No matter what, you’re not ready to make financial moves until your credit is in good shape. Even if you’ve got money in the bank, you must improve credit before you consider applying for loans, buying a house, or refinancing anything. This is the only way to get good rates and terms. Here are some strategies for improving your standing.
Strategies to Improve Credit
- Paying Down Debts – A large factor in determining your credit score is your credit utilization ratio. In simple terms, this is the amount of your outstanding debt vs. your total available credit. Going above 30% credit usage signals financial trouble. If you reduce or eliminate debt, then your ratio improves and your score goes up. This requires borrowers to make payments that are larger than the minimum amount due.
- Stop Using Credit Cards/Keep Balances Low – Reducing debt is pointless if you’re adding it right back on a different card. If possible, switch to a cash budget to help control spending and avoid new debt. Also, don’t open new cards since each credit application will ding your credit score.
- Become an Authorized User on Someone Else’s Account – If you know someone, like a parent or spouse, who’s a responsible card holder with good credit, becoming an authorized user on their account will gradually improve your credit. This only works if the account you join is kept current and with a low balance and no late payments. You don’t need to actually use the card or access the account if the person is not comfortable with that. Just being listed as an authorized user will boost your credit thanks to their positive credit activity.
- Don’t Close Old Cards – You might think it’s smart to close cards after you pay off debts, but doing this hurts your credit utilization ratio. Instead of closing cards, just leave them at home while you continue to implement your debt reduction plan. This is especially smart because older credit card accounts look better on your credit report.
- Be a Responsible Borrower – Staying current on your debt repayment is critical for more than just maintaining your credit score. Your credit history follows you and affects your life drastically. Be sure that you’re making payments on time and staying current on all of your accounts. Budgeting effectively will ensure that you’re able to manage credit card debt and other payments. If you find yourself struggling with debt in spite of budgeting efforts, it may be time to research debt consolidation options.
Additional Tips for Maintaining Credit Health
One additional way to maintain or improve credit is to access and consistently monitor your credit report. This allows you to track fraudulent activity or correct reporting errors that can have a negative impact or your credit. The Fair Credit Reporting Act guarantees you one free credit report per year from each of the 3 main credit reporting bureaus (that’s three total free reports per year). You can access your reports for free at AnnualCreditReport.com. Spread out when you access your three reports by a few months to consistently monitor your credit all year.
Finally, signing up for a free service, like CreditKarma, is a great way to monitor your credit report and score as often as you want. This way you can constantly track accounts to make sure you’re making payments to everything on time. Watch for accounts being opened in your name or other indicators of identity theft.