Your credit score is an important piece of your financial history. It is a significant factor in your ability to receive optimal mortgage rates, apply for credit cards, and make important financial decisions.
A healthy credit score reaches even farther past the ability to receive decent loan rates — they also confirm your history of paying off debts, which lenders typically look for to determine if you’re a suitable candidate.
Often, borrowers struggle with their credit scores due to overspending. When you live outside your means, you can become dependent on credit cards or forget to pay off student loans, and your credit score suffers as a result. With a lower score, you risk losing out on important loans since you’ll likely be seen as a risk from creditors and investors.
The good news is that there are ways to turn your credit score around. Rebuilding your finances takes time and dedication, but the rewards are worth the effort.
If you’re looking to improve your overall credit score, follow our guidelines and take the steps to healthier spending and saving.
Consider Consolidating
Juggling multiple payments can be challenging — whether you’re dealing with outstanding student loans, mortgage payments, or credit card balances. When you’re working and trying to pay off multiple high-interest loans, it may be helpful to look into debt consolidation.
Consolidation is the process of paying off several debts with a singular lump sum, often in the form of an alternative loan. Through this process, borrowers can pay off their high-interest debts and focus on smaller payments that are easier to pay down.
Finding an installment loan even with bad credit is often feasible through alternative lenders, who are there to help borrowers relieve their short-term financial hurdles. Once you’re able to relieve your immediate financial burdens, you’re in a better position to show your creditors you can make your payments, slowly raising your credit score over time.
Pay Regularly and Pay Often
One of the simplest ways you can improve your credit score is to make regular payments on all of your loans and credit cards. Any other strategy will be ineffective if you’re unable to make your payments on time. Your payment history is the most significant factor in how your overall score is determined — late payments can negatively impact your score for years to come.
Regular payments should be of at least the minimum balance, but if you can afford to save money in other aspects of your budget — from using coupons to shop for groceries to enjoying fewer nights out at restaurants or shopping secondhand — you can use those extra dollars towards outstanding payments. The larger payments made each month, the quicker you’ll be debt-free and can continue to take steps to rebuild your credit score.
Additionally, instead of making one payment at the end of each month, paying bi-weekly can significantly improve your score and lower your credit utilization — which is the amount of available credit you use in a percentage. This is calculated by adding the total balances of all your credit cards and dividing the number by the total of each credit limit, though it can also be calculated on a per-card basis.
If you can keep your utilization percentage low rather than letting it build towards your payment due dates, it can benefit your score almost instantly.
Keep Your Credit Cards
While it may seem counterproductive to have multiple cards open, closing them may do more harm than good. When you close a credit card, you lose that particular card’s credit limit when your utilization is calculated — this can actually lead to a lower overall score, particularly if the cards you’re cancelling have a higher limit.
If you’re tempted to close your card due to higher monthly or yearly fees, consider calling the credit card company and negotiating a more realistic rate. Then, you can use the card sporadically as needed — it’s recommended that you only use 30 percent of your available credit.
Try the Cash-Only Method
Credit cards are a constant temptation for spending, especially if you have higher limits. Rather than risk going back into debt, a cash-only budget has been proven to help consumers streamline their spending. This type of budget is a low-maintenance way of tracking your spending, so you rely less on your credit cards.
Often paired with the envelope system — which involves setting aside envelopes for each spending category — a cash budget helps teach spenders financial discipline. The important thing to remember with this budget is that you still need to utilize your credit card in order to maintain a healthy score, but it should be done so with discretion. For example, if you have money set aside for groceries in one of your envelopes, you can use your card initially and then deposit the cash and pay off the card immediately. It’s all about finding a healthy balance.
Diversify Your Credit
When you only have one type of credit — exclusively credit cards, for example — it can hurt your overall credit standing. Improving your credit mix is a helpful resource in building and maintaining a better score. Your mix often includes things like car payments, student loans, credit cards, and mortgage payments. These make up approximately 10 percent of your overall score and when paid on time and consistently, can help your credit score.
Practice Patience
It can take approximately three to six months to see changes in your credit score through healthy payments and consistent behavior. Unfortunately, it’s difficult to make any instant changes to your score, which is why patience is one of the fundamental ways to see improvements. Remaining committed to the process and improving your spending and saving habits will undoubtedly be rewarded in the future.
Once you are on your way or have reached your credit goals, you should have the foundation you need to continue making the right decisions — so that moving forward, you’ll be seen as a healthy investment for lenders and creditors.