Your credit score is a crucial factor in determining your financial stability. It can impact your ability to secure loans, rent an apartment, and even affect job opportunities. However, rebuilding your credit score can seem overwhelming if you find yourself burdened with debt.
Knowing which accounts to pay off and which balances to prioritize can be confusing. While paying off credit card balances is always a good idea, it may not be feasible for everyone.
Fortunately, there are simple steps you can take to improve your credit score without breaking the bank. In this article, we will explore some of the most effective ways to raise your credit score and achieve financial stability.
Avoid Closing Any Accounts or Opening (Too Many) New Ones
Your credit score is affected by the length of your credit history. It’s important to maintain a long credit history to help boost your credit score.
Closing old credit cards, even if you’re not using them, can negatively impact your credit score. The length of your credit history depends on how long you leave the credit card open. Therefore, it’s best to keep old credit cards open to maintain a long credit history.
It’s also important to avoid opening too many new credit cards in a short period of time. Multiple hard inquiries can bring down your score in more ways than one.
While there isn’t a hard rule on the number of new accounts you should open, it’s best to avoid opening any new cards if you want to raise your overall score in the short term.
| Tips to Remember |
|---|
| Keep old credit cards open to maintain a long credit history. |
| Avoid opening too many new credit cards in a short period of time. |
| Multiple hard inquiries can bring down your score in more ways than one. |
Maintain below 30% of total available balance on each card
Credit utilization rate, or the amount of credit you use compared to your total available credit, is an important factor in determining your credit score.
Maintaining a credit utilization rate below 30% on each of your credit cards is an effective way to boost your credit score.
Carrying a balance on your credit card doesn’t necessarily mean you are a high-risk borrower. In fact, borrowers with a perfect 850 credit score had an average balance of around $13,000, but their credit utilization rate was only 4.1%. This means that their debt was a small percentage of what was available to them, which did not hurt their credit score.
TransUnion recommends maintaining your balance as close to 0% as possible to indicate to lenders that you have the ability to pay off your debt quickly. However, if you have a high balance due to an unexpected event or out-of-control spending, paying it off may take some time.
In this case, aim to use only 30% of your total balance on each account.
If you have credit cards that you never use, occasional spending or a low utilization rate might positively impact your credit score more than if the card collects dust. Even if you pay off balances to avoid interest, it’s important to use your credit cards occasionally to keep them active.
Build a Credit Mix if You Have Little Credit
If you have little credit, building a credit mix can help boost your credit score.
A healthy credit mix, also known as depth of credit by VantageScore, includes a revolving line of credit and an installment account with fixed payments over time. This means having at least two credit accounts, such as two credit cards and one installment account.
It’s important to only apply for credit accounts that you can use and pay back. Having too many credit inquiries can negatively impact your credit score.
However, one additional credit inquiry will only take less than five points off a FICO Score and factor into only 10% of your overall score.
Recent credit behavior, such as opening a new account, only makes up 5% of a VantageScore. A new account with low credit utilization or a promotional 0% interest rate can actually help improve your credit score in the long run, especially if it lowers your overall credit utilization below 30% thanks to a balance transfer.
However, if your credit score is already above average and you’re attempting to raise it before applying for a car or home loan, it’s best to skip opening a new account since it could lower your score in the short term.
Here are some tips to help you build a credit mix if you have little credit:
- Consider applying for a secured credit card, which requires a deposit but can help you establish credit.
- Apply for a credit card with a low credit limit and use it responsibly. Make sure to pay off your balance in full each month.
- Apply for an installment loan, such as a student, car, or personal loan, and make your payments on time.
Building a credit mix takes time and patience. It’s important to use credit responsibly and only apply for accounts that you can manage and pay back.
Pay down a small bill on a credit card to 0% monthly
One way to boost your credit score in the short term is to set up automatic payments for a small monthly bill on a credit card without a balance. This method takes advantage of the credit bureaus’ consideration of low credit utilization as an indication of good repayment history.
