It’s safe to say that most of us understand the importance of credit in today’s world. Not only does it affect your buying power, but it can also affect your ability to rent or own a home, get a job, and even what you’ll pay for insurance coverage. Trying to maintain a healthy credit score can cause some individuals anxiety, stress, and even depression. It’s important to gain a clear view of where we are financially so that we can set a goal and make a practical plan of where we want to be in the future.
Fortunately, no matter where you’re starting, there are a few things you can do to increase your credit score. Below, are some basic steps that you can take to get started on a path to a healthier credit score (and less worry):
1. Make All Payments in Full and On Time.
Payment history is the largest factor that determines your credit score. It accounts for 35%. Therefore, making payments on time is the most effective way to increase your credit score and build a good credit file.
Missing a payment or two can happen in times of financial difficulty and can add to any financial stress you may already be experiencing. However, no other strategy to improve your credit score will work if you are missing payments or paying late.
Late and missed payments start reporting to the credit bureaus once they are over 30 days past due and can stay on your credit report for 7 years. (That’s a long time for a bump in the road to follow you) To minimize the damage late and missed payments can do to your score, reach out to your lender or creditor, and make arrangements to pay as soon as possible. Some will offer payment plans that will stop late fees or higher interest rates from hitting your account. Addressing them can also give you some peace of mind, knowing that you are handling them the best you can for your current situation.
Saver Tip: You can also ask the creditor if they will consider removing the late payment from your credit reports. They are often willing to do so for customers who have been in good standing in the past (and if they ask nicely 😉).
2. Use a Credit Builder Loan or Secured Credit Card
Adding on to the first step above, payment history makes up 35% of your score, therefore, good payment history is what builds healthy credit files. If you lack a “positive pay history” on your credit report, it’s time to start creating some by opening a credit builder loan and/or a secured credit card.
A credit builder loan works by allowing you to make payments to an account that are then reported as “loan payments” to the credit bureaus. These payments usually accumulate in an account during a set timeframe. In the end, the lender will take their fee and return the remaining balance to you. (another way to save too)
A secured credit card is one that requires an upfront “security deposit” or collateral. Most start with credit limits as low as $200. You put the cash up and then the company will extend a credit card account to you in the same amount. Many will return the security deposit (aka collateral) and convert the account to a regular credit card (often with a higher limit) after being in good standing for 6 months to a year.
Saver Tip: It’s recommended to have two to three credit lines reporting a good payment history at a time. These should also be different types of accounts, like a credit card and an installment loan. Your credit “mix” accounts for 10% of your score.
Although you need more than one tradeline reporting, it’s best to stick to just a couple to start. Adding too many new accounts to your report at once can lead to more debt if you're not careful and can result in lenders questioning your ability to repay them all. Work to build a good payment history on just a couple of accounts in the beginning, then add accounts (possibly with higher limits and lower interest rates) as your credit file grows and your score increases.
3. Maintain Low Overall Credit Utilization.
Which means that you need to keep a low balance at all times. The credit equation wants you to maintain low credit balances – especially the FICO 8 scoring model. The balances you carry on credit lines account for 30% of your credit score and are the 2nd largest contributing factor.
A general rule of thumb is to maintain a balance below 30% of your overall available credit. Carrying any balance will affect your score, but anything over 30% is when the amount it affects begins to increase.
Paying down balances is one of the best (and quickest) ways to increase your credit score. The key is having the lowest possible balance each month when your creditor reports to the credit bureaus. You can find this date in two places – on your credit report and your billing statement. On the credit report, the date will show as “date updated” or “last reported”, on your billing statement it will be your statement closing date. Make a plan to pay down the balance as much as possible right before this date each month. HCU's Credit Score Manager inside Digital Banking is a great way to keep tabs on your credit score and report.
Saver Tip: You can also request a credit limit increase to lower your overall utilization. However, be cautious – increased credit limits can lead to more spending (and more stress) so only choose this option if you can ignore the temptation.
4. Address Debt Collections, Charge Off Accounts, and Errors
An account in collections, a charged-off status, or reporting incorrectly can do some real damage to your credit score, so it’s best to address them as soon as you can.
There are a few ways to do that and how to handle it will depend on several things like what type of debt it is, how old the debt is, and who is attempting to collect it. It’s typically best to start with the entity reporting first and request debt verification to ensure that it is your debt and reporting correctly. You can then decide whether to work out a plan to settle the account or dispute it.
Stopping negative reporting each month can make a significant impact on your credit score.
Saver Tip: Check out the Consumer Financial Protection Bureau’s tips on debt collection here. There you will find articles, reports, and form letters that can be used to help you in the process.
