- Saving Money, Debt, Debt Consolidation, Credit Score
- November 25, 2019
- FCU Team
If you’ve watched TV at all in the last 15 years, you’ve no doubt seen an episode of a makeover show. It’s the genre that includes the likes of The Biggest Loser, Kitchen Nightmares, and of course, Extreme Makeover: Home Edition.
Many people love these types of shows because they show how good people who are down on their luck triumph over adversity. Through hard work, tough love, and a supportive community, the “stars” of makeover shows are able to persevere and turn what was their misfortune into great fortune.
Could this sound familiar?
For most people with low credit scores, their struggles come from a mixture of misfortune, bad timing, and some ill-advised decision making. Living with bad credit will limit opportunities to buy a new home, upgrade a car, move into a better apartment, and in some cases even land a job. Not being able to move into a better neighborhood or earn a better paying job can cause a domino effect leading to even more financial problems.
If you are struggling with a low credit score and reading this article, “stay tuned”, because your credit makeover is just about to begin. Follow these four tips to turn your credit around!
- Don’t Forget Your Score
As a member of Florida Credit Union, you have access to free credit score reviews with our member service representatives. But whether you bank with us or not, there are plenty of other ways to see your credit score.
Each of the three major credit bureaus: Equifax, Experian, and TransUnion, compile a score based on a variety of factors. Every year, you are entitled to a free credit report from all three agencies. Instead of getting all 3 of your reports at one time, it might be more beneficial to review one report every four months to keep you on top of things. These reports are “soft inquires” that won’t negatively impact your score and while you might notice some slight differences between reports, you can review these three reports throughout the year to keep better track of your credit.
Checking your credit scores every few months keeps you on top of things. It also gives you the chance to set modest goals for yourself, such as improving your score by 10 points before your next report. By knowing what makes up your credit score, you can better position yourself to tackle what is hurting your score by paying down debt and keeping your utilization low.
- Pay Down Debt, Smartly
Whether it’s installment or revolving, the two different kinds of debt, paying back money you owe is absolutely necessary to keep your credit score high. But it’s important to note revolving debt, the kind you get from credit card usage and lines of credit, has greater immediate impact on your score.
To raise your score quickly, one of the best things you can do is reduce your credit utilization. Utilization is the percentage of your credit limit you use. For example, if you have a credit limit of $10,000 and have $3,500 worth of outstanding debt, you would have a 35% utilization.
As a general rule of thumb, for every percentage point of your credit limit you use, it means 1 point from your credit score you lose. This means when you pay down purchases on your credit card, you will increase your score by lowering your utilization AND by improving your payment history. You can use the “snowball method”, to help clear out a good amount of debt by paying off smaller balances and new charges first, not allowing them to accrue interest.
Another way to tackle credit card debt is to pay it down using a Debt Consolidation loan. Not only will you save money by reducing interest on your payments, but you also convert your debt from revolving-type to installment-type, which lowers your utilization and improves your score.
It’s important to remember to not add new debt while clearing out old debt, otherwise you will just be spinning your wheels trying to recover. Limit your credit card use as much as possible during this time, and save as much money as you can to pay down any remaining debt.
- Paying on Time Keeps You on Target
Late payments are disastrous for your credit and need to be avoided at all costs. Not only do they keep your utilization high (by remaining unpaid), but late payments also hurt your credit history, which accounts for another 35% of your score. For instance, if you have a score in the 600s, a 30-day late payment can drop your score by almost 80 points. One late payment can make all the difference between qualifying for a loan or not, or between receiving a good interest rate and a back-breaking one.
One way to limit your spending on a credit card and keep your payments in check is by treating your credit card like it’s a debit card. You can do this by making the payment on your charge as soon as it is posted. Making a payment before the next billing cycle allows you to avoid interest altogether, which saves a lot of money in the long run. Credit bureaus give more weight to your recent history, meaning if you have missed payments in the past but consistently make payments going forward, your credit score will rebound significantly.
- Keep Your Cards Open
When you close a credit card, your credit score actually goes down. Because you are reducing your credit limits which increases your utilization, you also lower the average age of your credit cards. Even if you aren’t using a line of credit, you should keep it open because the longer you have a line open and the larger credit limit you have, the better it is for your score.
The length of your credit history accounts for 15% of your total score. You get points for having the same lines of credit for long periods of time, as well as the average for all your lines of credit.
To see how this would impact you in real life, here’s an example:
Say you had a $10,000 credit limit from three different credit cards. Your oldest card you’ve had for 10 years and it has a limit of $2,500. Your next oldest card is 6-years-old and also has a $2,500 limit. Your newest and last card has a $5,000 limit, but has only been open for 1 year. In total, you’ve used 30% of your credit limit ($3,000).
Closing your oldest card would reduce your credit limit from $10,000 to $7,500, also increasing your utilization from 30% to 40%, lowering your credit score by 10 points. You would also cut your average length from about 6 years to 3.5, lowering your credit score by another 4 to 5 points.
At Florida Credit Union, regardless of whether or not you’re a member, we want everyone’s credit to be the best it can be. By making sure to make your payment on time, keeping your credit utilization low, and starting small when paying down outstanding debt, you can turn your credit score around in no time!
And whenever you need assistance, financially or just moral support, FCU is there to help. If you have lots of high-interest credit card debt, take a look at our options for Debt Consolidation Loans and Credit Card options for people with struggling credit.
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 100,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.