The first thing to learn about credit is that it is a service created by banks, meant to streamline the flow of money. When you apply for credit, you are essentially asking a bank to loan you money, which you will then pay back, plus interest, regularly. Most people know that they will have to pay interest on a credit card, but not everyone realizes that they will be charged interest on their loans, as well.
If you want to improve your credit, the easiest way is first to set up a budget. Start by making a realistic list of your expected monthly expenses – rent or mortgage, utilities, food, transportation, insurance, credit card debt, and any other fixed costs. Next, transfer all your credit card balances to a card with a low-interest rate. Then, create a spending plan for each category in your budget. This way, you know exactly where your money is going. Next is to find ways to decrease current spending, such as finding a cheaper phone/internet plan, finding special offers for your weekly grocery shopping (see this example), and cutting down on luxuries such as takeout. These initiatives can free up extra money which you can use to deal with any current debt you have.
The best way to improve your credit score is to avoid applying for new credit cards and pay your bills on time. On occasion, this is easier said than done. If you find yourself struggling to meet a minimum payment or applying for a credit card just to make ends meet, the first step is to determine what you can afford to pay.
The credit score you get is based on your credit history. If you want to know how to improve your credit, you have to know what affects your credit score. Five factors can hurt your credit score:
- Late and missed payments
Missing a credit card payment or an electric bill payment might seem like a harmless slip that will go unnoticed, but it can have serious negative consequences. A missed payment on a credit card, for instance, can cause your interest rate to skyrocket from 15 percent to 30 percent or more, which means you’ll pay thousands of pesos more per year in interest alone. Still, not everyone understands the consequences of missing payments.
- How much you owe on credit cards
As you probably know, the average credit card debt for Americans is over $5,000. And if you’re like many people, you’re not exactly sure just how much you owe. Figuring out your total credit card debt is hard to do because different credit cards have different interest rates, and some of your cards may be paid down more than others. If you’re trying to pay off debt, you should know how much you owe to set yourself up for success. To help you get started, here’s a debt payoff calculator from Get Out of Debt Guy that will help you get a quick overview of your debt load.
- How much debt you have compared to your income
Personal debt is a hot topic for many people in the United States, especially people who have more debt than money. Although the U.S. economy continues to experience steady growth, high interest rates are causing an increasing number of Americans to fall behind on their debt payments. While the U.S. personal bankruptcy laws are designed to help people get back on their feet, the laws also provide a way for people to get out from under mountains of debt.
- New credit applications
You’ve just been approved for a new credit card, but how do you decide which one to choose? There are so many credit cards to choose from, each with its benefits and rewards program.
Choosing a new credit card is a simple process if you follow these four steps:
- Start with the basics. You’ll want to compare annual fees, interest rates, and rewards programs between cards, but start with the most basic of the three: annual fees.
- Compare interest rates. You’ll want to compare rates on general purchases, cash advances, and balance transfers.
- Look into the rewards program. Some credit cards will reward you for the type of spending you like to do, such as frequent flier miles. Some cards, like that offered by SoFi (see this resource here for details), offer exciting rewards including cryptocurrencies, putting them firmly at the forefront of where finance is heading.
- How long you’ve had credit
There are a few different ways to measure your credit score, but the most common one is by looking at the length of your credit history. This is because the length of your credit history is a good indicator of how responsible you are with your borrowing. The longer you have managed credit, the better you are at handling credit.
So, a few ways here that will improve your credit score and make it easier if y