If you're strapped for cash and having trouble making ends meet, improving your credit score may be the last thing on your mind. However, it's a worthy goal because it can help you get lower interest rates and improve your financial situation down the road. Even if your current financial picture isn't exactly rosy, you can still make significant strides forward with these easy ways to improve your credit rating.
TUTORIAL: Credit And Debt Management
Prioritize Extra Payments on Maxed-out Cards
A third of your credit score is based on the percentage of your credit limit that you use. This portion of your score looks at how much credit you use overall – your total credit utilization rate across all of your credit accounts – and it also looks at the percentage of available credit you've used on each card.
Because of the way credit scoring works, it's better to carry a $1,000 balance on a card with a $5,000 limit (20% credit utilization) than to carry a $500 balance on a card with a $1,000 limit (50% credit utilization). The credit scoring formula prefers borrowers with credit utilization ratios of 10 to 30% per card, according to credit score expert Liz Pulliam Weston.
When you have the cash to pay down your balances, focus on the cards that are closest to being maxed out, to benefit your credit score the most. That being said, if those are the cards with the lowest interest rates, perhaps because you took advantage of a low APR balance-transfer offer, the savings you'll achieve from paying off your highest-interest-rate debt first may be more important than improving your credit score. (For an in-depth reading on how credit cards can affect your score, check out How Credit Cards Affect Your Credit Rating.)
Don't Miss a Payment
Another third of your credit score depends on whether you pay your creditors on time. Paying on time sounds easy if you have plenty of cash coming in every month and more sitting in the bank, but what if you're cash-poor?
You don't have to pay your bill in full to have your payment counted as on-time; you only have to pay the minimum. Generally, it's not in your best interest to only make the minimum payment, as it means you'll be paying off your balance for years and paying lots of interest. Carrying high balances on your cards can also negatively affect your score. (For more on clearing up outstanding balances, read Should You Close Your Credit Card?)
However, if it's all you can afford, you're better off making the minimum payment on time than not making a payment at all. You can make additional payments towards your balance at any point, in the month, when you have some cash to spare. Keep a running list of all your cards and their due dates. Then pay what you can when you can, making sure to at least submit the minimum payment on each card by the due date. If you have to pay late, try to avoid paying more than 30 days late.
Don't Neglect Your Other Payments
Credit card activity isn't the only financial activity that gets reported to credit bureaus. To find out exactly which accounts are affecting your credit score, grab a copy of your credit report from each of the three credit reporting bureaus. Most people know that their credit card payments, mortgage payments, auto loan payments and student loan payments get reported, but are unaware of other items that sometimes appear, and that may only show up on one or two of the three reports. Old, unpaid gym dues that only appear on one report could be affecting your score without you even realizing it.
The Bottom Line
Having a good credit score isn't about having lots of money, it's about making the right choices with what you do have. To make the right choices, you have to learn the rules of the credit scoring game. But the rules aren't difficult to understand, and following them can mean a boost for your finances.