Building and Improving Your Credit Score: A How-To Guide

Credit is very important to be able to succeed in life and reach your goals, such as buying a car or owning a home. Even when it comes to renting a place to stay, or for certain jobs, credit checks are performed. Poor credit can lead to all kinds of problems in your life, affecting your work, home, and your personal well-being. Financial problems are a huge factor in your quality of life and mental health. If you are struggling with poor credit there are some steps you can take to help you improve your credit score and put you on the path that you need to to reach your life goals.

While it may seem futile, especially in the cases of incredibly poor credit, there are multiple steps you can take that will put your credit on the road to recovery and allow you to move forward with life, without your poor credit dragging you down. Here are some steps you can take and advice you can follow that will allow you to begin the process of improving your credit.

Credit Score

You Need Credit to Build Credit

One of the biggest misconceptions regarding credit ratings is that not having loans or credit cards is in your best interest for your credit score, and this is actually false! You cannot build a strong credit portfolio without having credit items, such as credit cards or car loans. Having no credit history can be just as detrimental as having a bad credit history. 

If you do not have an established history of credit payments, then your credit score will be low, as there is no way to give you a credit score. If you are in the position of having poor credit due to limited credit history, there are different actions you can take to start building your credit score, such as entering into a credit builder program loan or taking out a small credit card (or both)! When lenders review your credit history and see no history, there is no way to gauge your risk to those lenders, and therefore no way to assign you a credit score or credit risk level. If you have been paying for things with cash your whole life, and have no stable credit history, then you need to start building your credit portfolio to allow lenders to see how you pay back loans and do a proper risk assessment.

The rule of thumb for many lenders who may review your credit is to see three lines of credit that have been opened for three years or longer, this is when your credit history is considered to be well-established. This does not mean you need to take out multiple loans, however having smaller credit cards that show stable monthly payments, or a car loan that has no late payments, that has been opened for a sufficient amount of time, will allow you to increase your credit score and establish your credit profile.

Reducing your Debt Load Makes a World of Difference

While you may have a great payment history, if your lines of credit or credit cards are maxed out, you will see your credit score steadily decreasing. A great rule of thumb is to never have your balances over 50% of your available credit. So this means if you have a $1000.00 credit limit on your card, you never want the balance to be higher than $500.00. As soon as you have your credit lines higher than this, you will be considered high utilization, and high utilization can affect your credit the same as missing payments. Credit scores are not simply based on your payment history, but rather on your overall credit profile. This includes credit activity, credit balances, payment history, and length of established credit history. 

If you find your credit score lower than you would like, but have never missed your payments and are wondering what the cause could be, then looking at your debt load can be a good place to start. If you work at lowering your balances, then you may soon find your credit score increasing in ways you never imagined. Focusing on your smaller debts and paying them down, then using your money from those payments to pay down your higher credit cards, is a great way to go about lowering your balances and increasing your credit score.

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Closing Established Accounts is not Always a Good Option to improve Credit Score

So you have paid your credit card down to zero balance and you are considering closing your account, but is that the best move you can make for your credit profile? You may be surprised to hear it might lower your credit score, rather than improve it! Credit scores are based on active credit history, as well as the longevity of your open credit accounts. So if you have had your credit card open for ten years, and have it at a zero balance, it will help your credit score more if you leave it open than if you close it, as it will no longer be considered towards your credit score.

These are just a few of the steps that you can take toward increasing your credit score. Credit scores are complex grades that take into account so many factors. From usage to available credit, to the overall history you have, credit scores take into account more factors than many people think. Maintaining your credit score is not simply a matter of making your payments on time, it takes into account lowering your balances, having limited usage on your cards, monthly activity and so much more. 

If you are struggling to improve your credit score, focus on these specific steps and you will soon find your credit score climbing to heights you never thought possible. With responsible lending, usage, and payments, you don’t need to struggle with a low credit score, you can achieve your dreams and have your credit score helping you rather than hindering you.

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Hassan Abbas

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