Working to improve your credit can often be a frustrating process. Credit rehabilitation takes time and requires patience. You’re dealing with credit bureaus, banks and debt collectors to address sensitive credit report-related issues, which isn’t a day at the park.
If your credit is holding you back from a goal, such as purchasing a home, then passively waiting for your new and improved credit management habits to boost your credit scores may not be your best option.
The best way to earn better credit scores is to develop consistent and smart credit management habits. Such habits include making future payments on time every time, paying down credit card balances and keeping them low and not applying for new credit too frequently. Credit management behaviors like these will form a solid foundation upon which a better credit score will persist.
Of course, if your credit is holding you back from a goal, such as purchasing a home, then passively waiting for your new and improved credit management habits to boost your credit scores may not be your best option. Thankfully, in addition to sound credit management practices, there are some outside-of-the-box credit improvement strategies which might just speed up your credit improvement journey as well.
1. Nail One Percent Utilization
Credit scoring models are designed to pay close attention to your revolving utilization ratios. Revolving utilization is the relationship between your credit card limits and the account balances that appear on your credit reports. For example: A credit card with a $1,000 limit and a balance of $750 on your credit reports equals a revolving utilization ratio of 75 percent. The lower your utilization ratio, the better.
When you have a zero balance on your credit reports, your revolving utilization ratio will be zero percent. A zero percent ratio is great from a credit scoring perspective. However, believe it or not, if you can nail a utilization ratio of one percent, that is actually better than zero percent to credit scoring models.
The challenge, however, is actually nailing one percent. For example: If you have $10,000 in credit limits on your credit cards, you’ll have to end up with a $100 balance on your credit reports. And while that might seem easy, you’ll have to use your cards and pay them during the month such that when the statement closing date rolls around, the net of your spending and payments equals $100. It’s tough to do but your scores will be better if you can pull it off.
2. Mix Up Your Account Types
You might not realize it, but credit scoring models are designed to pay attention to the types of accounts appearing on your credit reports. The more diversity in account types, the better the impact could be on your credit scores.
If your credit reports contain installment accounts, like loans, but do not contain any revolving accounts, like credit cards, your credit reports are not as diverse as they could be. The addition of a credit card could potentially be helpful to your scores. The reverse to this scenario applies as well, although taking out a loan to improve your scores isn’t normally a good idea. This will happen organically, though, as you accumulate different loans throughout your credit journeys.
3. Consider a Credit Builder Loan
Adding positive accounts to your credit reports can be a helpful credit improvement strategy, depending upon your situation. People often turn to credit card accounts as a means to achieve this goal, especially since properly managed credit cards have the potential to help you build credit without taking on extra debt. However, credit cards aren't the only way to build positive credit.
A credit builder loan is often overlooked as a tool, which will help to add new, positive credit to your reports. Unlike credit cards, credit builder loans are "installment" accounts. These loans are often available through credit unions. Unlike traditional loans, funds from credit builder loans are held in an interest-accruing savings account by the issuing lender until you pay off the loan in full, which generally takes no longer than one year. The lender reports your activity to the credit bureaus and, provided you make all of your payments on time, your scores should improve as a result.