Key takeaways
- 4 out of 5 Americans want to improve their credit scores, but half face barriers to doing so.
- A good credit score can help you secure better credit cards, loans, and more.
- Paying on time, maintaining a low credit utilization rate, and addressing debt are essential for a good score.
A good credit score can open a lot of doors. It makes it easier to be approved for credit cards and loans with low interest rates and more favorable terms. But getting a good score can be tough, especially if you have made mistakes in the past.
According to a recent NerdWallet survey, almost four out of five Americans (79%) are working to improve their scores. Half say they face significant obstacles to doing so. This sounds bleak, but the good news is that scores are not set in stone—everything is changeable with a bit of work.
Let’s review the seven main roadblocks to good credit and how you can overcome them.
Having a low credit limit
A low credit limit can be a serious obstacle. The reason being when you have a low limit you’re more likely to have a high utilization ratio. Your credit utilization ratio accounts for 30% of your score – it is the second biggest factor.
You can calculate your utilization ratio by dividing your credit card balance by your limit and then multiplying by 100. The rule of thumb is to stay below 30% – lower is even better. Americans with the highest scores have utilization rates in the single digits. Achieving this can be difficult when you have a low limit.
Let’s look at an example. Say your credit limit is $400, but you spend $300. Your utilization rate is 75% – way too high. In this scenario, you should spend at most $120. This is not very much at all, especially with inflation. It’s no wonder that 15% of Americans say a low limit is the biggest obstacle.
What can you do about it?
You have a few choices: increase your limit, decrease your balance, or do both.
If your income has increased or your credit score has gone up since you applied for the card it may be worth requesting a limit increase. Many providers will approve a larger limit if you have a higher-paying job or a recent history of on-time payments. A higher limit will only lower your credit utilization ratio if your balances remain the same.
Be aware, though, that some issuers conduct a hard inquiry before approving a limit increase. A hard inquiry can temporarily decrease your score by a few points. Ask your issuer if they do a hard pull and decide if it’s worth it.
Another strategy is to lower balances is to make multiple payments throughout the month. Returning to our example, if you spend $120 and then pay $80 mid-month, you can spend another $40 before the month ends.
Or you can pay down your balance before your provider reports your usage to the credit bureaus. Card providers typically report at the end of the billing cycle. Ask your issuer or check your statements to determine exactly when your provider does so. Then, pay down your balance before it’s reported so that it remains under 30%.
Ideally, you’ll pay your balance in full each month. Not carrying a balance from month to month can significantly improve your credit utilization rate.
Cannot afford debt payments
Debt payments, in general, are a big hurdle for Americans. The survey found that 14% of Americans say being unable to pay debt is their biggest obstacle. 13% are more specific, claiming they cannot afford credit card or loan payments.
Paying off debt and making timely payments are hugely important for your score. The lower your credit card debt, the lower your utilization ratio. And on-time loan and credit card payments are essential for good credit. Even a single late payment can drop your score by 60 points.
Find a way to pay off debts
The first step in dealing with unmanageable debt payments is to talk to your creditors. Call your provider and explain your situation. Many providers are willing to negotiate debt since they want to get paid. They may agree to temporarily lower your minimum payment or waive fees depending on your circumstances. This is more likely to happen if you have a good relationship with them. They may also be willing to move your due date to better align with your cash flow.
If you are facing temporary financial challenges – job loss, divorce, medical emergencies – your creditor may offer a hardship program. These programs may include reduced monthly payments, lower interest rates, extended repayment periods, or deferred payments for a set time.
Some issuers offer structured payment plans that allow you to pay off your balance over a more extended period with more affordable payments. A payment plan can help you avoid missed payments, which lead to late fees and further damage to your score, as you work to pay down your debt.
Another route is to talk with a credit counselor at a nonprofit credit counseling agency. A credit counselor can set up a debt management plan to help you pay off debt for less. The counselor will negotiate with your creditors on your behalf to lower payments and interest rates. You then pay one lower affordable monthly payment to the agency, and they pay your creditors.
