Having good credit can help you lock in favorable terms on a number of financial products, from mortgages to credit cards. On the other hand, having a bad credit score can make it harder to qualify for loans and new lines of credit.
If you've made it a goal to boost your credit score in 2022, here are five strategies to consider:
- Review your free credit reports
- Improve your on-time payment history
- Pay down credit card debt
- Keep older accounts open
- Open a secured credit card
Learn more about each credit repair strategy in the sections below, and visit Credible to enroll in free credit monitoring services. You can also shop for a number of financial products, such as credit card consolidation loans and secured credit cards, for free without impacting your credit score.
The first step in boosting your credit score is identifying areas where you can make improvements. One effective way to do this is to review your credit reports from all three major credit bureaus: Equifax, Experian and TransUnion.
Check your credit reports for errors, such as missing accounts or clerical errors that result in erroneous missed payments. Then, dispute any errors by contacting the credit bureau, which is responsible for correcting inaccurate information through the Fair Credit Reporting Act.
You can request free weekly credit reports through April 20, 2022, on www.AnnualCreditReport.com. After that, you can pull your credit reports once annually for free. You can also enroll in free credit monitoring services on Credible, so you can identify mistakes or fraud as quickly as possible.
Your payment history has the largest impact on your credit rating, accounting for 35% of your score using the FICO score model. Derogatory marks, including missed payments, can last on your credit report for up to seven years, although they have less of a negative impact over time.
Enrolling in automatic payments for paying your bills and utilities is a simple way to improve your on-time payment history and build your credit score. It may also help to download a free budgeting app to track your spending and bills across all your bank accounts.
Another high-impact factor of your credit score is your credit utilization ratio, which is the amount of credit debt you owe compared to your available credit. For example, if you owe $500 on a credit card with a $4,500 credit limit, your utilization rate on that account is about 11%.
Borrowers who carry high credit card balances on a regular basis may have a high credit utilization rate, which can lower your credit score and cost you money over time due to high interest rates.
Let's say you carry $3,000 worth of credit card debt on an account that has a $5,000 credit line and a 17% interest rate. If you're just making the minimum payments, your credit utilization is 60%, which is about twice as high as the credit bureaus recommend. Plus, you're likely to pay hundreds of dollars worth of interest charges while you pay off debt.
One way to reduce your credit utilization and save money on interest is to consolidate credit card debt at a lower interest rate with a personal loan. As an added bonus, personal loans can diversify your credit mix, which may further boost your credit score. You can compare personal loans for debt consolidation on Credible with a soft inquiry, which won't impact your credit score.
Credit bureaus like to see a well-established credit history, which includes the average age of credit accounts in your name. If you have older credit accounts that you don't necessarily utilize, it may be worthwhile to keep them open to demonstrate a sufficient length of credit history.
Likewise, it may be wise to avoid opening new credit card accounts as you're building your credit score. New accounts will shorten your average age of credit, and they'll also result in a temporary (and minimal) negative impact due to a hard inquiry when you apply for the account.
You can also consider becoming an authorized user on a trusted friend or relative's credit card account. If they have a consistent on-time payment history on an older account, this can help build your own credit report without much effort on your end.
If you don't have an established credit history, it may be difficult to qualify for a traditional unsecured credit card. But without new credit lines, it can be challenging to build your credit.
Some credit card issuers offer secured credit cards, also known as credit-builder credit cards. These accounts allow you to borrow money from a line of credit that you secure with a lump sum of cash. With a secured credit card, you may be required to put $1,000 down upfront — then, you can use the credit card up to a certain limit.
Secured credit cards can help you establish an on-time payment history and add diversity to your credit mix. This can help you increase your credit score quickly while avoiding interest charges. You can visit Credible to compare a variety of credit cards, including secured cards.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at email@example.com and your question might be answered by Credible in our Money Expert column.
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