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If you want to whip your finances into shape, hereâs a good New Yearâs resolution: improving your credit score.
A lot of New Yearâs resolutions fail because theyâre so extreme. Think of all the bonkers weight-loss and money-saving goals that surface at the start of every year.
This resolution is different. No extreme measures are required. But there arenât any shortcuts. Building good credit is a goal you need to commit to 12 months a year.
How to Build Good Credit in 10 Steps
Ready to make 2021 the year you finally prove your creditworthiness? Or are you looking to recover from a 2020 setback? Hereâs how to build good credit in 10 steps.
1. Stay on Top of Your Credit Reports
Itâs essential to monitor your credit reports, especially if you received a hardship agreement from a lender due to COVID-19. Under the CARES Act rules, lenders are supposed to report your account as paid in full while the agreement is in effect, as long as you werenât already delinquent. But mistakes happen. Even in normal times, about 1 in 5 credit reports contained inaccurate information.
Through April 2021, you can get one free credit report per week from each bureau. (Typically, youâre only entitled to one free credit report per year from each bureau.) Make sure you access your reports at AnnualCreditReport.com, rather than one of the many websites that offer âfreeâ credit scores but will make you put down your credit card number to sign up for a trial. File a dispute with the bureaus if you find anything you think is inaccurate or any accounts you donât recognize.
Your credit reports wonât show you your credit score, but you can use a free credit-monitoring service to check your score. (No, checking your own credit doesnât hurt your score.) Many banks and credit card companies also give you your credit scores for free.
If the bureaus agree to remove information from your credit reports, expect to wait about 30 days until your reports are updated.
2. Pay Your Bills. On Time. Every Single Month
Yeah, you knew we were going to say this: Paying your bills on time is the No. 1 thing you can do to build good credit. Your payment history determines 35% of your score, more than any other credit factor.
Set whatever bills you can to autopay for at least the minimums to avoid missing payments. You can always pay extra if you can afford it.
A strong payment history takes time to build. If youâve made late payments, theyâll stay on your credit reports for seven years. The good news is, they do the most damage to your score in the first two years. After that, the impact starts to fade.
3. Establish Credit, Even if Youâve Made Mistakes
You typically need a credit card or loan to build a credit history. (Sorry, but all those on-time rent and utility payments are rarely reported to the credit bureaus, so they wonât help your score.)
But if you have bad credit or youâre a credit newbie, getting approved for a credit card or loan is tough. Look for cards that are specifically marketed to help people start or rebuild credit. Store credit cards, which only let you make purchases at a specific retailer, can also be a good option.
4. Open a Secured Card if You Donât Qualify for a Regular Card
Opening a secured credit card is one of our favorite ways to build a positive history when you canât get approved for a regular credit card or loan. You put down a refundable deposit, and that becomes your line of credit.
After about a year of making your payments on time, youâll typically qualify for an unsecured line of credit. Just make sure the card issuer you choose reports your payments to the credit bureaus. Look for a card with an annual fee of no more than $35. Some secured card options we like (and no, weâre not getting paid to say this):
- Discover it Secured
- OpenSky Secured Visa Card
- Secured Mastercard from Capital One
5. Ask for a Limit Increase. Pretend You Never Got It
Increasing your credit limits helps your score because it decreases your credit utilization ratio. Thatâs credit score speak for the percentage of credit youâre using. The standard recommendation is to keep this number below 30%, but really, the closer to zero the better.
If you have open credit, ask your current creditors for an increase, rather than applying for new credit. That way, youâll avoid lowering your length of credit, which could ding your score.
The downside of a higher credit limit: Youâll have more money to spend that isnât really yours. To get the biggest credit score boost from a limit increase and avoid paying more in interest, make sure you donât add to your balance.
Donât believe the myth that carrying a small credit card balance helps your credit score. Paying off your balance in full each month is best for your score, plus it saves you money on interest.
6. Prioritize Credit Card Debt Over Loans
Tackling credit card debt helps your credit score a lot more than paying down other debts, like a student loan or mortgage. The reason? Your credit utilization ratio is determined exclusively by your lines of credit.
Bonus: Paying off credit card debt first will typically save you money, because credit cards tend to have higher interest rates than other types of debt.
7. Keep Your Old Accounts Active
Provided you arenât paying ridiculous fees, keep your credit card accounts open once youâve paid off the balance. Credit scoring methods reward you for having a long credit history.
Make a purchase at least once every three months on the account, as credit card companies often close inactive accounts. Then pay it off in full.
8. Apply for New Credit Selectively
When you apply for credit, it results in a hard inquiry, which usually drops your score by a few points. So avoid applying frequently for new credit cards, as this can signal financial distress.
But if youâre in the market for a mortgage or loan, donât worry about multiple inquiries. As long as you limit your shopping to a 45-day window, credit bureaus will treat it as a single inquiry, so the impact on your score will be minimal.
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9. Still Overwhelmed? A Debt Consolidation Loan Could Help
If youâre struggling with credit card debt, consolidating your credit card debt with a loan could be a good option. In a nutshell, you take out a loan to wipe out your credit card balances.
Youâll get the simplicity of a single payment, plus youâll typically pay less interest since loan interest rates tend to be lower. (If you canât get a loan that lowers your interest rate, this probably isnât a good option.)
By using a loan to pay off your credit cards, youâll also free up credit and lower your credit utilization ratio.
Many debt consolidation loans require a credit score of about 620. If your score falls below this threshold, work on improving your score for a few months before you apply for one.
10. Keep Your Credit Score in Perspective
All the credit-monitoring tools out there make it easy to obsess about your credit score. While itâs important to build good credit, look at the bigger picture. A few final thoughts:
- Your credit score isnât a report card on the state of your finances. It simply measures how risky of a borrower you are. Having an emergency fund, saving for retirement and earning a decent living are all important to your finances â but these are all things that donât affect your credit score.