To implement this tactic, choose a small bill that you would be paying anyway, such as your Netflix or phone bill, and set up automatic payments to pay it off each month.
To maximize the benefits, set up another automatic payment from your bank to bring the credit card balance to $0 every month.
It’s important to note that you should not use this credit card for anything else and keep it in a drawer or cut it up to avoid temptation.
The auto-pay feature ensures that you never miss a payment and helps increase your credit score with minimal effort.
However, this strategy will only be effective if you continue to pay all your bills on time and reduce other revolving balances.
It may take a few months to see a significant improvement in your credit score, but this simple set-and-forget method is an easy hack that can make a difference.
| Pros | Cons |
|---|---|
| Boosts credit score in the short term | Only effective if all bills are paid on time and other revolving balances are reduced |
| Minimal effort required | Takes a few months to see significant improvement |
| Easy to implement | Must resist temptation to use the credit card for other purchases |
Mix the Avalanche and Snowball Methods
If you have multiple credit cards with revolving debt, it can be overwhelming to decide which one to pay off first. The Budgetnista recommends using a mix of the snowball and avalanche method to tackle your debt.
The snowball method involves paying off the smallest balance first, while the avalanche method involves paying off the debt with the highest interest rate first.
By combining these methods, you can free up an account to auto-pay a small bill monthly while also tackling the debt with the highest interest rate.
To implement this strategy, start by paying off the smallest balance first. Once you’ve cleared one or two small accounts, direct your monthly budget for debt toward paying off the card with the highest interest rate.
This will help you save money on interest charges in the long run.
To make it easier to track your progress, we recommend using a free budgeting app like Mint.
The Mint credit card payoff tracker can help you set a monthly goal and divide that amount between multiple accounts starting with the highest interest rates first.
You can also use the calculator to see how every extra dollar toward your debt payments will pay down your total that much faster.
Paying down your revolving credit accounts is crucial for improving your credit scores. These accounts impact your credit utilization ratio, which is a major scoring factor in both the FICO and VantageScore scoring models.
By using a mix of the snowball and avalanche method, you can tackle your debt and improve your credit scores at the same time.
Apply for a Secured Credit Card
If you’re struggling to get approved for a traditional credit card due to a low or non-existent credit score, applying for a secured credit card may be a good option.
With a secured credit card, you put down a refundable deposit as collateral, which acts as your credit limit. This means you can only spend up to the amount of your deposit, but it also means you can demonstrate responsible spending habits and build your credit score over time.
Secured credit cards are often easier to get approved for, even if you have poor credit. Since the bank can keep your deposit if you don’t pay your bill, they’re taking on less risk by granting you credit.
However, it’s important to note that you should still aim to pay off your balance in full each month to avoid interest charges and continue improving your credit score.
When choosing a secured credit card, look for one with no or low annual fees and a low interest rate.
Some secured cards may also offer rewards programs, such as cash back or points for eligible purchases.
It’s important to use your secured credit card responsibly and make all payments on time to avoid damaging your credit score.
Over time, as you build a positive credit history, you may be able to upgrade to a traditional credit card and receive your deposit back.
Remember, if you’re denied for a secured credit card, it will still count as a hard inquiry on your credit report, so apply with caution.
Consider a Loan to Pay Off High-Interest, Rotating Debt
If you’re struggling to keep up with your high-interest debt payments, you might want to consider taking out a personal loan to consolidate your balances.
While some people worry that opening a new line of credit will hurt their credit score, the impact of a new inquiry is usually small and temporary.
In fact, consolidating your debt with a personal loan can actually improve your credit score over time.
Here are some of the benefits of using a personal loan to pay off high-interest, rotating debt:
- Lower interest rates: Personal loans typically have lower interest rates than credit cards and other high-interest debt. By consolidating your balances with a personal loan, you could save hundreds or even thousands of dollars in interest charges over time.
- Fixed monthly payments: Personal loans usually come with fixed monthly payments, which can make it easier to budget and plan for your debt payments. This can be especially helpful if you’re currently struggling to keep up with multiple payments each month.
