Growing up my Dad would always tell me, “keep a good credit score and you can do anything!” While I do keep my credit score high, I did find myself bogged down with student loans that I would’ve rather avoided. Nonetheless, while one must be very responsible with credit, there is a lot of truth to being able to do more on your own when you have a little leverage to help you grow. For young people who have a lot of ambition to buy their first home right out of college or start a new business, a basic requirement for those things is funding. Lenders are not going to want to fund a home purchase or a new business if they see you’re not responsible in repaying funds that were borrowed. So if your credit score is not quite there for the things you want to accomplish, there are some steps you can take to help you improve your score.
Know Your Starting Point
You may know that your credit score isn’t great but do you know all of the specifics? Unless you pull your credit report at least annually to review the details, you are not going to know where to begin. It is not uncommon to find errors on credit reports. In fact, the three most common errors are incorrect reporting on your identity such as name and address, account details, and fraudulent accounts. Report errors immediately to the proper credit reporting bureau (either TransUnion, Equifax, or Experian) as this can be the quickest way to immediately improve your scores. By law, reporting agencies are required to investigate all disputes regarding your credit report.
Tip: I use Annual Credit Report.com to check my credit report for free! You can pull a report once a year from all three agencies, so to stay on top of things I pull one from Experian in February, one from TransUnion in June, and one from Equifax in October.
Make Timely Payments
Did you know that 35% of your credit score is based on payment history? This is the single biggest contributing factor to your credit score. If you have any outstanding loans or credit card bills, make a plan to make the payments on time every month. If you are working on building your credit, instead of applying for a standard credit card, apply for a secured credit card. A secured credit card is where you give $500 to your bank and in turn they give you a credit card with a $500 credit line (which is secured with your $500 deposit). This is reported to the credit agency showing your payment history on this credit line.
Responsible Credit Utilization
The amount of credit you have available to you versus the amount of credit that you are using is called credit utilization. To make it easy to understand, if you have a credit card with a $10,000 limit and only have a balance of $2,500 then your credit utilization rate is 25%. Keep your credit utilization to 35% or less to improve your score as this accounts for a third of your score.
While timely payments and credit usage makes up a huge percentage of your score (65%) there are also contributing factors to your credit score including length of credit history, new credit, and the types of credit you have in place. For example, a mortgage isn’t viewed as harshly as a credit card. If you want access to your credit score with helpful tips, I would recommend the free tools provided by Credit Sesame. For more information as to how medical bills affect your credit score, read my post here.
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions of failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor or CFP® who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used, and trust. Thanks for your support!