A poor credit score can significantly hinder your ability to improve your quality of life. Bad credit causes us to overpay for almost every major asset we will ever own. A person with a low credit score will pay significantly more for housing, cars, and many other types of credit.
Some people may think they cannot improve their credit score without a high income, but this is not the case. Many years ago, I drastically improved my credit score while my family lived on one income under $50,000. This article outlines the steps you need to follow to begin building your credit.
Get a Copy of Your Credit Report and Score
Understanding your credit standing is the first step to building better credit. While many websites provide a version of your credit score, the FICO scoring model is the most widely used. Over 90% of creditors use the FICO score to make their credit decisions. For this reason, I highly recommend that anyone on a credit journey invest in their FICO scores at least twice a year.
If you do not have the money to pay for your FICO score, you can still evaluate your credit standing by reviewing your credit report for free. Annualcreditreport.com offers a free copy of your credit report without the score. It is the only website authorized by the government to provide free annual credit reports.
Find and Address Inaccurate Information
The first step to improving your credit score is resolving any negative or erroneous information on your credit. If you have fraudulent information on your credit report, you should dispute this with the credit bureaus. When you open a dispute with the credit bureaus, the collection agency must stop collecting the debt until they prove its legitimacy.
Create a Budget and Stick to it
Bad credit is often the result of a mismanagement of finances. At some point, your spending outweighed your income, resulting in debt or missed payments. Creating a budget will help you tackle your financial problems at their source. A budget gives you a clear view of your financial picture. It allows you to map out your monthly expenses so that you can avoid missed payments and surprises.
Get Back into the Credit Game
If your goal is to improve your credit score, you cannot do this without having some credit. Once you have gotten your debt under control and are financially stable, you can start the rebuilding process. If your credit is less than 620, you may find it difficult to obtain traditional credit cards. This is where secured credit cards come in handy.
Unfortunately, secured credit cards often come with upfront costs and low credit limits. However, they are a great way to get your feet back into the credit door.
When searching for a new credit card, avoid adding too many inquiries to your credit report. This will have a negative impact.
Pay Your Bills on Time
If you follow the steps in this article, you will find that your credit score will begin to gradually increase. After all, 35% of your credit score is determined by your payment history. Even one missed payment can wreak havoc on your score and push you backward in your credit journey. Here are a few tips that help me to avoid missed payments.
- Set up autopayment of the minimum due. I strongly suggest paying your credit cards in full each month. However, setting up autopayment of at least the minimum due will help you avoid a missed payment.
- Check your balances each month. Even if you don’t use your credit cards, it is a good idea to check the balances each month. This is a good way to spot fraud and to catch any charges that you may have forgotten about. You wouldn’t want to miss a payment due to a $4.99 charge that you made on your mobile phone.
Be Patient
Building your credit is not an overnight process. While it may only take six months to a year to increase your score to qualify for better rates, it is best to think of credit as a lifelong commitment to making better financial decisions.
think of credit as lifelong commitment to making better financial decisions.
Your scores will fluctuate often depending on how you use the credit available to you. Reducing balances, paying off debt, and consistently making on-time payments will increase your scores. However, using more of your credit, applying for new credit, or financing a major purchase (such as a home or car) will decrease your score.
Avoid Falling Back Into the Credit Trap
When I first began improving my credit, I joined a well-known credit forum to get information on increasing my score. After some time, I realized that the people on this credit site had developed a competition of sorts. It became less about improving credit and more about having the best credit cards or the highest scores.
I found myself applying for credit that I didn’t need simply to “celebrate” my higher credit score. I eventually left that forum because I felt it was doing more harm than good.
The lesson
Once you start improving your credit score, you’ll find that you have access to more credit opportunities. It’s tempting to buy things you don’t need or can’t afford just because you have the credit to do so. But it’s important to be disciplined in how you use credit.
Imagine walking into a dealership and having the car dealer tell you, “You can have whatever you want.” I have experienced that! And, while it is nicer than having the dealer tell you, “You need a cosigner” (something I also experienced during my bad credit years), it is easy to get trapped into purchasing things you don’t need or cannot afford simply because you can.
One bad purchase can have you tumbling down the hill of poor credit again. So, it is best to be disciplined in how you use credit.
Remember that credit and credit scores are merely tools creditors use to assess the risk of lending you money. While creditor should also care about your income, they are often more concerned with their bottom line, so it is up to you to ensure you are not overextending yourself.
Happy Credit Building!
