So you’ve had a few problems getting the bills paid recently, and you’re wondering what you can do to repair the damage to your credit. Well you’ve got plenty of company. Millions of people in the United States have credit blemishes severe enough (and FICO credit scores under 620) to make obtaining a loan and credit cards with reasonable terms difficult.
Or maybe your credit is okay, but you’d like to make it better. Since, the better your credit, the less you pay in interest and, typically, for insurance.
So here are four steps you can take to improve your credit:
1. Get a credit card if you don’t have one
Don’t fall for the myth that you have to carry a balance in order to have good scores. You don’t, and you shouldn’t. But having and using a credit card or two can really help.
If you can’t qualify for a regular credit card, consider a secured credit card then, where the issuing bank gives you a credit line equal to the deposit you make. Also look for a card that reports to all three credit bureaus.
2. Add an installment loan to the mix
You’ll get the fastest improvement in your scores if you show you’re responsible with the two major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
If you don’t already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back with time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best rate from a community bank or credit union.
3. Pay down your credit cards
Paying off your installment loans (mortgage, auto, student, etc.) can help your scores but usually not as dramatically as paying down — or paying off — revolving accounts such as credit cards.
Lenders like to see a gap between the amount of credit you’re using and your available credit limits. Getting your balance below 30 percent of the credit limit on each card can really help; getting balances below 10 percent is even better. Though most debt experts recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
4. Use your cards lightly
Racking up huge balances can hurt your scores, regardless of whether you pay your bills in full each month. What’s usually reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You often can increase your scores by limiting your charges to 30 percent or less of a card’s limit; 10 percent is even better. If you’re having trouble keeping track, you can set up email or text alerts with your credit card companies to let you know when you’re approaching the limit you’ve set.
If you regularly use more than half your limit on a card, consider using other cards to lighten the load or try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so it’s not reported as late.
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