Farm credit: Your use of credit is an important part of your financial history. Lenders use your credit score to determine whether you qualify for a loan based on current loans, payment history, and other factors. Landlords may use your credit score to determine if you will make a good tenant. Even some employers may use your credit score to determine if you make sound financial decisions. Whether you want to prevent bad credit from developing, improve already poor credit, or build up to good credit, it is important that you practice responsible financial habits.
Check your credit score. A credit score is a number that lets lenders know how likely you are to pay back your loan on time. Knowing your credit score will help you determine whether or not you need to change your paying habits. To get your credit score, contact your credit card company, loan officer, or at an online credit score service like Annual Credit Report.
- Credit scores generally run from between 300 and 850. Above 700 is generally considered to be a good score while a score under 600 will restrict your access to loans.
- A credit report lists all of your credit activity, including any open accounts, debts, liens, ongoing foreclosures, and all inquiries that creditors have submitted. Many free credit reports do not actually contain your credit score. Reports are still useful, however, because they allow you to check for mistakes.
- Your credit card company may provide your credit score for free on your monthly statement or through your online portal. Others, however, may make you pay to receive your credit score.
- There are many factors that contribute to credit scores. These include your bill-paying history, your current unpaid debt, how many loans you have, how long you’ve held your loans, your credit ratio, and any new applications for credit.
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Minimize the use of credit cards. Credit cards are a common source of debt. If used responsibly, credit cards can help build good credit, but if allowed to get out of hand, credit cards can quickly lower your score. To use credit responsibly, make sure that your credit card balance does not exceed more than 20% of your total credit limit.
- Pay more than the minimum towards your credit card debt each month. Ideally, you should be paying back the full balance each month. If you do not pay back the full balance, you will accrue interest on the debt you have not paid, which will increase the debt over time.
- Use the card for small purchases, such as gas or groceries, or for purchases that get you special cash-back bonuses through your bank.
Read your contract. Reading your credit card contract or loan agreement will help you understand what you need to do to remain on good terms with your debt. Hidden penalties can sometimes hurt your credit. Some common things you may want to look out for include:
- Penalty APR: If you don’t pay your balance on time, the lender may increase your interest rate.
- Acceleration clause: If you miss enough payments, the lender may declare the entire balance due at once.
- Balloon payments: Your loan may have small monthly payments with a large final payment at the end, known as a balloon payment. Sometimes, this final payment is too large for you to afford paying it. Failure to pay the balloon payment may cause the lender to initiate repossession or foreclosure.
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Make payments on or before due dates. One of the most effective ways to avoid bad credit is to make all payments on your bills and debt on time. There are many reporting and monitoring agencies that alert the credit bureaus if you are late or delinquent on any payment. Late payments can cause your credit score to drop.
- It is important to pay each of your bills on time. This includes credit card bills, rent, utilities, and even cable and cell phone bills.
- Pay your bills at the same time each month. For example, each time you get paid, take time to sit down and make payments.
- Keep track of due dates by noting them in your calendar. You can even use technology–set reminders to help you remember each payment date.
- Many utility companies and credit agencies will allow you to set up automatic payments each month. These will automatically charge you when the bill is due for payment.
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Keep account balances low or fully paid each month. Using credit responsibly can be a good way to build your credit score. However, hitting the limit on any of your credit lines will lower your score. You should also avoid maintaining large balances on any of your cards. In addition, avoid creating a high debt-to-income ratio. This ratio measures your income to the amount you pay in debt payments each month. A high ratio (over one third of your income going to debt each month) can make you less creditworthy.
- Try to keep your credit card balance under 20% of your credit limit.
Maintain savings for emergencies. It can be tempting to use your credit card when there has been a costly emergency, but you can avoid this debt by keeping at least three months of your wages saved in an emergency fund. Do not touch this money unless you absolutely need to.
- If you have children or dependents, you may want to save more than three months of your wages.
- If you have no emergency fund currently, try saving a little bit of your paycheck each month to put into an emergency fund. Start with whatever money you have to spare, no matter how small.
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Monitor credit transactions for accuracy. You are able to request a free credit report once every twelve months. You can get this report from each of the major credit bureaus— Equifax, Experian and TransUnion. Go over the report carefully, and double check all transactions on the report. If you see a mistake, report it immediately to have it removed.
- Sometimes, credit reporting agencies will confuse people with similar names. If you have information on the report that does not belong to you, it may be a case of mistaken identity.
- If you have been divorced, your ex-spouse’s information may still be on the report. If this happens, report it immediately.
- Occasionally, a debt that has been paid may still be listed as delinquent or it may be listed twice. Report these discrepancies immediately.
- To report a mistake, you can write the credit reporting bureau a letter or you can use their online platform. Provide documentation of the mistake. By law, they must either open an investigation or delete the mistake within three days. They inform when they have done this.
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Remove mistakes on your credit report. Get a copy of your credit report by visiting annualcreditreport.com. This report is free to obtain once per year. When you have your copy, check it closely to see if there are any misreported or duplicated debts on your credit report. If so, contact the credit reporting agency (Experian, TransUnion, or Equifax) and go through their error disputing process. If they cannot remove the debt, you may have to contact the lender listed on your report and have them change it. Removing these types of errors can dramatically improve your credit score.
