Overcome Your Bad Credit Score! How to Build Credit Fast and Securely

overcome bad credit score how to build credit fast securely

You already spend your days balancing work, family, managing your household, paying bills, and maintaining relationships. Who needs one more thing to worry about?

The problem with credit issues is that you often don't know about them until it's almost too late. You apply for a loan or a lease and get rejected because of poor credit you didn't know you had. Now what?

The good news is that you have options. Follow these tips for how to build credit fast so you can move on.

Check Your Credit Report

As with any problem, the first thing you need to do with your credit is to find out how big the issue is. That starts with a close look through your credit report.

The law allows you to get your free credit report once per year. Review it carefully to see which factors are lowering your credit the most.

As you do this, look for errors too. As many as 20% of Americans have errors on their credit report. If you spot an error, be sure to dispute it and get it corrected to bring your credit score back up where it should be.

Pay Down Revolving Credit First

Most of us have balances on multiple types of accounts. Let's say you have credit card debt, student loans, and an auto loan.

To improve your credit, pay off the credit card debt first.

You want to do this because credit card debt is revolving credit. Revolving credit means you can re-use the credit over and over.

For instance, let's say you have a credit card with a $1,000 balance and you pay off $300. You can now charge another $300 onto the card if you choose. If you pay off $300 of a $1,000 student loan, you can't re-use that $300.

Why does this matter? Because one large factor that impacts your credit score is the percentage of your revolving credit that you've used. This is known as your credit utilization ratio.

You want to use as little as possible of your total revolving credit. Your goal should be to get below 30%. In other words, if you add up all your credit cards' credit limits and it comes to $20,000, you want your total balance on those cards to be under 30% of that limit, which is $6,000. 

Request a Credit Limit Increase

As we mentioned, you want to have as low of a credit utilization ratio as possible. You can do that in two ways: lowering your balance or raising your credit limits. Ideally, do both.

Before you do this, though, look at the hard inquiries on your credit report. A hard inquiry includes any time you've applied for new credit like a new loan or credit card. Whether or not you were approved, the inquiry goes onto your credit report.

If you have more than two hard inquiries in a year, it starts to lower your credit score. Requesting a credit limit increase may or may not count as a hard inquiry. To be safe, only request a limit increase if you have one or fewer hard inquiries on your report from the past year.

If you're in the clear, requesting a limit increase is as simple as contacting your credit card company.

Keep Old Credit Cards Active

Another factor that impacts your credit score is your average age of accounts. In other words, the longer you've been using and making payments on an account, the more reliable you appear.

If you have an old credit card from 20 years ago that you don't need anymore, don't close the account. That will lower your average age of accounts and lower your credit score as a result.

Some companies will close credit accounts that have been inactive for a certain number of years. That hurts your credit score just as much as if you were to close the account yourself.

To avoid that problem, use that old card for a purchase every few months. You can pay it off right away, but this will keep the card active and open. 

Consider Opening a New Credit Card

Some people believe that the fewer credit cards you have, the more responsible you'll be with your money. If you're trying to build your credit, though, that isn't always best.

Getting a new credit card can boost your credit in two ways. First, it adds to your total credit limit which lowers your credit utilization ratio.

Second, it can help you pay off your credit card debt. If you get a card with a low interest rate or no interest for a period of time, you can transfer your debt to that card. This allows you to pay more toward the balance each month because you aren't paying interest.

Of course, there are some limitations to this plan.

The first problem goes back to those hard inquiries we mentioned. Applying for a new credit card will count as a hard inquiry on your credit report. If you've already had two hard inquiries in the past year, steer clear.

The other risk is that you'll get the new card and rack up a balance that is the same or higher than your current credit utilization ratio. If you can't trust yourself to spend responsibly, this may not be the right choice for you.

Get a Personal Loan

Not all types of debt are equal. This is why so many people use personal loans to pay off their credit card debt.

If you pay off your credit card debt with a personal loan, it takes your credit utilization ratio to zero. Even if you can't pay off the whole balance with the personal loan, you'll make a big dent in a hurry.

As with many of the other strategies, though, applying for a personal loan counts as a hard inquiry on your credit report. Only apply if you've had less than two hard inquiries in the past year. 

Learning How to Build Credit Fast

When it comes down to it, credit is about trust. You need to prove that you're trustworthy enough to handle a company's money or property.

Like trust, many ways to build your credit take time. The tips above, on the other hand, can help you learn how to build credit fast for any purpose.

For more personal finance tips, check out other articles on our financial blog.

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