While today's low interest rates make it a great time to borrow money for purchases such as a home, tighter lending requirements mean that only those with high credit scores can qualify for these rates, or in some cases even qualify for a loan at all. If a low credit score is holding you back, these 10 tips will help you get on the right track.
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- Pay on time.
Prioritize the payment of bills that show up on your credit report and set up an organized bill-paying system so that you won't miss a payment. Paying on time accounts for 35% of your credit score, so this is one of the easiest ways to improve it. (For more tips, see A Procrastinator's Guide To Bill Payment.)
- Pay more than the minimum.
The minimum required monthly payment isn't there to do you any favors - it's there to keep you in debt. Pay as much toward your credit card balance as you can each month, and pay down the cards with the highest interest rates first. Lower balances are better for your credit score.
- Prioritize your biggest debts.
Focus on paying down credit card balances that are higher than 50% of your credit limit. The amounts you owe make up 30% of your credit score, and borrowers who have used up more of their available credit are considered higher risk. (For more insight, see Expert Tips For Cutting Credit Card Debt.)
- Negotiate a lower interest rate.
With a lower interest rate, your pile of existing credit card debt won't grow as much every month, and you'll be able to pay down your balances faster.
- Keep your oldest accounts open.
The length of your credit history is 15% of your score, so even after you've paid down your balances, keep your oldest cards open. If you don't have a balance, use these cards to make occasional purchases (then pay the bills in full), so the card company won't close your account for inactivity. (To learn about what you need to consider in making this decision, read Should You Close Your Credit Card?)
- Stop opening new accounts.
Having lots of recent inquiries on your credit report dings your score temporarily. If you're planning to apply for an important loan in the near future, don't apply for anything else.
- Pay for everything in cash.
If you stop adding to your existing balances, you'll have an easier time paying them off. If cold, hard cash is too tempting for you, just start paying with your debit card, and be careful not to overdraw your account. (Think you can't live without credit? Read Should You Pay In Cash?)
- Create a budget.
If you don't know how much you're earning and spending each month, it's easy to spend too much and accumulate debt. Watching where your money goes will make it easier to pay down your debts and improve your credit.
- Avoid cash advances.
Cash advances generally start accruing interest from the moment you take them out. They also come with fees and high interest rates. Finally, because of the way most credit card agreements are structured, you won't be considered to have paid off your cash advance until your entire balance is paid off, meaning it will probably take you longer to pay off your debt and get it off your credit report.
- Correct any errors on your credit report.
Although the documents can be daunting, it's important to make sure you understand everything on your credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and to verify that any negative marks are accurate. Any red flags are worth investigating.
The hardest part of getting out of credit card debt and improving your score is being patient; you can have an appreciable effect, but it will take time for you score to reflect your efforts. Following these 10 steps will get you closer to your dream score, but time is also a crucial ingredient, especially if you have late payments, discharged debts, bankruptcy or foreclosure in your past. Unless there are major errors on your credit report that you can easily get erased, there is no quick fix for a bad credit score. Often, it takes at least a couple years to go from a low score to a high one. But don't let the waiting game deter you from taking action - tomorrow will be here before you know it.