From your Social Security number to your cellphone digits, all kinds of numbers play a role in life. But arguably one of the most important is your credit score --the three-digit number that tells creditors how likely you are to repay your debt -- in large part because it can impact your car insurance premiums, whether you get hired for a job and more. Boosting this score may seem like a daunting task, but it doesn’t have to be. These tips can help you give yours a lift.
Good credit “opens up doors,” says Girish Govind, head of credit risk decision modeling at Citi, and not just figuratively but also literally: If you want to rent an apartment, the landlord may look at your credit score, he says. The same goes “if you’re trying to get a good insurance rate.”
At the same time, despite their significance, credit scores are low for many Americans. According to Experian's 2023 Consumer Credit Review, of those who have one, 33% have a score in the poor to fair range of 300 to 669. What’s more, the Federal Deposit Insurance Corporation (FDIC) reports that an additional 28 million people are credit invisible, meaning their credit history is so limited they don't have any credit score at all.
Fortunately, there are simple ways to help rebuild or establish credit Read on for eight strategies to consider.
If you haven't taken out a loan or opened a credit card before, it can be difficult to qualify for most forms of credit. Retail cards, though, may be easier to qualify for than traditional cards, and they don't require a security deposit, so they can be a good option for establishing credit. You can apply for a card with most chains and retailers. If you’re approved, and if you make your payments on time and keep your balance low, you can build your credit with a positive payment history and low credit utilization.
As with other types, of course, you’ll need to use it responsibly in order for it to benefit your credit. "Don't go and buy a whole bunch of stuff," cautions Todd Christensen, an education manager with Money Fit at Debt Reduction Services, a nonprofit credit counseling agency. "Just buy something you were going to buy anyway and pay off the purchase as soon as possible once you’re billed.
Here’s another helpful tool for anyone who has no credit history or has had credit problems in the past. A secured credit card requires a deposit, unlike traditional credit cards, which give you a credit limit based on your deposit. The deposit is typically between $200 and $1,000. You can charge only up to the available credit limit and it’s important to make timely payments as well as pay at least the required minimum amount due.
When you use this card and then make payments, the card issuer reports the activity to the credit bureaus. Even if you use it only for small transactions (say, a streaming subscription or a convenience-store item once a month), it may still have a significant impact on your credit score. If you didn't have enough of a credit history to generate a credit score before, a secured card may provide enough information to give you a valid score in just six months.
As you start building credit, scanning your credit reports at least once a year can be useful. “A lot of people have errors on their credit bureau reports,” says Govind – one-third of adults, in fact, according to a 2021 Consumer Reports study — and because these can lower your score, “it's important to check and see if all the accounts are yours, or if there are any inaccurate missed payments or outdated information."
You can view each of your credit reports from the three credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com for free. If you do spot any errors, such as accounts you didn't open or clerical mistakes, you can dispute those charges online with the credit bureaus.
You can also protect against fraudsters by freezing your credit with all three bureaus. This can be a smart move because it helps prevent creditors from accessing your credit file. If someone steals your identity and applies for a loan or credit card in your name, the creditor won't be able to perform a credit check, and the application will be denied.
A credit freeze “is free, and you can unfreeze it anytime,” Christensen says. "Unless you are applying for a line of credit, there's no need for it to be open.” And if you do want to apply for new credit at any point, you can remove the freeze through the credit bureaus' websites.
As your credit improves, you may qualify for other credit cards with better rates or benefits, such as those that offer cash back rewards or airline miles, so you may want to add one or more that work for your spending habits. But that doesn’t mean you should close your older card.
Keeping a credit card open helps with the length of your credit history as well as your utilization, explains Jenelle Dito, senior director with FICO Scores, the most commonly used credit scoring model. When you close an account, that credit limit no longer appears on your credit report. You then have less available credit to use, so your credit utilization — the amount of your available credit you use — increases. And because credit utilization determines about 30% of your credit score, the impact of closing an old credit card may be significant.
However, "If you're just too tempted to use [the credit card] and are not going to use it responsibly, then closing it may be a long-term benefit," says Dito. Otherwise, leaving the card open and using it only occasionally to keep it active may have a better effect on your credit.
Generally, creditors like to see that you can handle multiple forms of debt, such as a combination of installment loans, revolving credit — credit you can use again and again, such as a credit card — or mortgage debt. "[Credit mix] is only 10% of the calculation of a FICO Score," says Dito – it essentially acknowledges that people with a healthy mix of types of credit tend to manage their credit in a more responsible way — "but gradually adding different types of credit as you need it can give your score a modest boost.”
That’s not to say you should rush out and open credit solely to improve your credit mix. Doing that would make you vulnerable to accruing unnecessary debt because you’d have more available credit you can use. Your best bet is to shop for credit only when you have a reason to; for example, if you need a car loan to buy a new vehicle.
If you feel overwhelmed by your finances or debt and aren't quite sure what to do next, meeting with a credit professional could be a smart move. Nonprofit organizations typically offer financial education and possibly credit report analysis for free or at a low cost, and a counselor can also help you create a budget and manage your debt to improve your credit over time. (You can use National Foundation for Credit Counseling NFCC.org to find a non-profit credit counseling agency in your area.)
"Your credit is not a reflection of your personal character; it’s just a way for [creditors] to predict how likely you are to pay back your debts in the near future,” says Christensen. It can always evolve too. “It changes with your financial situation. It changes with your personal commitment and discipline …bad credit may become good credit in a year or less.”
For more advice on building and maintaining credit, visit Citi Financial Pathways, a new source of articles that can help you make informed decisions for your financial future.