- Simplified debt management: Consolidating your debt with a personal loan can simplify your debt management by combining multiple balances into one loan. This can make it easier to keep track of your payments and avoid missed payments that can hurt your credit score.
A personal loan can be a smart way to pay off high-interest, rotating debt and improve your financial situation. Just be sure to shop around for the best interest rates and terms, and make sure you can afford the monthly payments before you apply.
Set up Auto-Pay to Never Miss a Bill
Paying your bills on time is crucial for maintaining a good credit score. Late payments can have lasting impacts on your credit report, which can affect your ability to get approved for loans, credit cards, and even apartment rentals.
Setting up auto-pay for your bills can help you avoid missing payments and keep your credit score in good standing.
Here are some tips to help you set up auto-pay for your bills:
- For credit cards or loans, set up auto-pay for a day or two after you get paid. This will ensure that you have enough money in your account to cover the payment.
- If you don’t get paid on a regular basis, consider setting up a checking or savings account specifically for bills with fixed amounts. Transfer money into the account as soon as you receive freelance or project-based payments.
- Check with your utility companies and other service providers to see if they offer auto-pay options. Many companies allow you to set up automatic payments for your bills, which can save you time and hassle.
Keep in mind that while auto-pay can help you avoid missing payments, it’s still important to review your bills each month to ensure that you’re being charged the correct amount.
If you notice any discrepancies, contact your service provider immediately to resolve the issue.
Check Your Credit Score for Errors with a Free Annual Report
Before taking steps to improve your credit score, it’s important to know where you stand.
Luckily, checking your credit report won’t negatively impact your score.
You can request a full credit report from the government-supported website annualcreditreport.com. This will provide a detailed breakdown of your credit history.
It’s important to request and compare reports from all three major credit bureaus: Equifax, Experian, and TransUnion. This will ensure that you have a comprehensive understanding of your credit history and can identify any discrepancies.
Checking your credit report for errors is crucial.
Mistakes such as accounts that you never opened or someone else’s activity listed on your account could be signs of fraud.
You have the right to request your credit report if you’re denied a credit card, loan, or employment based on your credit history.
By regularly checking your credit report, you can identify and correct any errors, which can help improve your credit score.
The more you know about your credit history, the better equipped you are to make informed financial decisions.
Protect Your Credit Score from Fraud
As you work to increase your credit score, it is important to protect yourself from fraudulent activity.
One way to do this is by freezing your credit at all three credit bureaus.
This process is free and can be undone both temporarily and permanently if needed.
Freezing your credit can protect you against damaging events that can tie up your credit and take a lot of time to remove.
Frozen credit stops criminals from committing identity theft, where they could charge a multitude of purchases and open accounts without your knowledge.
Freezing your credit is a simple process that takes only a few minutes to complete.
According to CNBC, it will take approximately 10 minutes per bureau to complete.
You can rest assured that any banks you have a current financial relationship with will still be able to access your information as needed.
You should only lift a freeze for the amount of time needed to apply for a new account.
This will help protect against future widescale breaches.
Cyber attacks are not going anywhere, so it is best to make sure your social security number does not land in the wrong hands.
Negotiate with Creditors to Reduce What You Owe
If you’re struggling with outstanding bills, negotiating with creditors can help reduce what you owe. Here are some tips to get started:
- Call the hospital to ask for itemized charges. Review these charges for any errors or non-approved costs if you’re struggling with a medical bill.
- Federal student loans offer a range of repayment plans based on income.
- Request late fees be removed by calling your credit card company or bank. This works for one or two missed payments per year, as long as you typically pay on time.
- If you’re a responsible borrower, ask your credit card company to lower your interest rates.
- Move a loan into forbearance. This will allow a break from monthly payments for a period of time, even though you still accrue interest.
- Negotiate with debt collectors by avoiding admitting you owe anything to a collector during the first call. Also, never give personal information over the phone.
- Be prepared to offer less than the full amount of the original bill. Most debt collectors won’t expect the full amount.
