Credit cards can be very tempting, especially for young adults. Credit scores in opt-in models such as Fico are considered poor if they’re any lower than 580, which leaves cardholders in quite a predicament. Building your points to a better score will take some time, but you’re bound to get started, or else you’ll find yourself unable to get basic utility services; and in some cases, your employment options will be limited.
Why improve your credit score
Before we go into the minute details of how to salvage your financial situation, you need to understand how the scoring system affects you. It’s not just a reminder of how consistent you’ve been with paying off your debts. Credit scoring models are used to evaluate an individual’s potential risk of causing losses to financial institutions. Information on your payments, savings, and due debts are all collected in your credit report, which can be viewed by utility service companies, employers, landlords, and others who may want to check your financial reliability.
That said, having a low credit score may get in the way of landing the perfect apartment, getting a well-paid office job, or even running basic services. And if you’re looking to get your hands on some cash for a mortgage, getting a loan with very bad credit can be more than a challenging task. The good news is, a low score can be fixed. Here’s how:
Check your credit report for errors
If an organization or workplace has recently taken a look at your report and surprised you with a lower score than you expected, the best first step to take is to request a review from your bank. You’d be surprised by how the smallest errors can be the cause of a bad standing credit. A signature may have been misspelled in data entry, or there may have been a swap of digits in your social security number, which can direct credit payments to the wrong account.
Most credit bureaus offer a free report annually; you can request one and manually check for errors. If you find any payments marked as late, and you’re positive to have paid them on time, you can dispute errors and get them removed. The investigation and response process takes about a month.
Start paying up
Your debts have been long overdue, which is quite common amongst young adults primarily because they tend to make plenty of small payments, adding up to a chunk that they’re unaware of. If you have thousands due, don’t let that discourage you. Start by paying minimum installments. Less is better than nothing. If all else fails, or if you’re currently unemployed, you can discuss alternative plans with your creditors until you get back on your feet. Whatever you do, don’t ignore your piling debts and do your best to stop adding to them.
Don’t let rewards and bonuses tempt you
The more you use your credit card, the more bonus points and rewards you get. While it’s tempting to get discounts, overusing your card will eventually be counterproductive if you don’t set realistic expectations of how often and how much you can pay your creditor in the long run; otherwise, you’ll end up in a precarious situation of racking-up debt. You might want to learn to always carry a little cash with you, which will naturally make you more frugal with how much you spend because you can physically observe your spending habits.
Remove your credit card information from online websites
The most effective way of resisting temptation is to make it more tedious for yourself to give in to them. If you’re dependent on making purchases online, resort to your local stores to keep track of where your money is being spent. This includes removing your information from ride-hailing services and other online stores. If you have enough in your balance, withdraw cash, and pay them in person. Steer clear from deducting points in some form until you pay back the majority that is due, or until your credit score is at least fair. Limit your credit card usage to paying bills.
Request a higher credit limit
While it may initially sound counterproductive, this will effectively, although temporarily, up your score by a few points. The credit score model runs on ratios, so when your credit limit goes higher, while your balance is unchanged, your credit utilization immediately drops. You can make this request after a few months of making micropayments.
Do not close your credit cards
Another reason why you’re better off making micropayments than giving up the whole thing is that closing your credit card will only lower your score all together and make it far more difficult to issue another, even with a different financial institution. You’ll also have to make regular payments to avoid getting your account closed by the issuer, which may happen in the event you become delinquent on your payments for a prolonged period of time, or if your account is marked as inactive.
Pay your bills on time
While it goes without saying, this might be the core reason your credit points are on the lower spectrum. One of the biggest influences on your credit reports is payment history. Your bills might be the most frequent payments you have to make, and paying them late by a month or more can tarnish your report for up to seven years, although it’s nothing that cannot be improved. Your primary goal is to start adding positive information to your report. If you’ve accidentally missed a payment for a month or more, contact your creditor and arrange immediate payment.
The longer you delay it, the bigger the impact it will have on your score. Building your scores back is not something that can be done overnight. It will take you months of consistent micropayments to make small leaps, which will matter in the long run. Start by understanding that there are no shortcuts to reverse the damage. If you’re unsure where you stand, contact your creditors and request a tailored payment plan that you can stick to.