Confession: my credit score used to be terrible. It is excellent now but getting there took some effort. It’s worth it and if you have some work to do here are some steps I took to improve mine. Scores range from 300-850 and in this situation higher is better. Your credit score is how lenders determine whether or not they should do business with you. Here are the ranges according to Experian:
- Excellent 800+
- Very Good 740-799
- Good 670-739
- Fair 580-669
- Poor > 579
If you have never had a credit card before or have had some trouble paying bills in the past your score will be lower. A fair or poor credit score means banks are taking a risk when they lend you money. To make up for the risk they will charge you higher interest rates or require a deposit to borrow the same money as someone with a good score. While there are different ways to improve or maintain all scores this post will help you if you fall into the poor or fair category.
Tip #1 – Learn How to Play the Game
A big part of your credit score is based on your utilization rate. This is the percentage used compared to what is available to you. While it might seem like they would want you to max out your limits this isn’t the case. You have to stop charging things in order to lower your utilization rate if it is high. You can get this number by dividing your credit limit by your balances. If you use a monitoring service like Credit Karma or Credit Sesame it will analyze your utilization rate for you.
Look at your subscriptions – if any are linked to your credit card change them to your debit card so you can start paying down your balance without new automatic charges each month. If you can’t afford to do that you need to cancel them.
Think of it like going out to lunch with a friend and sharing a plate of fries. If you eat them all (maxing out the limit) you are not a great person to share with and your friend might not want to do that again. If you eat 0% you aren’t all that fun to go eat with either. However, if you only eat 30% of the fries you are PERFECT person to share with. The bank is your friend in this case and if you keep your utilization rate low they will do business with you all day long.
Tip #2 – Put Your Credit Cards on Ice…Literally
My parents never used credit cards so I had no experience with them whatsoever. When I got to college I was offered one the minute I stepped on campus. “Free” money and a shitty t-shirt was all the incentive I needed. Sign me up!! I blew my $500 limit real fast on calzones and awful black shoes with chunky heels. Instead of learning my lesson I applied for more credit. When I graduated I realized I needed to improve my score and stop charging.
One way to stop using your credit cards is by freezing them in a block of ice. This is a baby step if you can’t bring yourself to cutting them up. Make sure to delete them from your saved payment methods online as well.
Getting a card the minute I could was helpful in one way. It established my history at age 18 and lenders like a long history. I recommend talking to your kids about money before they get to college. Most students are starting out with loads of debt and they can’t afford to be careless when it comes to spending. Help them – even if it means sharing mistakes you made in the past.
Tip #3 – Stop the Bleeding
If you have maxed out your credit cards you need to address the root of the problem – overspending. If a shopping ban is too extreme you might want to consider creating a budget you can live with instead. When you create your budget there might be some areas that you have wiggle room. You might be spending more than you realized and paying for things you don’t even use. Take that money and apply it to your debt.
Attack your debt. Using online tools and calculators can help you determine where to put any extra money you have first if you have more than one card or loan. Apps like Qoins can help too. It rounds up your purchases and applies that change to your credit card balance to help you get out of debt faster.
Please remember debt does not make you a bad person. I do not feel ashamed that I had poor credit when I first started out. However, improving my credit in my 20’s after a rocky start helped me get a great interest rate on my mortgage and car in my 30’s. It takes time to make big improvements but these can help get you on track. You can make changes if you put in the work.