Catch up with delinquent debts. If you have any late payments or delinquent debts on your credit history, this is likely negatively impacting your credit score. Contact the lender to work out a repayment plan so that you can eventually have the bad debt removed from your credit report. When paying off debt, start with the debt with the highest interest rate and then, once that is paid, move on to the debt with the next highest rate. This can help you avoid accruing additional interest debt while you work to repay your debts.
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Negotiate with creditors to remove bad reports. Creditors are not required to submit information about your credit history to the reporting bureaus. You may be able to convince your creditor to remove or modify certain statements on your credit report. Talk to your lender or loan officer to see if you can negotiate a solution.
- If you have made good payments recently, you may be able to convince them to take off an older mistake. Alternatively, if you only missed one payment, you might be able to use your strong history of paying on time to convince them that it won’t happen again.
- If you have missed many payments, you may be able to offer the creditor a settlement, where you pay the amount due and avoid late fees and high interest rates. If you pay back the money due, they may be willing to remove it from your statement.
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Visit a credit counsellor. If you feel like you are unable to fix your credit on your own, help is available. You can visit a credit counsellor. Most credit counselling services are non-profit, and you can receive advice in person, over the phone, or online.
- Credit counsellors can help you figure out a debt management plan, and also help you create a workable budget.
- When you contact the office, ask what kind of services they provide and what qualifications the counsellors have.
Wait before applying for new credit. In general, you should avoid applying for new credit frequently. Applying for new credit cards or other types of credit can have a negative impact on your credit score if you do so frequently. If you need more credit to make a purchase, ask for a credit increase on a current card instead.
- However, if you only have one or two open credit lines, opening others can help decrease your credit utilization ratio, which can improve your credit score.
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Be patient. A bad credit score can be a major setback in achieving your financial goals. However, you can take steps to repair your credit. Just be aware that there is not a fast, simple way to raise your score.
- It can take several months, and even years, to raise your credit score. You need to pay all of your bills on time and demonstrate your financial responsibility.
- Be honest. Do not try to hide your poor credit from potential landlords, lenders, or employers. Instead, honestly and openly explain your circumstances.
Set a goal of raising your credit score. One way to have “good credit” is to have a high credit score. Your credit score is a number used to tell lenders, potential employers, landlords and others what kind of financial risk factor you have. Many lenders rely on FICO credit scores for this number. FICO stands for the Fair Issac Corporation, which is the company most relied upon to calculate credit scores.
- Credit scores can range from 300-850. The higher the number, the better. There is no set number for what defines “good” credit. Some lenders consider 650 good, while others go a bit higher or lower.
- There are three credit bureaus that keep files on your finances and release credit scores: Equifax, TransUnion, and Experian. You can get your credit score from these companies through their websites for a small fee.
- Your credit card, bank, or websites like Credit Karma or Credit Sesame may be able to provide you with your credit score for free.
- Your credit score will fluctuate over time, based on five factors: amount owed, new credit, length of credit history, credit mix, and payment history.
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Implement a budget to control spending. A monthly budget can help you prevent spending money that you may not have on items that you do not need. To create a budget, track how much money you make each month, and then tally up your expenses. Separate necessary expenses—such as rent, utilities, and insurance—from non-necessary items—such as eating out, going to the movies, or shopping.
- Set aside part of your paycheck each money to put into savings.
- If you are in debt, allot part of your paycheck each month to paying it off.
- Write down everything you buy and how much it costs. This can help you determine where your money is going. You can then eliminate or reduce places where you are spending too much.
Identify any bad habits that might affect your credit score. Be aware of your spending habits, and look for patterns or habits that cause you to spend more than you can afford each money. You should not be putting more money on your credit card than you can afford.
- If you rely on a credit card to get you through the money, you may want to develop a budget to see if there are any places where you can cut down on your spending.
- Avoid using a home equity line of credit for other types of purchases, as not paying it off could result in foreclosure.
- Co-signing someone else’s loan is generally a bad idea, as it puts you at risk if they do not pay back the loan. This can damage your credit just as much as taking out a loan yourself
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Avoid certain loans. Sometimes a loan can help your credit. Examples of “good” loans are mortgage or car loans from a reputable lender, such as your bank. However, there are many types of loans that can be detrimental to your credit.
- Payday loans should be avoided at all costs. These loans, which are granted to anyone with proof of income, can have exorbitant interest rates.
- Auto-tile loans are usually not a good idea, because the rates on these are usually high. You are also putting yourself in a situation where you might have to forfeit your car.
- Certain car loans can also be very bad deals. If the interest is in double digits, or it will take you more than 5 years to pay back the loan, it is not a good loan.
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Build your job history. Lenders look for several factors when deciding what type of loan they will grant you. One thing lenders look for is that you have a history of reliable income. You will often get a better loan rate if you can show that you have worked at the same job for a number of years.
- A solid job history can help you get loans and higher credit amounts on your cards.