Credit scores are a way for lenders and creditors to assess your risk as a borrower. When they approve a loan, they attach an interest rate, which is the cost of taking out the loan. Generally, those with low credit scores are considered higher risk and therefore get charged higher interest rates.
With a mortgage, car loan, or personal loan, the interest could be a significant amount of your monthly payments. That's why it's important your credit is as good as it can be to help you save money on future credit. If your credit is less than ideal, the following plan can help give you the boost you need for your future investments.
What Qualifies as Bad Credit
Generally, a FICO score below 600 indicates poor credit and lending risk. Anything above 750 is considered excellent credit and will help you get lower interest rates on future credit.
How to Improve Your Credit
1. Always Pay Bills on Time
The easiest way to improve credit is to always pay bills on time. This will reflect in your credit score, showing lenders that you’re a trustworthy borrower.
2. Pay More Than the Minimum on Debt
When repaying debts, try to pay more than the minimum required each month. This will not only help you pay down debt faster, but it will also help your credit score. Making just the minimum payments suggests you’re struggling to manage your debts.
3. Keep Credit Utilization Ratio Below 30%
Your credit utilization is the ratio of your debt compared to the total available credit. For example, if you have a credit limit of $5,000 and $2,500 in debt, your credit utilization ratio is 50%.
One way to improve your credit score is to keep that number below 30%. If yours is above this, make it one of your top priorities to clear your debts faster.
4. Check Your Credit File for Errors
Sometimes credit reports contain errors, such as false missed payments or even personal detail errors.
Try to get into the habit of regularly checking your credit report for any errors. If you spot anything that could be an error, contact the credit bureaus (Equifax, Experian and TransUnion) so that they can open a case and investigate it.
5. Don’t Close Old Credit Card Accounts
You may be tempted to close your credit card accounts to improve your score, especially unused old ones. However, this will decrease your overall available credit limit and affect your credit history.
With a reduced credit limit, any debt you currently hold immediately becomes a bigger proportion of your credit utilization ratio. And if you close the oldest credit cr you have, that can significantly shorten your credit history.
6. Avoid Applying for Lots of New Credit
Another thing that could damage your credit score is applying for lots of credit in a short space of time – especially if you have some credit rejections.
Lenders want a borrower who can comfortably afford the repayments on time. If you have multiple credit applications, this suggests that you are struggling with money and are relying on credit – which can reduce your score.
7. Stick to a Strategy to Pay Down Debt Faster
Beyond making extra repayments here and there, it helps to have a solid strategy to help you pay down debt faster. This might include cutting a particular expense to make extra repayments on the debt or developing ways to improve finances overall.
You could also use a debt strategy like the snowball method. This involves paying more on the smallest debt first. Then once that’s clear, you move on to the next, and so on. Each time you clear a debt, you make the next one easier to pay off.
8. Get Strategic With New Credit
While applying for lots of new credit can look bad, one way to improve your credit is to actually take out new credit—especially if you have limited credit history or credit mix. If you can take out a new kind of credit and keep up with repayments, this shows that you can be a responsible borrower with various credit types.
An installment loan with regular, consistent repayments is one of the easiest ways to manage and build credit. You could also try a debt consolidation loan if debt is holding you back.
Make Small Changes and Regular Checks
The key to improving your credit is a combination of making small changes – either to your budget or financial management—and regularly checking your credit report.
It's tempting to ignore a bad credit report or even avoid credit in the future. But the best way to fix it is to take out credit, such as a loan that you know you can afford comfortably, so you can start to build up a history of good payment behavior.
Learn more about Jora’s bad credit loans to help you resolve debts faster.