A bad credit score can seem like a very deep hole to dig yourself out of, but the good news is that it’s not impossible to recover from a lower-than-you’d-like credit score. That being said, it will definitely require some discipline and work on your part.
How can you improve your credit rating?
It’s a good idea to understand what affects a credit score, and in turn what you can do to improve your own credit rating – because you can then put this knowledge into practice. Some of the ways you can help improve your credit rating include:
1. Paying bills on time
This may seem obvious, but it is the most important – pay all of your bills on or before the due date. A record of consistent and punctual payments will help considerably towards getting a good credit rating.
This is especially important if the bill is for $150 or more, as a missed payment of that size can be recorded as a default on your credit report if it’s 60 days overdue. Defaults are one of the more significant black marks that can show up on a credit report, so they’re definitely best avoided if possible.
2. Not applying for any new credit
Whether you end up being approved or not, applying for a new credit product or loan will show up on your credit report, which in turn may affect your credit score. A lender or credit reporting bureau may take a dim view of the fact that you applied for new credit despite being in a reasonably precarious credit situation to begin with, which in turn may lead to a lower credit score.
That being said, we’re talking about additional credit here – we make the point further down that applying for a credit product which will replace one of your current credit products, such as a balance transfer on a new credit card, may actually help you improve your credit score – if utilised prudently.
3. Paying off any outstanding loans and debts
Furthering the point above, you’ll be much better-situated to improve your credit score if you’re not having to stress over existing loans and debts. They can exacerbate any money issues you’re currently going through, and will also appear as a feature of your credit report until you’ve paid them off – they may even remain there after you’ve paid them off depending on how large they were and how long it took you to pay them off.
4. Keep your credit card balance low
A consistently low balance is much better for your credit score than a higher one. If you’re struggling with spending too much, then our article on 70 ways to save money could be extremely useful to you!
One way you could potentially reduce the size of your outstanding balance is by switching to a credit card with a lower interest rate, or even one offering 0% for a certain period of time. A balance transfer could come in handy if you decide that switching credit cards is a good strategy for you.
The table below displays a snapshot of credit cards with 0% balance transfer offers on Canstar’s database, with links to providers’ websites. These results are sorted by the length of the 0% balance transfer period (longest to shortest), then provider name (alphabetically).
5. Check your debt-to-credit ratio
If you have $300 on a credit card balance, then that amount has a 15% debt-to-credit ratio on a $2,000 credit card as opposed to a 30% ratio on a $1,000 card. The lower your ratio, the better. So if you’re the kind to consistently spend the same amount on your credit card, it’s worth looking into one with a higher limit; however, don’t do this if you think it would tempt you to spend more. Of course, be sure to pay off your credit cards in full each month if you can!
6. Hold onto safe accounts
The longer a credit account is maintained without any negative reports (such as a missed payment), the more it can improve your credit rating. If you regularly do all of your spending on a credit card as opposed to doing it out of a transaction account, and do so without incurring excessive or regular debt that you can’t pay, that may be a good habit to continue. This is because it displays your ability to consistently and responsibly use a credit facility.
7. Diversify your credit
If you can demonstrate an ability to handle different types of credit at the same time, it could be an asset to your credit score. For example, a mortgage, a car loan, and a credit card would be an example of diversified credit, as long as you can meet the repayments on all three types of credit. A mix of short-term and long-term, and fixed payment and revolving credit – all maintained responsibly – would see your credit score improve. That is not, however, a suggestion to take on more debt than you need.
For more information on credit ratings, check out our article on how you can check and maintain your credit score. Additionally, you can click on the link below to read more articles about credit scores and credit reporting.
Here’s a few things that can do damage to your credit rating: What will hurt my credit rating?
- Having a bill that’s overdue by 60 days or more when the debt is at least $150.
- Several applications for credit in a short period of time (having a number of enquiries listed on your credit report isn’t an automatic negative, but credit providers ‘may’ take a dim view of it).
- Increasing or making no efforts to?reduce any outstanding debts you may have.
- Credit card balance transfers can also affect your credit score – if you are rejected for a balance transfer, or if you aren’t able to meet the minimum repayments on the balance transfer, or if you apply for back-to-back balance transfers.
- Refinancing your home loan – if you don’t do your research beforehand, and end up getting rejected for the loan.
However, it’ll always come down to ‘your’ financial behaviours, and how responsible you are with your money. The smarter you are with your money, the better your credit report will get or the faster your credit rating will recover.
It’s not a difficult task to improve your credit rating, even if it seems all hope is lost right now. It just requires attention, responsibility, and patience on your part. Use a bit of all three and you’ll hopefully see your credit score improve.
Learn more about Credit Cards
- How can I pay off my credit card faster?
- Should you increase your credit limit if it’s offered to you?
- How can I make sure my credit card details are safe?