One of the most important indicators of a borrower’s financial health is that person’s credit score.
A credit score is a three-digit number determined by assessing a borrower’s total number of credit accounts, accumulated debt, payment history, and other factors. Age of accounts also plays a role in determining a credit score, with older accounts more meaningful than newer ones.
If a borrower has a high, or good, credit score, lenders can feel confident that the individual will pay back any loan on time and in full. Such borrowers often get more favourable interest rates as a result of their established track record of financial trustworthiness.
Conversely, a low score is a warning sign to lenders that a borrower is riskier and may not be able to make full or regular payments. The increased risk often means these individuals must pay higher interest in order to access credit, raising the total cost of their borrowing.
Other consequences of a low credit score include shorter borrowing times or requiring a co-signer to access credit. Likewise, landlords, retailers, insurance companies, and utilities can access your credit score, and use the information to increase or decrease the deposit they charge you, or even whether to consider you as a tenant or customer.
If you have a low credit score as a result of financial hardship or limited credit history, here are three things you can do to improve your score and decrease the cost of accessing credit.
Pay your bills on time
There’s no more important factor in determining an individual’s credit score than payment history. Missing loan and credit card payments by 30 days or more means your overdue account can be reported to credit bureaus, and your credit score will take a hit. However, a long history of on-time payments will prove you are a reliable borrower, so work hard to keep your loan and credit card payments up to date. Even if you can’t pay the full amount each month, be sure to make the minimum payment and try to pay off the rest of the balance before steep interest rates increase your debt.
If you’re struggling to stay on top of bills, consider setting up automatic deductions from your bank account, or setting calendar reminders on your phone or computer to keep you from forgetting. Try to maintain good paper or digital records of your bills and payments, so you’ll always be on top of things.
If you expect a problem making a payment, contact your lender directly and explain the situation; they may have some sort of clemency program you can benefit from. Also, don’t skip payments because a bill is in dispute – let the issue work itself out in its own time.
On the subject of payments, make sure you also stay up to date with other monthly obligations, everything from rent and gym memberships to cell phone service and utility bills. While the payments themselves might not improve your score, you’ll avoid the woes of an overdue account being reported to a credit bureau.
Build up your credit, but don’t use too much of it
As a general rule, try not to use more than a third of your available credit at any time, whether it’s credit cards or a line of credit. For instance, if your card has a $10,000 limit, try not to charge more than $3,000 to $3,500 to it each month. That way, you’ll ensure your credit usage rate remains around 33 percent.
If you spend $1,200 each month but your card only has a $2,500 limit, you’re using a much higher percentage of your available credit. As long as you can resist the temptation to overspend, ask your financial institution or credit card company to raise your limit – you’ll keep spending as much, but it will represent a much smaller percentage of your total available credit.
If your spending is consistently high or you can’t increase your limit, another option for those with sufficient income to consider is increasing the frequency of payments. Weekly or bi-weekly ‘micropayments’ help decrease your credit usage rate in advance of the monthly due date.
Consider keeping old accounts open even if you no longer need them
Do you have an old credit card that you seldom use anymore? Perhaps you took out a line of credit a few years back to pay for a family trip or a home renovation project, but have since paid off all that you borrowed.
While you might be tempted to cancel that little-used card or close down the line or credit, keeping them open can actually be beneficial to your credit score. Not only do the card and the line of credit increase your overall amount of credit, their age will improve your score by lengthening your credit history and demonstrating years of responsible bill payments. No matter what credit you keep active, just be sure to use it or access it from time to time so the account doesn’t go dormant.