The Right Way to Improve Your Credit Health

ZenI know what you’re thinking, “Is there really a wrong way to improve your credit health?”

Simply put, yes there is.

Here’s the wrong way to work on your credit health: obsess over it daily and let it control and define you.

Seriously, even if this helped you increase your credit score, it’s definitely not a healthy way to live and won’t benefit anyone.

It can take a long time to build a healthy credit score and an even longer time to rebuild your credit after a financial rough patch.

Fretting over your score every day won’t add points. Don’t get me wrong, your credit score is an undeniably important number that can seriously impact your life for the better or worse.

So, before we get into the right way to improve your credit health, do me a favor and take a deep breath, ok?

Neither your debt nor your credit score define you, and we’re going to get through this together.

Up, Up, and Away!

Improving your credit health doesn’t need to be a mystery that you shy away from in fear. In fact, it’s probably easier than you’d expect.

You can’t work on improving your finances without first knowing what goes into calculating your credit score. There are actually dozens of ways to calculate scores, but in general lenders tend to emphasize the following categories:

  • Credit card utilization: It’s best to keep your credit card balances to less than 30% of your total credit limits. If you use your credit cards more than that, lenders might get concerned that you won’t be able to pay it off or that you’re relying too much on your credit cards. But don’t stop using your credit cards altogether! Creditors want to see people who use their credit, but are able to manage it responsibly.
  • Percent of on-time payments: This one’s pretty simple… try to keep the percentage as close to 100% as possible. While paying your bills on time may not increase your score, just one or two late payments can significantly lower your score, so this should be a priority.
  • Number of derogatory marks: These include accounts in collections, bankruptcies, civil judgments, and liens. Try to avoid having any derogatory marks on your credit report. They can severely influence your chance of getting approved for credit as they show a lender that you may have significantly mismanaged your credit in the past.
  • Average age of open credit lines: The longer your credit history, the better. Try to keep old accounts open and in good standing and spread out those credit card applications.
  • Total number of accounts: Consumers with more credit accounts typically have better credit scores because it means more lenders have granted credit. Slowly increase your number and mix of credit cards.
  • Total hard credit inquiries: Try to keep this number as low as possible. Multiple hard inquiries may indicate that you are desperate for credit or are unable to qualify for credit.

Monitoring Your Finances

As mentioned before, obsessively worrying about your credit is not going to help you. But neither is avoiding it.

Now that you know what goes into your score, the best thing you can do is monitor and work on those individual factors. This is where Credit Karma comes in.

Not only can you get your free credit scores, but it also gives a handy breakdown of your score in a section called your Credit Report Card. There, you can see how you’re doing in each of the categories and read helpful tips about how to improve in that category.

Getting it Right

If you’re like me, most of what you read disappears from your memory in about… 5 minutes. So to help you remember, and for your convenience,

I’ve summarized the best ways to improve your credit health in a handy acronym so that you really can increase it the RIGHT way. Ha! Get it?

Responsibly use your credit cards. Don’t rely on them too much, but don’t NOT use them. And pay them off on time each month.

Investigate things that look wrong on your credit report. Get them removed and watch your score go up!

Get your free scores and Credit Report Card at Credit Karma. Monitor them monthly, making appropriate adjustments.

Hack away at your debt. There are a plethora of tools that’ll help you do this, like ReadyForZero, which will give you a tailored plan to prioritize your debt and help you plan your payments. The Debt Movement’s forum is also a great place to turn to the community for advice.

Take some time. Improving your credit health isn’t going to happen overnight. It’s a journey. Don’t get flustered by the bumps on the road when your credit score dips — use those moments as opportunities to learn from your mistakes, and eventually you should find yourself in a pretty awesome financial situation.

That’s it! I sincerely wish you the best of luck as you continue to work on improving your credit health.  And remember… breathe.

 

About the Author:

Jennifer LeeJenna helps manage the social media channels and blog at Credit Karma, a free credit management website that helps more than 10 million consumers monitor their truly free credit scores.

Connect with her on Twitter @CreditKarma.