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Steps to take to build or rebuild your credit

Smart holiday spending with credit cards
Posted at 11:54 AM, Feb 04, 2020
and last updated 2020-02-04 17:05:52-05

Many people have financial resolutions for the New Year and if one of those was improving your credit score. Here are some tips on how to accomplish that goal.

Carl Carlson, CEO of Carlson Financial, said credit scores will be considered when applying for a new credit card, car loan, place to rent or mortgage. In some cases, a low credit score will get you denied for something that you want, or if approved, you will have to pay higher interest rates, meet specific conditions, or put down deposits – even for things like utilities. It can affect your insurance rates and cost you hundreds of dollars per year in additional premiums.

Also, employers are increasingly checking applicant's credit scores and might use it to gauge responsibility, whether or not that’s accurate. As you increase your credit score, it opens access to better credit products and paying less to use them, for example, 0% interest car loans.

Making on-time payments is very important. Even one missed or late payment can be a drag on your credit score, and it can stay on your credit report for seven years, so getting your payment in on time is really important, Carlson said. For fixed monthly payments, it’s probably best if you can set up auto-pay just to make sure you don’t miss a deadline. For other bills that might vary from month to month like a credit card bill, that’s not as practical and might cause you to overdraw. But you could still setup a monthly payment for the minimum amount due and then manually pay extra if you can. If you really can’t avoid missing a payment, call the creditor to try and negotiate the amount or the interest rate.

It's good practice to not use more than 20% or 30% of available credit. Carlson said your “available credit” is the amount of money a creditor has agreed to let you spend, like a $10,000 limit on your credit card. Credit utilization is the amount of this limit that you’re actively using, so if you have a $3,000 balance on a card with a $10,000 limit, you have 30% credit utilization. It is best to keep that low, below 30%. If you find that you’re consistently utilizing more than 30% (even if you pay it off every month!), it might benefit you to ask for an increase in your credit limit, assuming that you trust yourself with a higher credit limit. Getting the credit utilization down can quickly improve your credit score.

To improve your credit it's smart to save for a rainy day. This might not DIRECTLY impact your credit score, it’s more prevention than rehabilitation. If you’re prepared for unexpected expenses, there’s a smaller chance that you’ll need to use credit to pay for things. An “emergency fund” can help you continue to make payments and use less available credit during hard time, Carlson said.

Paying for a credit-monitoring service probably isn’t necessary unless you’ve had your information stolen and credit compromised before. For most people, he just recommends getting a free annual credit report at least once per year. You can get these from each of the 3 credit reporting agencies and if you’d like, choose to space them out throughout the year. Put a reminder on your new 2020 calendar so you know when you last requested. Many financial institutions also offer free credit score reports, and a sudden change in your credit score could be a tip-off that something might be going on.

Whenever you apply for new credit, like a credit card, car loan, mortgage refinance, it counts as a hard inquiry, which can bring your credit score down a few points for a while but overall, isn’t a huge deal. If you close an old credit card or open a new one, it will bring down the average length of time that you’ve had credit. That can also hurt your score, but it will improve over time as you’ve had credit for longer. If you’re not paying a fee on that old credit card, it doesn’t hurt to keep it open.