The pandemic has wreaked havoc on consumer finances, but getting back on track can be done with time and thoughtful planning. One area that often gets pushed to the side is credit health. However, credit affects your ability to borrow money to buy a home or car or to get basic needs such as rent an apartment or open a utility account. Not to mention, there’s a high cost that comes with having a low credit score. In fact, borrowers with subprime credit scores pay nearly $400 more in interest for a $550 emergency loan over 3 months and $3,000 more in interest for a $10,000 used-car loan over 4 years compared to borrowers who have prime credit scores, as reported by the Urban Institute. That’s why rebuilding credit should be a top priority this year.
To help you get started, here are 5 steps on how to whip your credit into tip-top shape.
Polish your credit report.
Your credit report has information about your credit and payment history which is used by lenders, creditors, and other businesses to determine your creditworthiness. Checking your credit file regularly is crucial to ensure accurate reporting of your financial and personal data. Yet, only 33% of consumers reviewed their credit file in 2020, as reported by a LendingTree survey. In addition to potential errors, you have to keep an eye out for fraudulent activity in which a hold or freeze on your credit may be necessary. To dispute an error, explain the mistake in writing and send copies of supporting documents to both the credit reporting agency and creditor who provided the information in the first place.
Everyone can access their credit reports from all three credit reporting bureaus once per year for free, but during the pandemic, you can check your credit file every week at no cost through April 20, 2022 at AnnualCreditReport.com.
Wipe away debt.
If you’re carrying balances across your credit cards, it’s time to pay those down as this will negatively impact your credit score. In fact, your credit utilization rate—the amount of revolving credit you’re currently using compared to the total amount of revolving credit you have available—is used to determine your credit score. Using more than 30% often signals concern among creditors and lenders so it’s best to keep that low. Plus, you will save on interest fees. You can get ahead by consolidating balances using a low-interest personal loan or open a new card offering 0% interest on balance transfers to save on fees. Going on a spending freeze and using the extra cash to pay triple the minimum due will help wipe away debt faster, too. Since paying down debt can often feel like a long road, stay motivated by tracking progress using the Debt Payoff Assistant app.
Get outside support.
Becoming an authorized user is one strategy to rebuild your credit by leaning on someone you trust. This means you are added as a secondary account holder on a trusted person’s credit card. Assuming the primary account holder has a strong history of on-time payments and a low credit utilization rate, meaning they carry low balances, becoming an authorizer user can help boost your credit score. That’s because their positive credit management will appear on your credit file and will be factored into your overall credit score. Just make sure the person you ask is someone who you trust as any poor money management behaviors can also negatively impact your score, too!
Declutter your card collection.
With so many rewards programs offered by credit card companies and even retailers, you may be carrying several cards to benefit from the various cashback or travel programs. However, spreading rewards across multiple accounts dilutes the perks and makes it harder to optimize a card’s benefits. Not to mention, decluttering your credit cards also makes it easier to manage and track your purchase habits so you don’t overspend. When trying to find a credit card that will give you the most rewards, an app like Gigapoints can help. This credit card matching tool analyzes every purchase and selects the card that will yield maximum rewards for the types of purchases you make the most.
Flush out accounts carefully.
Closing a credit card you finally paid off may seem like a great way to avoid digging yourself back into debt, but this strategy can backfire in your pursuit to rebuild credit. This is because the length of time you’ve had credit plays a role in your credit score. That means you don’t want to close those old accounts. The best way to avoid overbuying is to cut up that credit card but keep it open to benefit from a longer credit history. Not to mention, the more available credit you have against the debt you’re using, the more responsible you appear to lenders which will also positively impact your credit.