The past couple of years have been challenging in pretty much every way imaginable. With mass layoffs, business closures, and other pandemic-related economic hits, it’s no wonder that people’s credit scores have dropped.
Credit scores affect one’s ability to apply for home loans, qualify for low interest rates, or even get a rental application approved. Having a low score can prevent you from making some life-changing financial moves.
If you’re one of the many Americans who saw their credit score dip during the COVID-19 pandemic, it’s time to start making repairs. Here are four ways you can start making a positive impact on your credit today:
1. Get a Credit Builder Card
If you have a poor credit history, you might have a difficult time qualifying for a standard credit card or a loan. That’s unfortunate, as both options allow you to make regular payments that show your trustworthiness to lenders and build your credit score. Luckily, you can bypass those approval processes by looking at a credit builder card to get back on your feet.
An initial deposit or funds transfer sets the amount you can spend on your credit builder card. This mitigates the risk a lender has when extending a line of credit to someone with questionable or even nonexistent credit history. If you’re unable to pay off the balance, the credit card company uses your deposit to pay it off.
Other than that, a credit builder card is very similar to any other credit card. You can make regular purchases and payments on it and build up your credit by making wise decisions. You typically won’t qualify for many rewards programs from this type of card, but it will help you progress in the right direction.
2. Build a Payment Plan
The key to keeping a good credit score is to avoid late payments and stay out of debt. So how do you ensure that your finances follow that model? If you haven’t already, you should start by formulating a payment plan.
With a concrete plan, you can lay out all of your expenses and payments to make smarter financial decisions. You can decide just how much debt you should be paying off each month and when bills need to be paid. Add a budget into your plan and you can pay off debt faster while also avoiding more debt.
As an exercise, look at one of your regular debt payments and the amount that’s due each month. Calculate how long it would take to pay off the balance including interest. Now calculate how long it would take to pay off by budgeting an extra $25 into your monthly payments. You can reach that amount by giving up a second cup of coffee every morning and end up eliminating debt on a much faster timetable. The sooner you get out of debt, the better your credit will be.
3. Watch Your Credit Utilization
The most important aspect of credit card use is to pay off your balance — or at least make the minimum payment — each month. However, there’s more to owning and using a credit card than just that. Your credit utilization is a very important part of your credit score, and an underrated one as well.
Credit utilization is a simple formula showing how much of your available credit you’re actively using. Say you have a credit card with a limit of $10,000. If you have transactions totaling $1,000, you will have a credit utilization rate of 10%. A 100% credit utilization rate would occur if you maxed out all of your available credit.
By not maxing out your lines of credit every month, you show lenders that you are responsible with money. You also show that you don’t have to lean on credit cards to survive. This may qualify you for better interest rates and a higher credit score in the long run.
4. Diversify Your Credit
Another factor that contributes to your overall credit score is your credit diversity. This means that the major credit bureaus are looking at how many lines of credit you have open and how you’re using them. For instance, you might find yourself in higher standing if you have both a credit card and a home loan.
Opening a new line of credit might help you impact your credit by opening it and using it on occasion. Just be careful not to overspend. If you have thousands of dollars in credit card debt, focus on paying that off before applying for yet another card. Remember that every time you apply for a new loan or card, you will be hit with a hard inquiry. Too many inquiries into your credit can actually harm it.
The sooner you start working on your credit the earlier you can get back on your feet. Building up your credit can help you finally achieve your dreams. You can get that business loan, get a better mortgage rate, or start accumulating travel points to take a much-needed vacation. Start by making that plan this week and take actionable steps toward your end financial goal.