The following is for informational purposes only and is not intended as credit repair.
Believe it or not, most people don’t have great credit. In fact, the average score is just 675, slightly lower than what most financial experts consider a good score. If you’re buried under a mountain of debt like student loans and past due bills or collections, your credit score may need some work. Here are 5 great ways to start managing your score:
1. Know where you stand
Before you can start working on your score, you need to know how much debt you’re in and who you owe. There are other factors to look for, too, like if any of your debts have been sent to collections or if you have any late payments on your report. Request a copy of your credit report so you can get the big picture; you can get one free report from each bureau every year from AnnualCreditReport.com. Then there are a variety of ways to get your credit score. You can use free tools like Credit Karma, or one of your credit card companies might offer a free score. You can also receive your FICO score when you go through a free budget and credit counseling session with Clearpoint.
After you review your report and score, be sure to follow this guide to disputing errors on your credit report, if applicable. Errors are a common culprit for low credit scores.
2. Beware of identity theft
You’re more susceptible to identity theft as your credit score improves so you’ll want to be on the lookout for it. Check your report at least once a year to make sure there aren’t any unauthorized accounts in your name. If you don’t recognize something, be sure to question it with the reporting agency.
3. Address high-interest debt
High-interest debt can hurt your credit score and your financial well-being simultaneously. It’s sometimes difficult to see the light at the end of the tunnel when your debt is piling up and you’re struggling to pay the minimum payments. As you carry more debt, your “utilization ratio” also increases, which lowers your credit score.
There are several strategies you might use to address your debt and how it’s affecting your credit score. Consolidation is one popular option. But the best course of action will be one that addresses the debt, and gives you a plan to manage your finances more effectively. That’s why we typically don’t recommend consolidation or balance transfers (though they can work for some individuals). Instead, check out how a Debt Management Program might help. As clients pay of debt under this program, their credit scores often recover at a steady pace.
4. Determine what needs to be paid off first
If you’re paying off debt on your own, without any professional service, then there are two primary ways you can attack your debt and improve your score. The first is to pay off your smallest debts first—this is called the debt snowball, and will allow you to eliminate some debt quickly. The second is to pay off your cards and loans with the highest interest rate first—this is called the ladder method. This will save you a significant amount of money over the long-term, and it’s most efficient.
5. Consider requesting higher credit limits
This may seem to go against your goals, but a higher credit limit can lower your utilization ratio, a component resulting in your credit score (assuming you won’t be using more credit once you have a higher limit). In other words, you can ask to have a higher line of credit, but you have to be self-disciplined and avoid using it. This strategy, if used carefully, will help you meet your credit goals and may actually be one of the fastest ways to get the score you want. It’s even better if you can have a higher credit limit and pay your balances down or off in full. Do both of those, and you’ll have an excellent utilization ratio.
Having a bad credit score doesn’t have to hurt your future. You can successfully manage your score in no time if you can pay down your debt, check for errors, avoid identity theft, and improve your utilization. The sooner you get to work, the sooner you’ll have the score you want!