Are you one of the 43 million Americans with bad credit? If yes, you probably know the challenges that come with this situation.
With bad or poor credit or no credit at all, getting low-interest loans from commercial banks is hardly possible. When applying for rental housing, a landlord can run a check on your credit and reject your application.
Feeling helpless already? Don’t be.
Having bad or no credit isn’t a permanent situation. With the right strategy, it’s easy to become a credit-active consumer with good credit.
Here’s how to start building credit from the ground up.
Have a Clear View of Your Current Credit
If you’ve got no credit – perhaps you just turned 18 or have never taken out a loan before – skip this step!
But if your credit is bad or poor, the first step is to get your credit report, study it, and have a good view of your current status. What’s the reason behind your low credit score?
If you defaulted on a loan, the lender likely sold the account to a collection agency. This information ended up on your credit report and your score took a hit.
Although overdue loans and late payments are the primary reason behind bad credit scores, sometimes the cause is a simple clerical error. This is why you should scrutinize your report for the following errors:
- Identity mistakes (wrong or misspelled name, incorrect address)
- Multiple listing of the same debt
- Closed accounts still marked open
- Incorrect payment dates
- Accounts incorrectly marked as late payment
- Accounts with incorrect credit limits
- Accounts with incorrect outstanding balance.
If you find any of these errors, be sure to raise a complaint with the bureau that issued your report.
It might not look like a big deal, but a simple correction, such as delisting accounts that had the same debt, can give your credit score a decent boost. If your score was on the upper limit of bad, a simple correction can push your credit to “good.”
Open a Credit Account
If you have no credit history, opening a credit account is a good way to start building your credit. You see, credit rating bureaus heavily rely on your payment history to determine your credit score, so if you’ve no payment history, you’ll remain without credit.
You have two options: get a credit card or take out a personal loan.
However, without a credit history, getting approved for a regular credit card or personal loan can be a challenge.
This is where secured credit cards and credit builder loans come into play.
With a secured credit card, you pay up a refundable security deposit, which also becomes your limit. This means if you put down a $500 deposit, you’ll get a card with a $500 limit.
This might sound ironical because you’ll be spending your money after all, but remember your aim is to build a payment history. The more you pay up your balances, the better your history gets, and the higher your credit score goes. If you prefer this option, be sure to shop around for the best credit cards for this purpose.
Credit builder loans work similarly. You provide collateral, such as a house or car title, and the lender approves you for an amount you can manage to repay in installments.
Pay Your Bills on Time
Utility bills like rent and electricity don’t typically show up on a credit report, but it’s important to pay up on time every month.
If you pay late or default for a couple of months, your utility service provider might sell your account to a collection agency. When this happens, the account might show up on your credit report, and your credit score will tank.
When you’re building credit from scratch, the last thing you want is to make financial mistakes that’ll hurt your credit. It’s far easier to build credit as a starter than it is to rebuild bad credit.
If, for whatever reason, you’re unable to keep up with your bills, contact the providers and let them know you’re working on it. This way, they could lend you more time to get your act together, instead of sending your account to collections.
Pay Off Your Debts
This tip is for consumers who are battling credit, not those building theirs for the first time.
As you already know, a loan default can really put a damper of your credit score. Paying it off is an effective way to boost your credit score. The lender will close the account and credit rating agencies will update your credit report accordingly.
That said, paying off debt in a lump sum isn’t a realistic solution for most people.
If you’re unable to clear it off, contact your lender and work out a new repayment plan. Most lenders would rather offer a defaulting customer a new, more lenient plan than risk losing the entire amount.
With a new plan, the loan account will be marked “open” or “active,” which is far better for your score than an account marked “delinquent” or “collections.”
Maintain a Good Credit Utilization Ratio
Credit cards are handy financial tools, but they can hurt your credit score if misused.
The secret to leveraging the power of credit cards isn’t maxing them out and settling the balance on time. It’s maintaining a good credit utilization ratio.
This is the ratio between your credit limit and your card balance. If you have a $1,000 card limit and you’ve spent $800. Your credit utilization rate is 80 percent. This isn’t a good sign.
Experts recommend a credit utilization ratio of below 30 percent. This means with a $1,000 credit limit, you should never spend more than $300.
If you can maintain this ratio month in month out, your credit score will keep growing.
How to Start Building Credit Simplified!
Whether you have no credit or your credit is in ruins, you can always work your way up. With this guide on how to start building credit, you now know the steps you need to take.
All the best and keep reading our blog for more handy tips and insights.
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