If you have seriously damaged your credit or have not started to build any credit, you may be wondering if there are any ways to quickly and drastically improve your credit score. Let’s say you have a 480 credit score, for example, and need to bring it up to at least 650 before you can apply for a loan.
Are there any steps you can take to make that happen?
Knowing Your Score
When you look at your credit score, it is important to know how much each contributing factor impacts your score. As you can see in the graphic below, payment history and balance owed are the two most important things to keep in mind when trying to improve your score. The remaining 35 percent of your score is made up of credit history (most blemishes take about seven years to fall off your report), the types of accounts open (creditors would like you to have open credit in various different categories, i.e. auto loans, credit cards, student loans, etc), and new credit accounts.
So, how do you use this information to help improve your credit score?
Sticking with the example above, if you are trying to raise your credit score by 100+ points, you’ll need to have a plan of attack. While there is no set process for bringing your 480 credit score up, there are a few things you can consider changing to increase your score:
- Know your score. Consider downloading a free tool like Credit Karma, Credit Repair, Credit Firm, and Credit Assistance Network or similar apps that allows you to monitor your credit. Once you see your score and know where you are you can begin to take action and improve your score. Remember to look at your credit report critically and identify any items that may be fraudulent.
- Save some money. There is always a huge debate in the finance world when it comes to whether you should save or pay off debts first. If you don’t have any money in savings you’ll need to establish emergency savings before tackling any of your debt. Your 480 credit score will only get worse if you have to continue taking out loans or credit cards for emergencies. If you’re having trouble saving, you may consider selling some of your old stuff for extra cash.
- Start making payments. After you have an emergency savings account started then you can start making payments. You’ll want to pay more than the minimum monthly payment and, if you can, pay the debt off completely. As you know from the graphic above, having an overall lower balance owed will improve your score significantly.
- Set payment reminders. A huge portion of your credit score is attributed to your payment history (about 35 percent). If you chronically pay your bills late your score will go down. Setting up payment reminders or automatic withdrawal is a great way to make sure your payment history isn’t negatively impacting your credit.
- Once you’re able, pay things off completely. If you’ve been paying on things each month and your balances are getting more manageable, pay them off. Having completely open lines of credit will help you repair your credit drastically.
- Keep your old accounts open. Remember, if you pay an account off it is better to leave it open and unused than to close it. Closing an account can actually negatively impact your credit.
- After you make progress, consider getting new lines of credit. After you’ve saved some cash, paid items off and established a better payment history you may want to consider opening new lines of credit. (You do need credit to have a good score.) You may find it difficult to find lenders, especially if you recently had a 480 credit score. If that is the case, consider a secured credit card or other secure debts. If you maintain the good payment practices mentioned above, a new credit account will help improve your score tremendously.
Build Your Credit Score From 480 to 650 With Small Changes
Maybe your score is better than 480, but could still use some work. If this is the case, there are a few smaller changes you can make to improve your credit score:
- Don’t max your credit cards out. Maxing out your card every month (even if you pay it off) will not help improve your credit. It is recommended that you keep your credit card at 30 percent of its limit. So, if you have a $10,000 credit card you would only ever spend up to $3,000 on it.
- Become an authorized user. If you’d like to increase the amount of credit available to you (about 10 percent of your credit score makeup), then becoming an authorized user on a credit card may help. Usually you will have to find a relative or friend willing to allow you access to their card, which can be hard. But it can be a great way to bump your score up a little if you both pay the bill on time.
- Ask for a credit limit increase. Increasing the amount of credit you have can help increase your score a bit too. Similar to the previous point, upping the amount of credit available to you can improve your credit score. It is important to keep in mind, however, that you shouldn’t start to over-use your new credit. Spend the same amount you would have before the credit increase.
Things to Keep in Mind
Whether you have a 480 credit score or no credit at all, it is important to remember that communication is key when it comes to creditors and debt collections agencies. If you hit a hard spot financially, talk to the lender. Oftentimes, they will work with you on a payment plan or even defer payments if possible. When you begin to ignore their calls and cease communication, you make it harder for them to help you.
There Are No Shortcuts
Also, keep in mind that increasing your credit score won’t happen overnight. In fact, it will likely take months to improve your score by 100-150 points. It is important that you don’t become discouraged and continue to work on improving your credit score. By just changing a few things in your day-to-day life, you’ll be on the road to good credit in no time.
Having Good Credit Makes You Feel Great
Lastly, getting your score from a 480 to a 650 makes you feel great. Your borrowing costs are lower, your self-respect is higher, you are in charge of your personal finances and you are a making the right decisions to improve yourself. You are in effect a more financially savvy and disciplined person. So, there are lots of reasons to improve your credit score.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.