When your credit is less than pretty, it can be difficult to get big things you need like a car, a house, and a cellphone. These tips properly implemented over time can increase your credit score dramatically. My husband went from a sub 500 score to an almost perfect credit score in about 2 years from following these steps. You can easily be on your way to growing your score and applying for credit like a boss without even breaking a sweat!
Step 1 – Spend less than you make. Keep a simple budget.
In my early twenties, I learned the value of budgeting and spending less than I make. Simply because…I had to! Or, I wouldn’t have food to eat. Fast forward to last year in the same month I turned 30. I applied for my first home mortgage jointly with my husband and I had NO WORRIES about whether or not we’d be approved. Simply because our credit scores were high, our credit utilization was low, and our assets and income exceeded our expenses. If you learn how to budget and spend less than you make, you’ll be well on your way to a near perfect credit score.
Step 2 – Pay all your bills on time.
This one should be a no-brainer. Download my budget sheet below, and you’ll see I’ve also created a tab for monthly bills. My husband and I have separate individual accounts and a joint account. That’s what has worked for us for the past 5 years, but you should play around with the spreadsheet to find what works best for you. Once you get into the habit of paying your bills on time and sticking to your budget, you’ll start to see a buffer grow in your account. A buffer is extra money you’ll leave in your checking account just in case you need to pay cash for something quickly like a down payment or a security deposit. Once you establish enough of a buffer (like $500), put the rest of your discretionary income towards debt or savings. Hint: Tackle debt first!
Download my monthly budget & bills checklist here! – Seriously, this is a copy of my actual spreadsheet with the names and actual figures changed or removed. No newsletter signup necessary! Combine this with a Mint.com account.
Step 3 – Pay down debt starting with the smallest debts & highest rates first.
Learn to be a big fan of paying down your debt as soon as possible. The more debt you pay off, the more discretionary income will be available for fun stuff like restaurants and movies! There are two main ways to do it: 1) Snowball and 2) Avalanche. The snowball method means paying off your smallest debts first. Once you pay off a small account, you’ll roll that monthly payment you originally paid towards that other account into another account.
For example, let’s say you have a credit card with $100 account balance and your minimum monthly payment is $25. Once that account is paid off, you’ll put that $25 towards another account balance IN ADDITION TO the monthly payment you are already paying on this account. More funds are now allocated towards this account so it gets paid off faster. You’re going to keep that momentum going until your snowball gets bigger and bigger until all your debt is paid off. Now I’m not against having fun! It’s okay to go out every once in a while, but think about how much closer you’ll be to debt freedom each time you don’t use those funds towards extra stuff.
The other method is the avalanche method. This involves only paying only the minimum balance on all accounts EXCEPT the account with the highest interest rate. Tackle the highest interest rate first with the rest of your discretionary funds. This will minimize the amount of interest you pay off over time, but it won’t necessary be the fastest way to pay off your debt.
I like to do a combination of both. Roll your snowball into an avalanche! Take on the highest interest account with the smallest balance first. This will help pay off your debt quickly AND you will pay less interest over time. You can also choose to balance transfer a few of your high interest accounts into a limited time zero interest credit card. Just make sure to pay off this credit card before the actual interest rates kick in after a couple years.
This tactic may not be feasible until you have more discretionary income and better credit. If I had to choose one preferred method for a beginner, it would be the snowball method. Another tip: If you get a large sum of money like a tax refund. It’s okay to buy a little something you NEED like a new kitchen hand mixer or new lamp. But then, apply as much as you can afford to your debt so you can pay it off quicker.
Step 4 – Get a secured credit card & retail credit card. Pay them off each month.
This is my favorite tip because this was the biggest turning point for my husband. He was desperate for a solution that would get his credit score up so he consulted his bank for advice. Since his credit score was so low, there were very limited options for building up his credit score. They suggested a $500 secured credit card. A secured credit card is a type of credit card that doesn’t require a credit check because you’re putting up a small amount of collateral to prove to the bank that you can pay off anything charged to this card. A good strategy would be to use this card only for gas and pay it off IN FULL each month. Over time, you will easily grow your credit score in as little as 6 months.
Once your score starts to climb, apply for retail credit cards to exponentially increase your score. Disclaimer: This assumes you’re ALWAYS paying off your debt at the end of the month IN FULL. Get a Walmart credit card and an Amazon credit card. These should be fairly easy to get with a minimal credit score. Use your retail cards for your normal purchases and always pay off the card at the end of the month. Every 6 months or so, request a small credit limit increase (usually 5-10%) for each one of your credit cards (especially if you get a raise). Over time, you can grow your credit limit to well over 6 figures. This credit limit is only there to increase your credit score. It’s never to be maxed out unless there is an extreme emergency such as a sudden job loss.
Step 5 – Don’t close any credit cards.
This leads into another important tip. Don’t ever close any credit cards! This will decrease that beautiful credit limit you’ve built up and impact your credit utilization ratio – what you use versus how much you have to use. Let’s say you have a $1000 credit limit between all of your credit cards. If you close a card with a $500 credit limit, that’s over half of your credit limit vanquished. If you have a $250 balance on one of those cards, your credit utilization ratio automatically goes up. This is bad! You want to keep your credit utilization ratio as low as possible – less than 30% . Keep using your credit cards for stuff you already buy and pay them off completely each month. Do this to keep your credit score climbing, but also so the credit card company doesn’t automatically close your account for inactivity. This would also be bad!
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