Your credit score isn’t something to take lightly, as it can have a huge impact on your life and your finances. If you need to get any sort of loan, your credit will help determine whether you’re approved and the annual percentage rate (APR) the lender offers you. A high credit score could end up saving you thousands in interest on a loan. There are also plenty of other situations that could involve a credit check, from finding a job to applying to rent an apartment.
If you don’t have the best credit, there is no magic bullet to boost your score. Repairing your credit will hinge on adopting the right financial habits.
Make a Budget
The first step when you want to get your finances in order is making a budget. This doesn’t need to be some lengthy process that takes you days to complete. You just need to write down how much money you’re making every month through your job and any other income streams, and then list all your expenses. Banking statements and credit card bills are an easy way to find out how much you spend.
Once you’ve done that, you can see if you’re making enough to cover your bills every month and pay off any debt you have. If not, you need to find ways where you can cut spending.
Paying Your Bills on Time
Your payment history is one of the most significant factors in determining your credit score. If you pay your bills late or miss payments, it lowers your score. Make sure that you pay all your bills by the due date. Set up automatic payments if you need to so you don’t miss any.
No Quick Fix: How to Repair Your Credit the Right Way
The other key factor in your credit score is your credit utilization, which is how much of your available credit you’re using. If you have one credit card with a credit limit of $10,000 and your balance is $5,000, then your credit utilization is 50 percent. Credit bureaus lower your score once you go above about 25 to 30 percent credit utilization, so aim to stay below this amount.
Keep in mind that credit bureaus could check your credit utilization at any time. If you put a large purchase on your credit card, it’s best to pay it off as soon as possible instead of waiting until the due date.
Debt has become far too common. The average American household has $16,000 in credit card debt alone. If you’re in debt, commit as much as you can every month to repaying what you owe so you can minimize the amount of interest that you pay.
Long-term loans, such as mortgages, auto loans and student loans, aren’t as much of an issue when it comes to debt. These are all major purchases, so taking on some debt can be okay. When you need a home, a vehicle or an education, getting a loan can be worth it. But you should do everything in your power to avoid other types of debt.
Credit card debt is typically a result of spending beyond your means. Debt from short-term loans, such as auto title loans, is usually from not having an adequate emergency fund ready for financial hardships. Focus on paying off these types of debt immediately, and then correcting the issue that caused that debt in the first place.
It takes time to repair your credit score, but the habits that build your credit score also help you become more financially responsible. Focus on budgeting, controlling your spending and paying off your debt. Make sure that your credit utilization stays under that 30 percent mark, and ideally you should pay off your credit card balance in full every month. As you do this, you’ll get into that good-to-great credit score range.