Having a low credit score can have a detrimental effect on finances and the ability to utilize credit for moving forward in difficult times. Many people struggle with maintaining a decent score, and it often puts their lives on hold until it is repaired.
I, too, struggled with maintaining a good credit score while in college and university, mainly because of credit cards. The good news is that a low score is not a life sentence and there are practical steps that can be taken to improve your credit. By following these easy steps, I was able to raise my credit score by nearly 100 points in just four months.
Having less than stellar credit, many lenders are limited as to what they can lend, and interest rates are usually significantly higher. In order to assist Gen Z, and others struggling with their credit score, we will go over the following:
● What a credit score is, and why it matters.
● Who credit scores apply to.
● In this post, we’ll explain why a good credit score is important, explain how to improve a less than perfect score, and provide 5 suggestions if you’re new.
What is a Credit Score, and Why Does it Matter?
A credit score is a numerical expression on a level analysis of a person’s credit files which represents the creditworthiness of an individual, with scores ranging from 300 to 850, where higher numbers make for a better credit score. In the United States, the score is based on credit reports sourced from the three main credit bureaus, i.e. Equifax, Experian, and TransUnion.
Each of these credit bureaus utilize what is called a FICO score model to determine a person’s credit score. A FICO score consists of the following categories and their respective percentages:
- Payment History (35%)
- Debt Burden (30%)
- Length of Credit History (15%)
- Types of Credit Used (10%)
- Recent Credit Inquiries (10%)
If each of these categories is optimally utilized, the person’s credit score will be higher. Taking each section into consideration, along with private mathematical formulas, each of the bureaus create a credit score for the individual. Credit scores between 300 and 579 are considered “poor”; scores from 580 to 669 are “fair”; scores from 670 to 739 are “good” and those from 740 to 799 are “very good”; and anything over 800 is considered “excellent.”
The average credit score in the US is around 698.
A credit score suggests to a lender the likelihood that the potential lendee will pay the amount back. A score can also signal how likely the person is to make regular payments, keeping to their agreement and terms, which can help a business plan for their future.
By having such low credit scores, this makes lenders less likely to offer such things as personal loans, credit cards, mortgages, lower interest cell phone purchases and plans, general lines of credit, vehicle loans or lease offers. It can even make it difficult to get a place to rent, and in some cases employers will not hire someone with a low credit score.
How to Improve Your Credit Score
So, you recognize that having a good credit score is imperative for your growth and flexibility within the market, and you’d like to improve your score now. Taking these steps, you may in fact boost your score, while saving more money for your pocket and spending elsewhere.
1. Run a Credit Check & Monitor Your Credit
Run a credit check that checks with the three main bureaus. By running a credit check, you will know for certain what your debt is, and to be able to ensure there is no debt attached to you that is not yours. Sometimes your credit score is being tainted by a fraudster. If you have debt that is not yours, contact the listed lenders from the report and file a dispute with them to clear it up.
While you are repairing your credit, it is super helpful to have a credit monitoring company watch your credit and keep you posted with any changes. By keeping track of changes to your credit reports, you will be able to keep track of your progress in near real-time. Each of the bureaus, many banks, and most credit card companies offer credit monitoring services for free or at a low cost.
2. Make Payment Plans to Lower Your Debt
If you have debt that is yours, either pay it off in whole, make a large payment towards it, or set up a payment plan. The more you pay off your old debts, the more your score will rise relative to the other components of your FICO score. If you can’t pay off your debt in full, you may be able to settle your debt with the lender. You could end up paying only 45-80 percent of your debt, while improving your score. However, the credit bureaus will likely be informed of this not-in-full payment, and your score will not be as high as it would be had all the debt been paid.
Additionally, banks considering lending for mortgages, personal loans, or credit cards may not give you as good of an interest rate or line of credit. Generally speaking, it is better to pay off all of your debt in full. It is usually best practice to pay off the debt that has the higher interest rate first.
3. Learn about Piggybacking.
Piggybacking is a fantastic trick for boosting credit scores, especially if you do not have many years of credit history and need a quick boost. Piggybacking is simply being added to a person’s line of credit, usually a credit card, as an authorized user. This does not require you to have a credit card. When you are added to a person’s account as an authorized user, you will share a part of that person’s FICO score, and it does not harm their score. Be sure they have a good score before you waste your efforts. I personally tried piggybacking, and within 2 months I received a specified notification from my credit monitoring company that my score increased by 79 points! If you are a young person with less than seven years of credit, by getting added to your parents’ credit card as an authorized user, you should benefit from piggybacking relatively quickly as long as their score is significantly above yours.
4. Take Out a Personal Loan or Credit Card
Taking out a loan or opening a new credit card may seem counterintuitive, but this plays a big role in the overall FICO score calculations. Once your score is improving, you can qualify for personal loans or credit cards, usually at least thirty-one days after paying off debt.
Many of the credit monitoring companies will let you know ahead of time what you will likely qualify for, and what your monthly payments might be. By taking out the personal loan or credit card, and keeping the total debt amount used less than 30 percent of all available credit, you are increasing your credit score. This personal loan or credit card can also be used as a method of debt consolidation or lowering interest rates for debt amounts still due.
With debt consolidation, you are transferring debt from one lender to another, usually because it has a significantly lower interest rate whether for a year at zero percent or any other. Cash back credit cards are another great way to save overall costs, but this should only be used by those with enough discipline to pay their debt off monthly.
5. Budget, Budget, Budget!
If you are looking to repair your credit, or raise the score, budgeting is going to have to be a practical part of the process. Here are two easy-to-follow budget plans to help:
- 70-20-10 Rule. Spend no more than 70 percent of your after-tax income on living expenses, 20 percent towards debt, and 10% towards savings.
- 50-30-20 Rule. Spend no more than 50 percent of your after-tax income on living expenses, 30 percent towards debt, and 20 percent towards savings.
Living expenses consist of housing, transportation, insurance, food, phone, fuel, electricity, internet, etc., basic day-to-day costs. To be more aggressive with your credit score, the faster you can pay off your debt the better. If you are living with your family at no cost for rent or mortgage, whatever is remaining after deducting your living expenses should go towards your debt. To be able to pay off even more at a faster rate, budgeting at smaller and smaller levels will further your success. Saving on food, transportation, and frivolous spending are fantastic methods to add to your arsenal. By sticking with one of the listed budget methods, you can help create a solid plan that incorporates an exact amount and date to pay everything off. A goal requires a detailed plan and a date, anything else is just a dream.
Credit scores are a part of the world we live in, and they are one signal as to how well we honor our commitments and how well we can be trusted when borrowing money. With economic and personal downturns it can sometimes be difficult to maintain a solid score, but we can always work on fixing it. By taking the steps aforementioned you should be able to improve your credit score relatively quickly and easily.
Perhaps you cannot start making immediate payments today, but you can at least start a budgeting plan, run a credit check, and set up a free credit monitoring service. You might even be able to be added to a relative’s account as an authorized user for the piggybacking method.
The faster you act on these steps the better off you will be. Once this debt-monkey is off your back, you can start learning to use credit for flinging yourself forward rather than back in the mud.