Your credit score is often used to signify your ability to repay loans and lines of credit on time, and having a low credit score can come with a number of negative effects on your finances.
If you currently have a low credit score, you should be aware that you can improve your credit score if you are patient and disciplined about your finances. Depending on your current situation, the most effective method for improving your credit score can differ.
For example, if you currently do not have any credit history, you will be required to build your credit from the ground up. On the other hand, if your credit score is already low, you will need to repair your credit using a number of different methods ranging from paying off old debts to fixing mistakes on your credit report. Read more to learn the most effective methods on how to improve your credit score.
Basics of Improving Your Credit Score
Before you begin working towards improving your overall credit score, there are a few basics you should be aware of. For one, your credit score will not improve overnight. In fact, many consumers with a low credit score require a long period of time, sometimes several months or years, in order to improve their credit. Depending on the type of credit you have, it can take a differing amount of time to boost your credit score. Additionally, once your credit score is good, you must work to maintain your financial standing.
Another important thing to know is that not having any debt does not necessarily mean that you also have good credit. Since your credit score is calculated based on your individual credit history, you will be required to have some form of debt or credit in order to establish a credit history. Your individual score is not based exclusively on how much debt you have. Instead, it is calculated based on your history of paying off debt and credit in addition to the ratio of your debt to your income. For example, if your income is currently less than your debt, it may negatively impact your credit.
Working to Pay off Your Debt
One of the most effective ways for people with low credit scores to improve their financial situation is to pay off their debt in a timely fashion. Consumers who have a low credit score because they have maxed out their credit cards are encouraged to manage their spending habits and making regular payments on their debt. Those who can afford to make large payments towards their debt are recommended to do so in order to improve their credit score. Some helpful tips for consumers to maintain a good credit history and improve their score include:
- Speaking with a credit counselor who can help borrowers budget their resources to remove their debt.
- Making timely payments on all credit cards, loans and other credit payments, ideally more than the minimum requirement.
- Keeping a higher percentage of available credit by paying and lowering debt.
- Keeping low balances on credit cards.
- Paying off any bills or credit accounts that are past due.
Fixing Errors on Your Credit Report
Credit reporting agencies sometimes make mistakes on credit reports, which can cause borrowers to have a lower credit score than they should. These errors can arise from clerical mistakes such as incorrectly inputting date such as a Social Security Number or if the information from a person with a similar name was applied to the wrong account. Fortunately, these mistakes can be fixed by catching the mistakes and reporting them to the appropriate credit agencies.
The Fair Credit Reporting Act (FCRA) ensures that credit agencies and organizations are responsible for correcting any erroneous information on a credit report. When you first receive your credit report, you should check to see if there are any errors that you can fix to improve your score. Some common errors that are found on these reports include incorrectly reported late or misapplied payments. If you have adequate proof that these reports are incorrect, you can inform the credit reporting company by writing a letter, calling by phone or sending an online report.
One option is to inform the credit bureau of any inaccurate or incomplete information directly, so that they may begin to investigate the claim. Typically, credit reporting agencies will provide you with a new credit score report after the corrections have been made. The second option that you have is to report any errors to the organization the filed the initial incorrect information. Information providers are also required to investigate and correct data according to the FCRA. Once the organization identifies the error, they will then report it to the credit reporting agency. If you are looking to avoid any mistakes and expedite the process, you should inform both the credit bureau and the provider.
Note: If you find that the error has not been fixed, you can dispute the credit reporting company’s findings.
What if I do not have a credit score?
If you do not have any credit history to constitute a score, you will need to begin building your credit before you can receive a credit report. There are many ways to start, but applying for a credit card is one of the most common. For those under 21 years old, the best option may be to have their parents or legal guardians cosign their credit card. They may also list their parents as an authorized user of their parent or guardian’s credit card so they can begin to build their credit effectively.
Applicants who are older than 21 may prefer to open up a “secured” credit card with their bank. Secured credit cards are cards with limits that are established based on how much money you initially put down. For example, consumers who place $300 on their secured card will have a credit limit of $300. These types of cards establish easy and consistent payments which can be an effective way to build credit.