By ADRIANA MORGA Associated Press
NEW YORK – Credit scores are complicated, and because rating agencies consider many factors, the process of improving them can be different for everyone.
When Willard Carpenter, 68, wanted credit to start a new business, he found his credit rating wasn’t high enough to be approved. After checking his credit history, he found several issues that he needed to resolve.
Carpenter’s credit was badly affected by credit card debt left in their joint account by his father after his death over a year and a half ago. He also hasn’t had credit cards for at least 10 years — he stopped using them after filing for bankruptcy due to credit card debt.
Now he’s working with a financial advisor to clear his father’s debt history and begin building his credit safely.
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Here are some tips on how to do the same:
Know your starting point
The first step to improving your credit score is knowing your current credit score and credit report, said Kristin Myers, editor-in-chief of The Balance, a personal finance website.
“You can’t fix what you don’t know,” she said. “Check if there are any errors or if you’ve previously raised an objection and it keeps popping up.”
Once you see what’s in your report, you can start identifying vulnerabilities. For example, if you have a large amount of debt on one of your credit cards, begin paying off that debt to reduce the credit load that is affecting your credit score.
Manage your debt as much as possible
Ideally, you pay off your credit card every month. But if that’s not possible for you, small payments can help you maintain or improve your credit score.
If possible, pay a little more than the minimum monthly payment so that you pay less interest over time.
A well-known payment method is the “debt snowball,” where you pay off your debt from smallest to largest to build momentum and good habits. Once the smaller debts are paid off and you get into the habit of paying off debts, the money you set aside each month can be used to pay off larger debts. NerdWallet offers a calculator to use this method.
Another small way to fight debt is the Consumer Financial Protection Bureau’s recommendation to “use cash if it’s under $20” to avoid overspending on your credit card.
Avoid further debt if you can
Not taking on new debt is another way to improve your credit score, Myers said. If you haven’t paid off the debt you currently have, it’s best not to open any more lines of credit. If you are dependent on a loan due to economic circumstances, avoid making unnecessary purchases that could significantly increase your debt.
Use credit cards, but in moderation
Many people’s first instinct is to avoid using credit cards to avoid debt. However, this is not a good tactic if you want to have good credit. It’s best to have at least one credit card, but the key is to use it in moderation, said Colleen McCreary, consumer finance attorney at Credit Karma.
“You don’t want to use more than 30% of the balance you have, but you also want to use those cards just a little bit to prove you can be trusted,” she said.
If you use your credit card, make sure you pay on time each month and try to only use it for purchases that you are already planning and can afford.
Don’t close your old accounts
After you’ve cashed out your credit card, you may think it’s best to close the account to avoid using it again.
This actually hurts your credit score. Since one of the factors in your credit score is the length of your credit history, when you close your oldest credit card account, you also delete that from your credit history.
“Keeping the length of that credit history open-ended is incredibly important because the length of time you’ve had a loan or line of credit will improve your credit score,” Myers said.
If you don’t have a credit history, start safe
If you’re looking to get started and build your credit, there are several ways to make this process safe so you don’t get into debt. One of the most recommended ways is to open a “secured card,” which are credit cards that require a deposit, usually equal to the amount of credit you get.
The deposit is there in case you can’t return the balance, but will be returned to you after you upgrade to an “unsecured” card. Secured cards are reported to credit bureaus, which means that this line of credit will appear on your credit report and can help build or fix your credit score.
This is how Carpenter plans to build his credit rating.
“This allows me to start with a low limit and pay it off each month, and then I can ask for a higher limit,” said Carpenter, who lives in Bismark, Arkansas. Carpenter plans to open three credit cards and use a maximum of 25% of the allowed credit, he said.
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