Going from a 550 credit score to above 700 may seem overwhelming, but you only need six simple steps and to improve your credit score.
Step 1: Get a line of credit
In order to establish credit history, you need to have a form of credit. The simplest way for you to begin will be to open a credit card. If your score is low or non-existent, then you’ll need to apply for a secured card or a store card.
Secured Card: You’ll use your own money as collateral by putting down a deposit of a few hundred dollars with the bank. Typically, that amount will then be your credit limit. Once you prove you’re responsible, you can get back your deposit and upgrade to a regular credit card. [Our favorite is the Discover it® Secured. You can apply here, or learn more about secured cards in general here]
Store Card: People with a low credit score can often still get store cards because banks are more likely to approve users who apply through the store. The catch is that the interest rates are often very high if you can’t make your payments. [Read more here]
Step 2: Keep your utilization rate low
Utilization is the amount of your credit limit you spend each month. For example, if you have a $500 credit limit and spend $50 in a month, you’re utilization will be 10%. Your utilization is part of what determines your credit score.
Your goal should be to never exceed 30% of your credit limit. Ideally, you should be even lower than 30% because the lower your utilization rate, the better your score will be.
We recommend you make one small purchase (hello, pack of gum) a month to keep your utilization low and help increase your credit score at a faster rate.
Step 3: Pay in full, and on time, each month
The easiest way to prove you’re responsible is to only charge what you can afford. Never use your credit card to buy an item you won’t be able to pay off on time and in full each month.
Being late on your payments has a huge, negative impact on your credit score.
There is also no advantage to only paying the minimum amount due on your card. That will only result in you paying interest and does nothing to help your credit score. So just save yourself money and pay your entire bill.
Step 4: Avoid credit card debt
This goes hand-and-hand with step three. By only purchasing what you can pay off in full, you’ll never accumulate credit card debt.
If you’re already in debt from the misuse of credit cards, then make sure you continue to pay at least the minimum due on time each month. Paying on time is the number one indicator of a responsible borrower. You should consider applying for a personal loan, and using the money from the loan to pay off your credit card debt. Personal loan companies have interest rates that start as low as 4.25%, and they are approving people with credit scores as low as 550. You can shop around for a personal loan without hurting your score, because the lenders will approve you using a soft pull (which doesn’t impact your score). A recent study by Lending Club showed that people who paid off their credit card debt with a personal loan saw their score increase by 31% on average, right away. You can look for the best personal loans using this personal loan tool at LendingTree. [Disclosure: LendingTree is the parent company of MagnifyMoney.] With a single application, you can check your rate with dozens of lenders. And the best part: LendingTree uses a soft pull, which means your credit score will not be negatively impacted.
After you pay off your credit cards with the proceeds on the loan, do not build up your debt again. Instead, just make one purchase each month and pay it off in full.
Once you pay off your cards, resist the urge to close them. Closing your cards will not only lower your utilization but remove history which damages your score in the “length of history” category.
Step 5: As your score improves, so do your options for better credit cards
You’ll start to get credit card offers as you begin to build your credit history and improve your score. Credit card companies still love sending snail mail.
Beware of any offers, especially for cash back cards, while your score is below 650. These cards typically provide little value and can smack you with high interest rates if you fail to follow step three.
Once you get your credit score above 680, the good credit card offers will start rolling in. You can have your pick of the top-tier reward credit cards and start using your regular spending to get cash back or rack up points for travel.
Step 6: Protect your score
Once you’ve achieved a higher credit score, but sure to protect it by following these simple steps:
Always pay on time – late or missed payments will cost you dearly
Try to keep your credit used below 30% of your available credit
If you apply for a store card to increase your credit then immediately put in the freezer (literally if you have to) and avoid spending
Be sure to check your credit reports for accuracy and signs of fraud – you’re entitled to one free report per year from each of the three credit bureaus