Having access to credit opens a lot of doors toward getting the things you want. While it is true that using credit cards irresponsibly can be disastrous for your finances, using credit responsibly can help you build a reputation (your credit score) that convinces lenders that they can trust you to repay borrowed money. You might be discouraged by the number on your credit report right now, and you might feel like qualifying for things like home mortgages and small business loans are out of reach, but the good news is that your credit score increases gradually as you demonstrate your reliability in meeting your financial obligations, including but not limited to repayment of borrowed money.
If you have recently run your credit report, it is probably because you applied for a credit card or loan, or because you want to apply for one, and you are wondering how you can increase your lackluster credit score. There is plenty of flippant advice out there, such as “Get a credit card, but almost never use it,”, but given that nearly half of Americans would not be able to pay a $400 unexpected expense without making a credit charge that it would take them several installments to pay off, there are millions of people out there who need to start smaller than that. If you do not have a credit history, or if you are trying to recover from a credit report that reflects financial setbacks and borrowing to make ends meet, there are still some concrete steps you can take, so that your next credit report will reflect an improved credit score.
- Make Bill Payments on Time
The usual line of thinking is that you have to have a credit card to improve your credit score, and you have to improve your credit score to qualify for a credit card. Consider, though, that when you apply to rent an apartment, the management company looks at aspects of your financial history such as your employment history and whether you pay recurring bills, such as car insurance, on time. Some services will provide a credit report of your “alternative credit history,” (https://www.prbc.com/) showing your track record of paying recurring bills such as rent, utilities, and phone service, on time.
- Negotiate with Creditors
It is human nature to want to ignore debts that you can’t pay or bills that went into collection, but dealing with them can be a first step to improving your credit score. Negotiate with creditors to see if you can get them to reduce late fees in exchange for you paying a certain amount by a certain date. Especially when dealing with collection agencies, be sure to get a written record that a certain portion of your debt has been forgiven.
- Get a Secured Credit Card
If you do not qualify for a regular (unsecured) credit card, you can start to build your credit history with a secured credit card. Secured credit cards require you to deposit a certain amount of money as collateral before they give you access to credit. At least when you start out, the credit limit will be equal to the amount of the collateral. After you build a good history by using your secured credit card responsibly (paying off its balance each month), you will be able to qualify for an unsecured credit card, which can raise your credit score even more.
- Pay Down Your Existing Debts
Your credit to debt ratio is a major factor in the figuring of your credit score. The higher your available credit (such as available credit card balances) is compared to all the debts you owe, credit card and otherwise, the higher your score. The first step to improving your credit to debt ratio is by paying down your debts. You are probably already making an effort to do this, but when budgeting your money, keep in mind that every penny you pay above the minimum payment helps your credit score.
- Have a Relative Add You to His or Her Credit Card
If you have no credit history, an easy way to build one is to be added as an authorized user on a relative’s credit card. This is especially helpful if your relative has a long credit history and a high credit limit on his or her credit card. If possible, make very few purchases using your relative’s credit card, and when you do make purchases, pay them as promptly as possible. If your relative is reluctant to add your name on the account, assure him or her that this is only temporary, and you will get your own credit card as soon as you qualify for one.