If only we were offered a substantial financial education in our high school curriculum, many of the generally avoidable credit mistakes young adults make might have never happened. But we didn’t, and the damage is done. Research shows that most of the significant credit mishaps occur in our twenties, and the slip-ups linger on our credit reports for years to come. If you’re reading this, you are probably among the ones in need of some serious credit repair action. What can you do to boost your credit score fast? And what not to do in the process.
The Struggle of Late Payments
We know the phrase “avoid making late payments” is a cliche. The familiar tune you hear so often has another essential component – avoid making late payments at all costs and create a micropayment system composed of frequent smaller amounts throughout the month. You may think that one little accident is forgivable in the eyes of the lender. Unfortunately, the financial world is guided by a different set of principles. Even if one missed payment doesn’t significantly damage your credit score, getting in the habit of being late with debt repayment will have severe consequences in the long run. Not only will you potentially have to pay a late-fee charge every time you forget (and those add up), you may observe a notable interest rate hike as well.
Additionally, if you don’t make a payment within the same billing cycle, that’s a good enough reason for a creditor to furnish this information to the credit reporting agency. The credit bureaus will most certainly document the incident in your credit report. And that’s a cause for concern.
Now, let’s talk micropayments. To understand how frequent payments made to your account boost your credit score, you need to grasp the concept called credit utilization. The credit utilization ratio is the amount you currently owe divided by your credit limit. Your credit score is greatly affected by the percentage of debt, which generally should be lower than 30% of your total revolving credit. By making multiple payments throughout the month, not only are you splitting your debt into smaller amounts, making it more financially manageable; you are also continually lowering your credit utilization rate.
Increase Your Credit Limit
Why, so I can make more purchases? Increasing your credit limits serves more than one purpose. If you want to raise your credit score, maxing out your credit limit is not an option. If your financial situation makes it impossible for you to make frequent payments toward your debt, and consequently lowering your credit utilization ratio, increasing your credit limit may help you boost your credit score. That way, you automatically generate a lower credit utilization percentage.
Some platforms allow you to ask for an increase in your credit limit online, often getting an immediate response. Otherwise, resort to calling the credit card issuer and ask for an increase over the phone. Being denied will not reflect on your credit report and will not lower your credit score. To ensure that your credit score remains intact, ask the creditor to avoid making a “hard” credit inquiry in the process.
Get Out Of Debt Faster With a Balance Transfer Credit Card or Peer-To-Peer Loan
Sometimes the current debt is holding you back. It becomes more than you can handle, finding yourself unable to make the payments. Both tools will make your life easier, your debt becomes more manageable, and your credit utilization ratio lower. However, only consider this option if you genuinely believe that you will get approved for those options. Otherwise, it can be counterproductive – loan denial can impact your credit score because lenders make “hard” credit inquiries in order to check your creditworthiness.
Balance transfer credit cards and peer-to-peer loans typically come with lower interest rates. Pay off your outstanding balances to get out of debt faster, and use math to calculate your new monthly payment by taking advantage of the no-interest months offered. Try to squeeze in as much as possible during that period. Keep the previous accounts open since closing them may impact your credit score.
Utilize Your Paid Off Credit Cards
Credit card inactivity may subsequently result in the closure of your account. Making small purchases and paying them off instantly will minimize the risk of returning to debt and prevent the accumulation of interest. Open and utilized credit card accounts help you build a strong credit history reflected by your transactions and long-established relationships with creditors.
Canceling unused credit card accounts majorly affects your credit utilization by decreasing the amount of total available credit while the overall debt remains the same.
Become an Authorized User
A trustworthy relative or a friend with a long-standing positive credit history who is willing to add you to their account as an authorized user is an excellent source for building better credit history and consequently boosting your credit score. The account in question is added to your credit report. If the primary cardholder makes timely payments and maintains the account in good standing, you’re on the right track to building excellent credit with an outstanding credit score.
And here’s the kicker: You don’t even have to use their credit card. No purchase necessary. Sit tight and enjoy the benefits of being an authorized user on someone else’s account.
Mix Your Credit Up
There are different types of credit and loans available to consumers. Those include installment accounts, credit cards, mortgage, signature loan, or a car loan. The types of credit can be divided into revolving credit, such as credit cards where you decide how much to pay each month, or an installment account, where you have a fixed amount every time your payment is due. Having different types of credit under your name is extremely helpful in building positive credit history and boosting your credit score. If you only owe credit cards, consider applying for an installment loan to improve your creditworthiness.
What Not To Do?
Believe it or not, some things, often surprising, hurt your credit score. Let’s get a quick look at the factors that contribute to decreased creditworthiness, and consequently, low credit score.
Missing a payment
You might think, “not again with late payments.” We can’t emphasize this enough – missing a payment is largely avoidable damage. Period. If you still question the importance of up-to-the-minute repayments, think about it this way: payment history is responsible for 35 percent of your credit score. That is quite significant. Missing the entire billing cycle accounts for a loss of 90 to 110 points. What’s more, a missed payment can be present on your credit report for up to seven years.
Avoid hard inquiries
Are you attempting to finance your desired laptop for a fifth time this month? Rethink the idea, as any effort to obtain a loan or credit card, results in a hard inquiry. Hard inquiries occur when a lender pulls your credit report to check if you qualify, judging by your previous credit endeavors. Although the loss might seem minimal, if you frequently apply for credit, the numbers add up, impacting your credit substantially.
Requesting too many credit cards
Applying for numerous credit cards within a span of a few months not only increases your “hard” inquiry volume; your behavior gives away the desperation for credit. According to FICO, you are more likely to declare bankruptcy in the near future if you have six or more inquiries on your credit report.
Often inevitable, bankruptcy can cost you up to 240 points off your credit score. And unlike other financial mishaps, bankruptcies stay on your credit report for up to ten years.
While boosting your credit score is often a process that might take up to several months, by following the tips and tricks provided in our guide and understanding the basics of credit, you can improve your credit score in 30 days. Remember, even a slight positive change can have a long-term impact on your financial situation.