- Lenders look at more than your credit score. Having a low debt-to-income ratio, decent down payment and steady paycheck all increase your odds of approval when youâre making a big purchase, even if your credit score is lackluster.
- Donât focus on your score if you canât pay for necessities. If youâre struggling and you have to choose between paying your credit card vs. paying your rent, keeping food on the table or getting medical care, paying your credit card is always the lower priority. Of course, talk to your creditors if you canât afford to pay them, as they may have options.
Focus on your overall financial picture, and youâll probably see your credit score improve, too. Remember, though, that while credit scores matter, you matter more.
Now go crush those goals in 2021 and beyond.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
If youâre serious about your credit score, you need to pay your bills on time. One late payment can have a devastating effect on your credit score. Hereâs what you need to know about late payments and your credit score, and what you can do to protect yourself.
How Late Payments Affect Credit Scores
Your payment history is the biggest factor in determining your credit score, so itâs imperative that you pay your bills on time whenever possible. If you do make a late payment, there are three factors that determine how much it will affect your credit score.
- Your credit score and credit history
- How long ago the late payment was
- How severe the late payment was
According to FICOâs credit damage data, one recent late payment can cause as much as a 180-point drop on a FICO score, depending on your credit history and the severity of the late payment.
Your Credit History and Late Payments
The impact of a missed payment on your credit score varies significantly depending on your circumstances. The better your credit, the more you may feel the sting of a late payment. In fact, that 180-point drop mentioned earlier is most likely to happen to an individual with excellent credit who is 90 days late on a payment. Because individuals with good and excellent credit donât have a history of risky behavior, one mistake sends up a red flag that can drop their score more dramatically.
Individuals with a shorter credit history will likely see a dramatic decrease in their score after a late payment as well. Because there is less information available on your financial behavior, a late payment is a bad sign. On the other hand, individuals with lower credit scores already have a history of risky behavior, so one more late payment wonât drop their score as much.
How Time Affects Credit
The more recent a late payment is, the more severely it will affect your credit score. A missed payment remains on your credit report for up to seven years from the date it occurred. The overall impact of the late payment diminishes over time and goes away completely when the missed payment ages off your report.
Your score won’t necessarily jump 100 points simply because a late payment ages off or is removed. Even though a late payment might have originally dropped your score by a good number, the impact of that late payment changes over time. How much your score goes up when a late payment is removed depends on a variety of factors, so youâll want to continue practicing smart financial habits like making payments on time and keeping your credit utilization low.
How Severity Affects Credit
If you missed your credit card payment by one day, you probably don’t need to sweat it. In most cases, lenders and creditors have grace periods that can range from a few days to up to 10 days. Grace periods are meant to account for minor mistakes and lag in mailing or posting payments. If your payment arrives within that time period, the lender may not count it as late.
Most lenders donât report missed payments until your account is 30 days past due. After 90 days, the effect on your credit score will be even more drastic.
Make sure to read the fine print on your account agreement, though, to know if you have a grace period. And avoid falling into the habit of relying on the grace period. If you’re used to paying your bill five days after the actual due date, you could miss the grace period if you experience a personal emergency. Also keep in mind that interest and fees may still apply during the grace period, even if your payment isnât reported as late to the credit bureaus.
How to Protect Your Credit History Against Late Payment Impact
Payment history is a huge part of your credit score. It accounts for around 35% of your scoreâover a third. Take action to ensure late payments aren’t impacting your score when they don’t need to. Here are three tips for doing so.
1. Check Your Credit Score and Report Regularly
Check your credit reports frequently to ensure late payments aren’t being reported inaccurately. A simple clerical error is enough to cause your score to go down. If you see inaccurate information on your credit reports, you can and should challenge it and ask for verification.
You can get a free credit report annually from each of the three credit bureaus. Due to the COVID-19 crisis, you can get your free credit report once a week through April 2021. When you request your credit report from AnnualCreditReport.com or the individual credit bureaus, you wonât also see your credit score. If you want to see both at the same time, consider signing up for ExtraCredit. Youâll see 28 of your FICO scores from all three credit bureaus, plus your credit reports from each.
2. Use Tools to Help You Make Timely Payments
Avoid late payments by using resources that ensure you make payments on time each month.
- Sign up for auto payments. Your lender may offer this option, letting you enter a credit or debit card or checking account and taking payments out of that account each month. The benefit is that you can set and forget your payments, never worrying that they’re late. The disadvantage is that you have less flexibility in when you pay each month, and you have to ensure you keep a balance in your account to cover the charges.
- Use apps or phone alarms. Remind yourself to make payments with app notifications that let you know the payment date is arriving soon. Many credit card companies and other lenders offer options for receiving such notifications directly from them.
- Make smaller, more frequent payments. If you’re struggling to save enough to cover a large bill each month, pay a portion of what’s owed every week. This can help simplify your budget, though you do need to ensure you’re not being charged convenience fees or other amounts every time you make a payment.
3. Ask for One-Time Late Payments to Be Forgiven
Life happens, and creditors are aware of this. So if you do find yourself making a one-off late payment, contact your creditor.
Apologize for the late payment, let them know it’s not a normal occurrence for you and point to your previously pristine payment history. Ask the creditor to waive late fees and interest charges as a courtesy and not report the late payment to the credit bureaus. It’s a tool you must use sparingly, but creditors may to oblige if you really do normally pay on time.
Your Credit Score Will Thank You
Making all your bill payments on time is one of the best ways to keep your credit score happy and healthy. Keep track of how youâre doing by signing up for ExtraCredit.
The post How Much Does One Late Payment Affect Credit Scores? appeared first on Credit.com.