For many people, rebuilding their finances is a battle that begins and ends with credit. Credit was an easy crutch to lean on during the recession, and in 2009, average household credit debt ballooned to nearly $20,000. At last count, that average had fallen to just over $15,000.
Before you get too excited, this improvement is actually a little misleading. Americans didn’t suddenly change their credit habits overnight. With so many seriously delinquent accounts floating around, credit companies increasingly started “charging off” accounts (letting cardholders settle debts for smaller amounts) and in turn, they tightened restrictions for new lines of credit. Both of these factors contributed to lowering household credit debt.
Because of those new restrictions, these days you’ll need nothing short of a stellar credit score to have a shot at decent credit (the average APR is over 15%). For many, that will mean doing some serious damage control. To help, we came up with a simple guide with actionable ways to start rebuilding your credit.
It won’t happen over night, but follow these tips and you’ll be on you way to a better score this year:
1. Attack the largest debts first.
Focus on your larger debts first, since paying them down will pack the biggest punch and likely save you the most on interest charges. A big chunk of your credit score is based on your revolving debt (debt you have lingering on cards that hasn’t been paid off yet) and the smaller that total is, the better off you’ll be. The general rule of thumb is to keep credit balances under 30% of your available limit, but if you’re looking to improve your score dramatically, you need to aim for 10% utilization or lower. That means carrying no more than $100 at a time on a $1,000 credit card.
2. Whatever you do, make payments on time.
There is no better way to improve your credit score than simply making on-time payments. Payment history makes up a whopping 35% of your credit score (check out the full breakdown in the chart below), which means a missed payment can be seriously detrimental. The simplest way to make payments on time? Leave nothing to chance. Sign up for auto payments and set text reminders on your cell phone a few days in advance to make sure you’ve got the cash on hand.
3. And if you miss payments? Start sweet talking.
Mistakes happen. If you miss a payment on your credit card, the good news is that you have time to call up your lender and sweet talk them into removing the flag on your account before they report it to the credit bureaus.
“ You have 30 days from the due date before the lender can report the late payment to the credit bureaus so you have a bit of wiggle room,” says John Ulzheimer, credit expert for CreditSesame.com.
4. If possible, always pay more than the minimum balance.
This is easier said than done, but you’re only doing credit card companies a favor by paying their puny minimum balance each month. They get to rack up interest charges on your account and you might as well be spinning on a hamster wheel for all the progress you’ll make paying down your balance.
5. Look into a secured credit card.
A secured credit card can be an excellent tool for people with poor credit to rebuild their scores. Bankrate.com has a smart guide to understanding secured credit cards, but here’s how they work in a nutshell: You pay a lump sum upfront (usually around $300 to $500), which is used as collateral, and receive a credit card with that amount available. All of your payments are then reported to credit bureaus and reflect positively on your credit history, helping you improve your credit over time. Note: They don’t come for free. Try to find a card without an application fee and a low annual fee.
6. Go to your credit union for a credit builder loan.
If secured credit cards aren’t up your alley, try applying for a credit builder loan from a local bank or credit union. This is a favorite credit-building strategy of Ulzheimer’s.
Unlike a typical loan, you don’t actually get access to the money straightaway. The bank will put it in an interest-bearing account and hold it there while you make monthly payments on the balance. Once you’ve paid off the balance, you get the cash (plus interest!) and you’ve had a year or two of good payment history reflected on your credit report.
7. Get authorized on someone else’s account.
Becoming an authorized user on a spouse or parent’s credit account is a simple way to get some good credit under your belt. Just use caution. If that person winds up screwing up their credit, your name will be attached to the card and your credit will get dragged down right along with theirs.