Long after you finish school, your credit score is the one score you should always work to improve. Here are eight tips to help you clean up your finances and increase your credit score.
1. Find out where you stand. Once you commit to reducing your debt and increasing your credit score, finding out where you stand financially is key. Order your credit report; you are entitled by Federal law to order a copy for FREE each year. This is also a good time to fix any incorrect information you find on your credit report and dispute errors. Ordering copies of your credit scores from the three credit bureaus is relatively inexpensive and should be done on an annual basis.
2. Map out a plan. Tally up all of the debt you have whether its student loans, credit cards, mortgages, personal loans, loans from family members, etc. Once you figure out how much you owe, create a budget for yourself. According to Learn Vest, it’s best to follow the 50/30/20 rule: allocate 50% of your monthly budget to essential expenses, 30% to lifestyle expenses and 20% to debt repayment and savings. Sites like Learn Vest, Mint and You Need a Budget can help you to manage your budget with your smartphone or computer. Excel spreadsheets are also a useful tool to create and maintain your budget.
3. Commit to paying bills on time. Paying your bills on time is a key component of maintaining good credit. Your payment history contributes 35% to your credit score’s calculation (source: MyFico). While you are figuring out your budget, make sure you know the due dates for all of your bills. Set up automatic bill pay or program due dates into your phone’s calendar so you never forget to pay a bill again. There are also numerous bill pay apps available on to smartphone users. If your credit score is low or you have a brief history of credit, apply for a secured credit card, use it regularly and pay off the balance in full each month. Be strategic when applying for more credit and only do so when necessary.
4. Keep an open dialogue with creditors. Keep an open dialogue with creditors, particularly if you are not current on your payments. See what options they offer for payment plans. If you have a consistent payment record for your credit cards payments, inquire to see if you can lower your APR (they may say no, but it never hurts to ask!).
5. Reduce debt. Lowering your debt is a very important step to increasing your credit score. The amount you owe contributes 30% to your credit score’s calculation (source: MyFico). You can use the snowball approach popularized by Dave Ramsey where you pay down the debt with the lowest balance or you can pay down the debt with the highest interest first. Numbers wise, it may make more sense to pay down the debt with the highest interest rate, but if you are motivated by paying off balances from smallest to largest, take that approach instead. The important thing is to pay down the debt as quickly as you can and commit to never accumulating it again.
6. Increase your Income. Increasing your income is ideal when you putting effort into paying down debt and improve your credit score. An increase in income can translate to additional payments on debt. Increasing income can mean a promotion at an existing job, a higher paid job at another company, a part time job, freelancing your awesome skills, or doing odd jobs you find on sites like Taskrabbit.com and Craiglist among others.
7. Build your savings. There are always things that will happen that are beyond your control; cars break down, unexpected doctor’s bills come up, jobs have layoffs, and much more. Emergency funds ensure that you don’t rack up more debt when life’s emergencies end up costing you unexpected money. Aim to build up one month’s worth of living expenses first. Then as you pay down debt, work to build up 6 months – one year’s worth of savings.
8. Get help if you need it. If your debt is at a level where you feel you need assistance in getting it under control, contact the Consumer Credit Counseling Services, the National Foundation for Credit Counseling or Credit.org. Counselors can help negotiate with creditors’ on your behalf and help you implement a plan to get your finances in order. If you are a chronic debtor, you may want to consider going to Debtors Anonymous to stop the cycle.
So what are some of your favorite tips for reducing debt and boosting your credit score?