“Credit” is a magic word. It determines your borrowing capacity, which is going to then determine a lot of material factors in your life – where you live, the car you drive – even the cellphone you carry! Of equal importance, your credit score will determine your ability to refinance your student loans. Refinancing can be an extremely valuable tool, so if your credit is less than stellar, it may be time to take a look at repair.
Credit must be carefully managed in order to maintain a score that permits substantial borrowing. If you’ve slipped up and damaged your credit with delinquent accounts or excessive debts, all is not lost! There is always a road to repair.
Maintain minimal balances
The biggest roadblock to good credit is a large balance that takes up a large percentage of your available credit. Large balances tend to create a snowball effect, because increased fees and unmanageable minimum payments can add up so fast. In terms of your score, large balances can put a big dent in it, unless you have a much larger line of credit. Basically, lenders like to see that you aren't using up every penny of credit available to you, whether that is $500 or $5000 because it is a sign of financial distress. Having a $100 balance and $5,000 of available credit is much better than having a $4,500 balance and $5,000 of available credit.
If you’re looking at balances that are nearly maxing out your available credit on multiple accounts, you should strongly consider paying more than the minimum monthly payment for each debt, putting your focus on your highest-interest rate debts first. Prioritizing your repayment will help you to limit the interest you pay, which will reduce the total repayment amount over time.
Remember for the future: Once your debt is paid off, pay off your balances every month. If you can't do that, you need to re-assess your spending.
If you’re behind on payments, it’s time to catch up. Current payments mean your credit score will steadily creep back to normal, so don’t miss! If money is too tight for a payment, call your creditors. They may be able to work with you to figure out how to proceed (particularly on student loans!), but they can’t help if you don’t stay in touch.
Handle the past
We know how tempting it can be to stick your head in the sand when it comes to resolving past financial issues. But trust us – in this case, it’s worth a little discomfort.
- Resolve public records like judgments. Paying off a debt, even an old one, can mean clearing your credit history and ultimately increasing your credit score over time. Remember that you can offer to settle if the balances are too high to manage.
- If you have current collection accounts, settle them! The relief of terminating a credit collection effort will be an added bonus to the long-term help to your credit score. Ask about rehabilitation programs or simply pay off the total balance if you are able to.
Manage your credit cards
Credit cards can do some serious damage to your credit, but they can also help. Here are the basics:
- Don’t open credit card accounts just to increase your credit line without a lot of careful thoughts. You’re correct in believing that increasing your credit lines overall can help your score, but there’s a price to pay. You may be tempted to use money you don't have when you have more available credit.
- At the same time, don’t close cards just if it isn’t necessary! One element of your credit score is the average age of your revolving accounts. That means that if you open a no-annual fee card while you’re in college, you should keep it open indefinitely! As the card ages, your credit improves. Just remember to only buy on it what you can pay off the same month.
Your past mistakes may take a while to reach resolution. After they’re settled, it can take years for delinquent accounts to entirely disappear from your credit history. In the meanwhile, things are going to steadily improve! Each month that you keep those balances paid down means your score will increase. Be patient and keep tabs on your credit, and you’ll see changes faster than you may think.