If you’re confused by the many different pieces of advice you get from family and friends regarding building and maintaining good credit, you’ll be happy to know that doing so can be easier than you think. Based on the fact that the three major credit-reporting bureaus use basically the same objective criteria for evaluating consumer credit users, you can take precise steps to keep your credit score and reports in good shape.
Pull Your Credit Reports
The first step in building and maintaining good credit is to know where you stand. You can visit AnnualCreditReport.org and download all three of your credit reports free, once each year. Alternately, you can go to the websites of Transunion, Experian and Equifax and download your reports one at a time. Carefully review your reports to make sure all your information is accurate. If anything is incorrect, contact the agency or agencies and file a dispute. The directions for doing so are located at each agency’s website.
Use a Mix of Credit
If you’ve paid cash most of your adult life or have used little credit in the past, the best way to build creditworthiness is to open credit accounts and follow their terms of service. Shop for credit cards that offer a low annual percentage rate and/or no annual fee. Open a retail store account to differentiate the credit products you have, which will help improve your credit score. Begin using the cards and making payments. Make at least the minimum payment each billing cycle, or pay off the balance every month to avoid paying interest. A late or missed payment will damage your credit rating. If you have poor credit, talk to your bank about how you can restore your credit, asking if they have any programs for opening a credit card.
Avoid Products You Don’t Understand
Be careful of advertisers who entice you with credit-rebuilding cards that look too good to be true. Some offer exorbitant interest rates and big annual fees, while others require secured cash amounts that aren’t true credit cards. Debt-consolidation programs can help you lower your monthly payments, but can also damage your credit and stay on your reports for years. If you have a mortgage, contact your lender to see if you qualify for any government-backed refinancing programs that lower your monthly payments and interest rate without damaging your credit, such as the Home Affordable Refinance Program. Print out offers that seem attractive and meet with your banker or someone you know with credit experience to evaluate different products that may help you get back on your feet.
Review Your Cards
Evaluate your current credit cards based on their annual percentage rates and fees, balances and how often you use them. Don’t close an account because you aren’t using it, advises personal finance guru Clark Howard. Your debt-to-available-credit ratio is important to determining your credit score. The more unused credit you have, the better your score. Older cards also increase your credit score because they can show you have a history of being responsible with credit, while new cards decrease your score.
Sacrifice Some Savings
If you are contributing to a retirement or college fund for children, consider using that money to pay down loan and credit amounts. If you have a 401(k) match, stopping your contributions will most likely cost you much more in the lost match and annual interest than you save by paying down a card, but this tactic will help you lower your debt and raise your credit score. If you have the cash to do so, accelerate student and car loan repayment or credit card debt reduction until you get your debt-to-available-credit ratio below approximately 30 percent. This means that if you have $10,000 in credit available, try to get your balances below $3,000.
Borrow Family Money
If you have a family member who is wiling to lend you money, offer to pay them interest on money they lend you. This will help you reduce your credit card and loan balances to improve your score. In some cases, you can pay them less interest than you’re currently paying on a high-interest credit card, while offering them more interest than they are currently earning on a low-interest certificate of deposit or checking account balance.
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