Your credit score is an important part of your identity and it can potentially determine how smoothly your finances will run. The credit score can make it easy or difficult for you to obtain new loans and credit cards by showing lenders whether you are a low-risk, moderate-risk, or high-risk borrower. Lenders will usually bend over to lend you money if you are a low-risk borrower but you’ll be faced with oppressive interest rates and tough repayment plans if you are a high-risk borrower with a tendency to default.
Nonetheless, a credit score is not a permanent score and you can take some proactive steps to ensure that you attain and maintain a high credit score. Interestingly, you can also take some restorative steps to revive your credit score if your credit history is less than impressive.
1. Pay bills in full and on time
The first step towards reviving a dying credit score is to understand that your bills determine about one-third of your FICO score. In essence, if you have been in the habit of ignoring your bills or letting them accumulate, your credit score will suffer for it. Unpaid bills can affect your credit score by showing the bills you have paid, the outstanding bills, the bills that have gone into collection, and your history of declaring bankruptcies.
If you are already caught holding the bag, you can still improve your credit score even with bad credit too. You should start by attacking any of your bills that have gone into collection first. Bills are relatively smaller and numerous; $23 here, $17.65 there, $72 in another place; hence, you can start paying off bills one at a time instead of waiting until you have a large cash windfall to pay them off all at once. While on the matter of bills, you should note that credit cards are another kind of bill and shouldn’t fall behind in paying up your credit card balances.
2. If you can’t avoid debt, keep it low
Human wants are unlimited but the means to satisfy those wants are limited. Hence, it is normal that you’ll have debts in some places to augment the difference between your income and your expenses. Nonetheless, if you want to revive a dying credit score, you’ll need to reduce your debt to income ratio significantly. Some financial advisors will recommend keeping your debts at under 30% of your debt to income ratio. Others take a more drastic approach of recommending that you keep your revolving credit balance under 10% of you debt-to-income ratio – desperate times calls for desperate measures.
You must ensure that credit debt is far as possible from the maximum limits in order to give your credit score a hope for revival. If your credit limit is $10,000 and you have a debt of $3000, you’ll be better off than someone whose credit limit is $20,000 with $10,000 worth of debt.
3. Old credit is better than new credit
A simple but profound truth that might have the biggest effect on your ability to raise your credit score is that you need to age your credit. Lenders generally want to see proof that you have past credit accounts that have been in good standing with your creditors. Hence, your credit score will be higher if you have a couple of longer-term debts than if you have many short-term debts. In fact, you’ll have observed that people with no credit or little credit do not usually have high credit scores because they are playing too safe.
You should not hesitate to access lines of credit when the need arises but you should always remember that your credit score will be better off with a number of big credit payments spread out over time than multiple credits that you can pay off in a couple of months.
4. Embrace credit but use credit responsibly
The internet is awash with tons of new age wisdom teaching folks to burn their credit cards and never to buy a thing on credit. Granted, credit card companies might not always be chivalrous in their business practices and it is easy to think that life will be simpler and better if you don’t take on credit. However, the fact is that “credit” should not be mistaken for “debt” – credit is good, debt is bad.
People who complain about credit cards are usually people have allowed originally good credit to denigrate into bad debt. If you take and use credit wisely and responsibly, you’ll be able to use “other people’s money” to meet your needs and you’ll have a stronger credit score in the end.