The importance of having a healthy credit score is often realized only when you are in dire need of using it. And by that time, you may have done some irreparable damage to your financial profile. Luckily, there are ways to improve a bad credit score, but you need to play by the rules and make the right moves to do so. Having a good credit score has many advantages. Given below are 7 ways that you can improve a bad credit score.
Pay Your Bills as Soon as Possible
Your credit score keeps an account of how reliable you are with your finances. And although you may be paying your bills in full on the same date every month, it may not be the best strategy to use while you have a credit card. Say, for example, you have a credit card with a $3000 limit and you spend about $2500 right in the first week of every month. Instead of waiting until the end of the month to pay it back, try to pay it off as soon as you can. Pay it in two or three installments if you have to, but try to minimize the time that your credit card is in debt.
Minimize Credit Usage
Many credit card users believe that drawing large amounts of cash, and then paying them back is a good way to increase credit scores, but it is not. Just because you have a credit card limit of say $3000, you do not need to spend up to $2900 every month. It is true that building a credit card history means that you should use your credit card often and pay it off before the last date. However, spending more than two-thirds of your credit limit makes you seem less financially responsible in the eyes of a bank. Keep your credit card usage lesser than 30% of your credit limit, and you will have a better credit score.
Increase Your Credit Limit
If you simply have to use a major chunk of your credit, ask your creditors to increase the credit limit. The idea is to reduce the ratio of credit card usage below the 30% mark per month so that it would not seem like you are maxing out your card. However, this move should be used only if you are absolutely sure that you are not going to go on a shopping spree, otherwise, it will do more harm than good to your credit profile.
Have Multiple Credit Card Accounts
A smart way to increase your credit score is to use multiple credit cards. Having multiple cards means that you can use one as a backup card and even choose which card to use depending upon the unique rewards they offer. Distributing your expenses on a number of cards helps you keep your credit usage ratio minimum without affecting the amount of cash you can use per month. However, you need to be even more mindful of your payments as it could lead to bad habits if it is not controlled. Also, do not apply for too many cards in a short period of time, instead, do your research and purchase a card that fits perfectly with your spending habits.
Keep Paid Debts in Your Credit Report
Bad debts can negatively affect your credit history, but some people erroneously believe that having a history of paid debts is a bad thing. Having a record of paid debts is the best way to increase your credit rating as banks see you as a more reliable investment. If you have paid off a huge loan, keep the account active for as long as possible as it is the best thing to happen to your credit history.
Use Different Kinds of Investments
Setting a schedule for credit card usage and payments may help you manage your finances with more ease, but it does not improve your credit score as much as you think it does. A high credit score tells the bank that you can be trusted with a huge investment that lies beyond your usual expenses, and sticking to a simple pattern does not help. Use different kinds of credit, like buying an electronic appliance on installment, to show that you are comfortable with different payment schedules. Again, this must be used only if you are sure that you can pay it back on time.
Do Not Close Any Credit Card
Say that you have a credit card that you use primarily to make payments of your home loan, and after years of diligent payments, you have finally paid it off. Many people in this situation choose to close their credit account as they believe that keeping an idle credit account negatively affects the credit score, and they are right. However, canceling a credit card causes a drop in your available credit, subsequently increasing the ratio of utilized credit, and this does not look good on your credit history. Instead of closing the account, keep it active by using it for recurring charges, like your utility bills, and pay it back as soon as you can to gradually increase your credit score.
A credit score shows your payment patterns over time. And although it places more importance on recent purchases, you cannot improve your scores overnight. Some factors may influence your credit score more than others, and most changes nearly always affect a large number of metrics on your credit report. Having too many inquiries, late payments and negative public record items like a bankruptcy can seriously damage your credit score. The best thing to do in such a situation is to pay all your dues and wait before you apply for more credit. Remember that there are no quick fixes for bad credit scores, and you can undo past mistakes only by making up for it with good financial behavior.
The length of time that is needed to rebuild a good credit history depend on the severity of the factors that caused a drop in your credit score. A delinquency, collection amount and most other negative public records generally stay on your credit report for about seven years. Unpaid tax liens and bankruptcies, on the other hand, remain for nearly a decade. Make sure to regularly check your credit reports to see if there are any signs of fraud. Each one of the three credit bureaus offers you one free record per year, and you can stagger them in intervals of 4 months to keep in touch with your financial habits. It pays to keep your credit score good.
