Having bad credit can be just as damaging to your financial reputation as having a bad personal reputation. However, many people give up on their credit completely after realizing that it is damaged, leaving them spiraling into a deep financial abyss that will only get harder to correct the longer they ignore the issue. The process of rebuilding your credit score can be challenging, but it will be worth it in the end.
A common reason that people continue to have poor credit is that they are uneducated about what to do or where to start. The first step is to obtain a copy of your credit report, which you can get for free once every 12 months from the three major credit reporting agencies: TransUnion, Equifax, and Experian. A key factor in calculating your credit score is based on your credit utilization ratio (CUR), which is based on the total amount of revolving credit you use in a single month compared to the amount of available credit you have. Another factor is how much you owe, which accounts for 30% of your final credit score.
Here are some ways to build your credit:
- Consistency is key. Pay your bills before the statement date and watch your credit card balances.
- Leave good, old debt on your report, as it is good for your credit.
- Eradicate “nuisance” balances by sticking to one card or paying off one card before charging to another.
- Diversify your account types and pay the minimum to keep accounts and balances low, which will result in a higher credit score.
Here are some common myths about credit that you should be aware of:
- Closing old accounts will increase your score: This is not true. Closing old accounts could potentially hurt your score by shortening your credit history and reducing your available credit. It’s better to keep old accounts open and maintain a low utilization rate.
- Paying off loans early is better than making payments: While a closed, paid-off account can add to your credit score, an open account in good standing has a bigger impact. It shows that you are consistently handling credit responsibly. A closed account only reflects past behavior and becomes less predictive of future habits.
- Opening many accounts will improve your score: This is absolutely false. Opening many accounts signals risk to lenders and could indicate that you are in a financial bind and in desperate need of credit.
- All delinquencies are created equal: This is not true. Missing a mortgage or auto loan payment will have a greater impact on your credit than missing a credit card payment. The more established the debt, the more weight it carries on your credit report.
If you’re looking to improve your credit, don’t procrastinate. The longer you wait, the harder it will be to repair your credit in the long run. Practice self-control when it comes to spending and budgeting, and be patient. Good things take time, and anything that comes quickly may not be good for your credit in the long run.
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