Credit scores are complicated, but there are proven ways to build your credit — from any starting point.
NEW YORK — Credit ratings are complicated, and because rating agencies consider so many factors, the process for improving can be different for everyone.
When Willard Carpenter, 68, applied for a loan to open a new business, he realized his credit score wasn’t high enough to be approved. After checking his credit history, he discovered several issues that he needed to address.
Carpenter’s credit was badly affected by the credit card debt his father left on their joint account after he passed away more than a year and a half ago. He also hasn’t had credit cards for at least 10 years – he stopped using them after declaring bankruptcy due to credit card debt.
Now he’s working with a financial advisor to erase his father’s debt from his history and start building his credit safely.
Here are some tips for doing the same:
KNOW YOUR STARTING POINT
The first step to raising your credit score is knowing your current score and what’s showing up on your credit report, said Kristin Myers, editor of The Balance, a personal finance website.
“You can’t fix what you don’t know,” she said. “Check if there are any errors or if you have already made a dispute and it is still showing up.”
Once you see what’s in your report, you can begin to identify where you might have weaknesses. For example, if you have a large debt on one of your credit cards, start paying off that debt to reduce credit usage that affects your credit score.
MANAGE YOUR DEBTS AS WELL AS YOU CAN
Ideally, you pay off your credit card every month. But, if that’s not possible for you, making small payments can help you maintain or increase your credit score.
If you can, pay a little more than the minimum monthly payment so you pay less interest over time.
A well-known method of payment is the “debt snowball” where you pay off your debts from smallest to largest, to build momentum and good habits. Once the small debts are paid off and you get into the habit of paying off your debts, the money you used to put aside each month can then be used for larger debts. NerdWallet offers a calculator to use this method.
Another small way to tackle debt is the Consumer Financial Protection Bureau’s recommendation to “use cash when it’s under $20” to avoid overspending on your credit card. .
AVOID MORE DEBT, IF YOU CAN
Not taking on new debt is another way to boost your credit score, Myers said. If you haven’t repaid the debt you currently have, it’s best not to open any other lines of credit. If you are in a situation where you rely on credit due to economic circumstances, try to avoid unnecessary purchases which could significantly increase your debt load.
USE CREDIT CARDS, BUT WITH MODERATION
Many people’s first instinct is not to use a credit card to avoid getting into debt. However, this is not a good tactic if you want to have a good credit rating. It’s best to have at least one credit card, but the key is to use it in moderation, said Colleen McCreary, consumer finance advocate at Credit Karma.
“You don’t want to use more than 30% of the credit that’s available to you, but you want to use those cards even a little to prove that you can be trusted,” she said.
When you use your credit card, be sure to pay on time each month and try to use it only for purchases you already intended to make and can afford.
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DON’T CLOSE YOUR OLD ACCOUNTS
After paying off your credit card, you might think it best to close the account to avoid using it again.
It actually hurts your credit score. Since one of the factors in your credit score is the length of your credit history, if you close your oldest credit card account, you also erase it from your credit history.
“Keeping the length of that credit history open is extremely important because the length of time you’ve had a loan or line of credit is going to increase your credit score,” Myers said.
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IF YOU HAVE NO CREDIT HISTORY, START SAFELY
If you’re just starting out and want to grow your credit, there are several ways to secure this process so you don’t get into debt. One of the most recommended ways is to open a “secured card”, which are credit cards that require a deposit that is usually equal to the amount of credit given to you.
The deposit is there in case you can’t repay the credit, but it’s returned to you after you switch to an “unsecured” card. Secured cards are reported to the credit bureaus, which means that this line of credit appears on your credit file and can help you build or fix your credit score.
This is how Carpenter plans to increase his credit rating.
“It will allow me to start with a low limit and pay it off every month, and then I can apply for a higher limit,” said Carpenter, who lives in Bismark, Arkansas. Carpenter plans to open three credit cards and use a maximum of 25% of authorized credit, he said.