If you are looking to improve your credit, check out these 6 helpful tips!
1. Request your credit report – Thanks to the Fair Credit Reporting Act you are able to get one free credit report a year without any strings attached. But be careful, each additional report costs you money and can negatively affect your credit score.
Your credit score is composed by three different credit consumer bureaus, Experian, Equifax and TransUnion. It is important to know your score for several reasons. The first and most important is to monitor your credit for fraud and reporting any financial activities that you did not do. The second step is to check each report for errors and to report them to the respective bureau and have them fixed. The final reason is for personal knowledge of your score. If you are looking to improve your credit you need to know where you stand.
2. Educate yourself on credit – All three credit agencies and many other companies track the information contained in your credit report. They gather this information from things like your mortgage payments, credit card payments, car payments, loan payments and much more. These agencies and companies take this information and formulate it into your three-digit credit score. Late payments, early payments, over-paying, etc all factor in.
A low credit score raises limits your ability to get loans and drastically limits the payment terms and the interest rates you will be able to get when applying for a loan or credit card. Basically your credit score determines how much or how little you are going to pay for credit. Things like the aforementioned plus keeping your debt below 35% of your available credit and disputing errors on your credit report will help improve your credit.
3. Actually read AND understand the terms and conditions of your contracts – Reading the fine print is likely to give you a headache with the way contracts are worded and because of the amount of legal jargon. Yet despite this, trudging through is very important because every loan, credit card and other lending contract you sign contains important information about payment terms, interest rates, annual fees and of course penalties.
Taking the time do this tedious task has its benefits, like not being surprised when your interest jumps up after a late payment or missing a payment. Thankfully this tedious task will come to an end due to the 2010 Wall Street Reform and Consumer Protection Act. This new act empowers the newly formed Consumer Financial Protection Bureau to make changes to language of contracts and make them easier to understand. Hopefully this act and this agency remain to make this a reality as it will greatly benefit consumers and not require them to have a degree in contract law to understand what they are signing.
4. Always pay off your credit card balance – This is easier said than done. For many of us the recession pushed our accounts to the limit. Credit cards got maxed out, savings were depleted and vacations and other spending plans were put off permanently. If you are in this boat, paying off your highest interest credit card should be your first priority. When paying off this credit card paying more than the minimum amount is crucial.
Paying the minimum is counterproductive as basically all you are doing is paying off interest. Paying off more than is due is important because the extra amount goes straight to paying off the principal and helps reduce your debt, even if it is just a bit. It may not seem like much at the moment, but in the long run it adds up as your interest payments will be less. Paying more than is due also positively affects your credit rating.
5. When it comes to credit cards, be practical and disciplined – If you already have more than one credit card under your name and either one or both has debt remaining on it, it isn’t a good idea to sign up for another one even if it offers discounts or awesome rewards. Often times these cards have higher interest rates and have escalators if you are late on a payment. If you can’t afford to pay off your credit card every month what’s the point of paying a higher interest rate for airline miles if you cannot afford to utilize those them for a vacation? If debt is an issue be smart and do not sign up for these kinds of credit cards. If for some reason you need another credit card, pick one that has the best rates and terms, not one that has good rewards.
Avoid using store credit cards even if they promise zero interest for 12 months as most these cards interest rates are going to be high and can jump up to extremes if you make a late payment. Now if you know you can pay off the purchase before those 12 months are up and you can pay off the debt each month utilizing the cards discounts when shopping at their store is a different story. If you can save money, it is a smart decision. However leaving a balance on these cards can be very expensive and ultimately the debt cancels out the benefits of the card.
6. To cancel or not to cancel your credit card? – Credit scores are impacted by the variety of accounts you have and if you are using up your available credit by carrying a balance. If you owe money on a credit card and keeping spending on it, cancelling it to avoid spending more is not the smart move. Doing this is a red flag to the credit bureaus and will negatively impact your credit score. If you do want to cancel a card, focus on paying it off first. And never cancel all your cards at once, especially if you have debt on them.
Maintaining multiple cards can be beneficial if you use them wisely. If you spread your spending between them, keep their balances low, pay them off or pay more than is due each month and use the cards often you will have a low credit utilization ratio which will improve your credit score.
However, if you are struggling with debt disregard the above advice. It is smarter to take a credit hit than to have the temptation of available credit spending power and having to face the consequences of charging too much debt and not being able to pay it off.
In the end managing your credit comes down to being disciplined. Being able to differentiate what you want and what you need and making the hard choices when it comes to spending are vital steps in improving your spending habits and ultimately your credit score. If you cannot control how you spend your money you will not be able to improve your credit score.
Take the time to create a budget and track how much you are spending on your credit cards each month. From your statements see how much of that is interest. It can be shocking to see how much money you are throwing away each month on interest alone.