that is, making purchases that could be immediately paid in cash or with a debit card. That way, you’re spending money you can afford and intend to spend. When a payment is due you have the funds to pay it in full and on time.
There are also programs available that will collect and report financial data that are not typically used in calculating a credit score. This can include banking history, utility payments, and even paying rent. If you have a good history of making these payments on time, programs such as Experian Boost and UltraFICO can help build a credit score.
3. Don’t Close Down Old Accounts
If you have an old account you have paid off and are not using, it can be tempting to close down the account to simplify account management. However, one of the contributing factors in determining your credit score is the “age of credit accounts.” The longer you have had credit, the better your score. This means an old account can increase your average credit age and improve your overall credit score.
4. Consolidate Debt
If you have multiple forms of debt and are struggling to pay them off, you may consider consolidating your debt into one loan. Credit unions typically offer debt consolidation loans at lower interest rates, which may be advantageous to paying off your loan faster and improving your credit utilization ratio, which factors toward a good credit score.
If you’re looking to build credit or improve your credit score through debt consolidation, consider choosing Central Willamette Credit Union for your financial journey. We’re all about serving our members so they can easily manage their money. Turn to us for great rates and friendly service.
5. Avoid Applying for Too Many New Accounts
Though it may be necessary to open a few accounts to build a credit file, submitting too many credit applications during a short period of time can have a negative impact on your credit score. Applying for a new credit card, mortgage, or auto loan is considered a “hard inquiry” into your credit history. These don’t always affect your credit score too much, but if you apply for a lot in a short period of time, it may communicate to a lender that you’re having financial difficulty and therefore are a risk. If your goal is to improve your credit score, try to avoid applying for new credit until you have achieved your desired good credit score.
If you follow these simple steps, you will be on track to building or improving your credit score. With some intentional planning and a little time, a good credit score can be within reach of helping you achieve your financial goals.
You can also read: How to Side Hustle Your Way out of Debt
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Author: John Mulindi
John is very passionate about digital marketing. He blogs on topics ranging from social media marketing (SMM), search engine optimization (SEO), search engine marketing (SEM), Internet marketing, email marketing, business, tech, entrepreneurship to personal Development. In free time he likes watching football, reading, listening to music and taking nature walks. View all posts by John Mulindi
