Building and maintaining a good credit score takes dedication and consistency. While it usually takes months of effort to boost your score, doing nothing can cause your score to drop overnight. This thought can be disheartening, especially if you already have a low credit score. But you are not out of options. Below are familiar and not so familiar ways to nudge up your low credit score, starting today.
How To Manage Credit Cards Responsibly
#1 Piggyback Credit
To piggyback means you become an authorized user on an account with a family member who has excellent credit. The Fair Isaac Corporation (FICO) thinks piggybacking a family member’s credit makes good sense. This is an opportunity to learn and get coached on responsible money management. But beware of any offer allowing you to piggyback with strangers. These often turn out to be bogus claims that steal your money through hefty fees.
#2 Watch for Errors Like a Hawk
A low credit score might be the result of mistakes and errors in your credit file. At least once every year get a free credit report from each major credit bureau to clear up every mistake. The credit reports you get contain valuable information for calculating your score. Remember that each credit bureau uses different calculation your score you get will be different from each one.
Check the report to ensure that no late payments are listed incorrectly on all your accounts. Dispute every error with the reporting agency and credit bureau in writing if possible. Cleaning up errors in your credit report can make a huge difference when taking out credit in the future.
Use a free service like Credit Karma to view your credit score and your credit report. It's one of our favorite online financial planning tools.
#3 Reduce Your Debt
Reducing the amount of credit card debt you have is the biggest step you can take to boost your credit score. The first step should involve avoiding using your credit cards completely. List all your credit card accounts along with how much you owe, the interest rate and the minimum payment amount.
A good way to start reducing your credit card debt is to use a debt snowball plan. You pay a little extra on the highest interest card while paying the minimum on the other cards. Once you pay off the highest interest card you move onto the next highest interest card. It's called a snowball because you'll take everything you were paying on the first card and roll it onto your payment for the next card. Your payment gets bigger and bigger just like a snowball rolling down a hill. Soon you'll be credit card debt free!
While you're implementing your debt snowball plan ensure that you continue to pay all your bills on time. Late payments will kill your credit score.
Just the act of paying down your credit card debt is a sign that you're a responsible borrower.
#4 Preserve Your Credit History
Many times, borrowers will take out new credit lines and close old accounts. But this is a mistake because the length of your ongoing credit history is important. Older accounts that have been carefully maintained are a positive sign of your credit worthiness.
Note that if you have not actively used a specific credit card for years, the issuer can close the account without notifying you. If you notice an account was closed without you agreeing to it, contact the credit card company to resolve the issue. You want to keep your credit history intact.
Another good tip is to setup an automatic monthly payment on your cards to show that you are actively using the account. This will decrease the chances of having your account closed without your knowledge.
#5 Consolidate Wisely
A lot of people like to play the zero interest rate credit card consolidation game. But you need to proceed with caution.
If you're planning on paying off the debt in the amount of time the 0% introductory rate lasts then consolidation could work for you. But beware because if you don't pay off the balance you could get hit with a high rate and even have to pay back interest on the unpaid balance.
Another solution you might want to consider is a cash out home loan refinance. If you have enough equity in your home then you could you the cash to consolidate all your high interest credit cards into one low rate.
Communicate with Creditors
Many debtors believe that creditors are the enemy, which isn't true. Every lender issuing you a credit card is in business to generate profits. Take personal responsibility for your credit. You are the one that makes the decision to open and close accounts. You alone are responsible for managing your accounts.
But tough times happen. If you are suffering short-term financial issues make sure to reach out to your lenders. Communicate with the lender openly and make contact as soon as you know any problem will arise. They've heard it all before and the last thing they want to have you do is default on your account.
Whatever you decide to do, never force your lender to move your account to a collection agency to get you to pay the debt. This is the quickest way to kill your credit score.
By taking the initiatives above, you can improve your credit score and make it easier to get credit in the future. Having a high credit score will save you a ton of money on all the big purchases you decide to finance throughout your life.