By Emily Elmore | 24 March 2020
Whether you’re new to credit, tanked what credit you had, or just want strategies to improve existing credit: we have you covered. You can survive with bad credit, but it won’t be cheap. Establishing a respectable credit score will save you some serious cash… and that’s important if we’re headed toward a recession.
First, let’s establish what credit is and what good credit looks like.
Personal credit is your ability to borrow money or access goods and services with the understanding that you’ll pay for those things later. Good credit means you’ve demonstrated a consistent history of paying what you owe, when you owe it. It tells the lender what kind of asset you are. Are you a good bet, or a risky one? Your credit score is basically a ranking on that risk scale. If you have a great credit score, it’s more likely the lender will give you credit approval. Beyond access to credit, this can also result in higher limits and better interest rates.
Good credit is generally considered to be a score of 670 or higher and borrowers who achieve this score are more likely to receive credit approval. Anything below 670 will classify the borrowers as having “fair” or “poor” credit. Young people often fall into this category because they have no credit history. Without history the risk is unknown, and lenders aren’t optimistic by default.
Are Benefits of Good Credit Really That Good?
Oh yeah. From access to credit cards (or access to cards with better perks) and loans to lower interest rates on both, good credit will save you major cash in the long run. A good credit score also gives you more access to types of cards and loans, meaning you have negotiating power when it comes to terms and rates.
What if I own my car and rent an apartment? Does it still matter? You bet! Credit is often used by landlords as part of their tenant screening process. Evictions and outstanding rental balance can significantly alter your credit score, and landlords are on the lookout. Even if you’ve experienced one (or both) of those things, you can repair the damage. If your score is decent, it’s unlikely the landlord will dig into your credit history or refuse your rental application.
As far as your car goes, even if you aren’t looking for a loan you can still benefit from a good credit score. Car insurers factor your credit into your “risk score,” and bad credit equals higher premiums. Yuck.
Finally, you can often save even more money with good credit scores by avoiding security deposits on utilities and cell phone contracts. The Bureau of Labor Statistics published a long-term study that showed the average person will hold 12 jobs between the ages of 18 and 48. Millennials often move to accommodate those new jobs, and Gen Z will likely continue the trend. Every time you move and put your name on new utility bills, you could be paying upwards of $200 in security deposits…per utility. Keep that money in your pocket with a higher credit score.
Roll Up Your Sleeves, We Got Work To Do
Building credit scores can take some time, but the sooner you address the issues holding you back, the faster you’ll reap the rewards of a good score.
Step 1: Check your credit score online. You can’t fix what you don’t know. You get three free reports annually. Many folks will split these up across the three credit reporting agencies once every 4 months throughout the year.
Step 2: If you see any inconsistencies on your credit report, disclose them right away to the credit agency. Identity theft is a major problem, and accounts opened in your name can destroy your credit. Place a credit freeze through the reporting agency and start notifying the lenders of the fraudulent accounts. You may even want to consider credit monitoring, which can often be accomplished through the reporting agency or through your bank.
Step 3: Once you determine that your score and credit history are correct, start implementing best practices. The most important one of these is to pay your bills on time. Lenders are VERY interested in how reliably you pay your bills. Past performance is a good predictor of future performance. If you have a hard time remembering to pay your bills, set up automatic bill pay (psst: the nav.it money app can do this for you.)
Step 4: Pay off debt and keep balances low on any revolving credit (like credit cards). Your credit score is also dependent on the “credit utilization ratio” which basically determines if you’re overextending your ability to pay back money owed. Lenders like to see a ratio of 30% or less, and people with the best credit have low ratios. A lower ratio demonstrates effective credit management, and is a good indicator that you aren’t maxing out credit cards. You can improve this ratio by paying off debt, keeping balances low, or by becoming an authorized user on another person’s account… as long as they use credit responsibly. The latter option is also a great strategy for establishing credit if you’re new to it.
Step 5: Don’t open cards just to have them and don’t close unused cards. Too many credit accounts may increase hard inquiries on your account (which will lower your score) or tempt you to accumulate debt across many accounts. Once a card is open, however, don’t close it. Doing so will likely increase your credit ratio, which will also lower your score. We know that seems a little counter-intuitive. Don’t open too many, but once they’re open, leave them.
How Long Does It Take To Improve Scores?
Like most things, it depends. Debt by itself won’t impact your score but forgetting to pay your bills or having so much debt that your credit utilization ratio rockets above 30% will. Negative information on your file can stay there anywhere from 2-10 years. Positive credit management can offset these negative items before that. Rebuilding or improving your credit will take time, but it’s time well-spent for a life well-funded.