Financially speaking, you can't get very far in life without credit. It's a harsh reality for some, especially those who try to qualify for a car loan or secure a mortgage only to be turned away because of poor credit -- or worse -- no credit. Fortunately, there are some things you can do to help build or improve your credit score.
Evaluate your borrowing situation. If you have never borrowed at all, even to the extent of opening up a checking or savings account, lenders will have no way of assessing your credit history. It's a Catch-22: It seems like you need credit sometimes to get certain types of credit. Start small. Develop a budget, and over time, develop different types of credit such as a secured bank credit card or retailer loan. The key is balance. High outstanding credit card debt can negatively impact your credit reports. Bank of America recommends credit card and loan payments comprise less than 20 percent of your net monthly income.
Pay your bills on time. More than one-third of your FICO score is based on your payment history. Creditors look at all of your payment history, including rent, utility and phone bills, so keeping up with credit loans is not enough. Getting behind in payments is the Achilles heel of most people struggling to build up their credit. If you're behind, contact your lender and ask if you can work with them to get back on track. Your proactiveness may help calm the waters and keep your account from being referred to collections.
Pull your credit reports and clean up. There are three credit bureaus that collect credit data -- Experian, TransUnion and Equifax. Review all three of these reports by visiting AnnualCreditReport.com (you are allowed one free credit report per year) and rectify any outstanding credit issues, address or name errors, erroneous inquiries and other matters. Be sure to contact the creditor and the credit bureau with your corrected or updated information. The individual scores you receive from each credit reporting agency are what comprise your FICO score -- your golden ticket to all things credit-related and the embodiment of these reports. The negative factors listed on your reports are responsible for your score not being higher. Your credit score is based on a scale of 300 to 850, with a score of 700 and higher being excellent.
Pay off debt. Lowering your debt-to-income ratio is one of the best ways to improve your credit rating. Keep your balances low, or, if possible, pay them off fully each month. Avoid the shell game of transferring debt between creditors as a means of paying down the balance. While it appears to be a quick fix to reduce your interest rate, you're essentially reducing the overall amount of available credit allotted to you.
Consider getting a co-signer if you're unable to get approved for a credit card or loan on your own. (This should be a last-resort option.) Note: This is not the same as applying for a joint account. Your co-signer will be held financially liable should anything go awry with your ability to keep the account in good standing. However, if you keep the credit limit small, this will minimize risk to the co-signer and enable you to begin to establish or improve your credit history.
- While it's tempting to close a credit account after you've paid it off, hold that thought. Fifteen percent of your FICO score is determined by the length of time you've held a credit relationship. Carefully consider which accounts to close to optimize your credit portfolio, and avoid any closures shortly before applying for a large loan.
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