None of us are born with bad credit — bad credit is made… from a history (or even a one-time event!) of poor financial choices. If you need money and have bad credit, you may be dead in the water when it comes to applying for credit cards or an auto loan. Learning to avoid bad credit in the first place can save you agony and backtracking to fix the damage that’s been done. Being proactive prepares and sets you up for success so that you have more options and choices when you need to make important financial decisions in achieving financial freedom.
One-third of all Americans have poor or fair credit, which still falls under the “bad” credit label for most financial institutions. Bad credit is technically considered 670 or below on the “FICO® Score 8” scale. According to Experian, the average American has a score of 703, which is still considered “good,” but you should strive for a better credit score to secure the best financial options. Those who reach above 740 credit scores are assigned the “very good” status. This score can mean that you will probably get approved for most things and with a interest rate on the lower end of the scale. That’s what you want to shoot for!
You may have a way to go to reach 740 or above and that is okay! However, if you want to avoid dipping below 600, we have outlined five successful ways to help you learn how to improve your credit score and stay out of the “bad” zone.
- Ensure Accuracy of Credit Reports
Running routine credit reports is a great way to stay on top of your credit score. It’s important to make sure those credit reports are accurate. The “Big Three” major credit reporting agencies –Experian, TransUnion, and Equifax– are the most commonly used to generate credit reports. They collect your info from organizations where you have open accounts, such as banks, credit unions, retailers, and utility companies.
Although these companies do attempt to collect accurate information, 26% of people who use these reporting agencies have found errors. When you receive your report, make sure that all accounts and negative marks are yours. You can visit theAnnual Credit Report website to receive your free full credit report every year provided through federal law to ensure regular credit updates are correct.
- Pay Bills on Time
One of the fastest ways to watch your credit score go belly up is to miss payment deadlines on your bills. Thirty-five percent of your FICO score is tabulated from your payment history. If you already have a high score and want to avoid bad credit, even one payment that is thirty-days behind could drop your score 90 to 110 points. Your points will continue to drop with each late payment and even more so with multiple late payments on various accounts.
Also, keep in mind that even one late payment can haunt your credit report for up to seven years. Being scrupulous about bill deadlines can ease that score with time, but the negative mark will remain like a big, red flag to creditors and loan agencies.
To fix this issue, we suggest putting all your recurring bills on auto-pay and set reminders for other irregular bills. Many apps exist today for Android and iOs to keep you from ever missing a payment again.
- Don’t Overdo Debt
Debt is the second biggest factor influencing your credit score. Credit scores look at how much debt you owe overall, and your credit card balances in relation to credit limits. If your credit card balances remain high, despite you paying off the minimum every month, creditors will assume you are using your credit cards to stay afloat.
Avoid bad credit by keeping your credit card balances low and making regular loan payments. When possible, pay off more than the minimum amount on your credit card statement to cut down overall credit utilization factors and increase your score.
- Get a Credit Card
Just beginning your financial journey or don’t have a credit card? Build a better credit score by getting a credit card. While abusing a credit card can quickly derail your credit score, not having a credit card means a non-existent score.
If you sign up for a credit card, make small purchases, and pay on time every month, you will quickly rack up a positive payment history. Keep that card balance low to create a low credit utilization ratio.
- Build a Healthy Savings
While credit scores never look at your bank balances, having a healthy surplus of money will still help you avoid bad credit. When you have adequate money saved up, you won’t be tempted to reach for the credit card during a bad month. Plus, if you have extra savings, you can quickly pay down your debt when inevitable and unexpected expenses occur.
These tips should make it easier for you to maintain good scores and avoid bad credit ratings. If you need any help with financial management or have questions about ways you can personally achieve your credit score goals, LoanMe is here to help. We are always dedicated to showing you how to up your credit score and effectively save money for life’s challenges and milestones.