Medical debt is no exception. Contact your hospital’s billing department and explain the problem. Ask if they offer financial assistance programs, discounts, or reduced payment plans based on your income. You may be able to negotiate the bill down or enter into an interest-free repayment plan.
If you’re ever struggling to pay, don’t ignore the problem. Most creditors have plans to help you get on your feet without further damaging your score.
Dealing with debt?
Unable to get a credit card
The easiest way to build credit is to get a credit card. But getting a card is hard when you don’t have a decent score. 14% of Americans find themselves in this Catch-22 situation. They cannot be approved for a credit card due to a poor score or lack of credit history, but they can only improve their score with a card.
Luckily, there are several ways to break free of this cycle.
Secured credit card
One option is to apply for a secured credit card. This type of card requires a cash deposit that serves as collateral and sets your limit. The deposit lessens the creditor’s risk, making it easier to get approved. Use the secured card just like a traditional credit card – pay bills on time and keep your usage low – and your score will go up. As your score grows, many issuers will transition you to an unsecured credit card and refund your security deposit.
Starter cards
Another choice is to consider beginner credit cards. These are traditional credit cards – no deposit required – designed for those with limited or no credit history. The trick with these cards is many come with high APRs (annual percentage rates), additional fees, and low limits. You’ll have to decide if they’re worth the cost.
One type of starter card is a store credit card. Store cards have lenient requirements but high APRs, low limits, and can only be used at the issuing retailer. They still have their benefits. Many merchants offer discounts, rewards, or coupons to cardholders.
Authorized user on a credit account
Becoming an authorized user on a family member’s or friend’s credit card account is an easy way to establish credit. As an authorized user, you benefit from the primary cardholder’s positive payment history and low usage. You don’t even have to use the account for it to work.
Before you go this route, verify that the primary account holder has good to excellent credit, always pays on time, and maintains a low utilization rate. It’s also a good idea to check with the credit card issuer and make sure they report authorized users to the major credit bureaus – Experian, Equifax, and TransUnion.
Not knowing how to improve your score
Many Americans need help improving their credit scores due to a lack of understanding. According to the survey, 13% of Americans admit they do not know how to build credit.
New
To get a good score, you have to know the factors involved. The basics are straightforward, though not always easy to do: Pay on time and don’t spend too much.
How scores are calculated
The two main credit scoring models are FICO (Fair Isaacs Company) and VantageScore. The factors they consider are very similar; the most significant two (payment history and amount used) are the same. If you have a good FICO score, you will more than likely have a good VantageScore. We’ll go over FICO in more detail because they are used by 90% of the top lenders.
FICO scores consider:
- Payment history – 35%
- Credit utilization – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New inquiries – 10%
Pay your bills on time, keep your usage low, and limit applying for or closing accounts. Do this, and over time, your score will increase.
One big tip is to check your credit report. You can get your credit reports from each bureau for free once a year via annualcreditreport.com. Look them over. See what mistakes you’ve made that need to be corrected. If you see any inaccurate marks, dispute them with the issuing bureau. Getting an error off your credit report can immediately boost your score.
A secured credit card is too expensive
Secured credit cards are often recommended as good first step for people starting out or for anyone who’s made mistakes in the past. They are easy to be approved for and can improve your score just like a traditional credit card. The problem is 10% of Americans say they cannot afford the security deposit.
Most secured cards require a refundable cash deposit of $100 to $200. This can be a lot of money to have locked away for a year or so as you work on your score. While the deposit is a hurdle, the benefits of a secured card can be well worth it.
How to get over the deposit
Save up. Take a hard look at your expenses and see where you can cut back. Perhaps you have too many subscriptions? Or do you eat out too often? Maybe you could walk more and drive less? Whatever it is, the sacrifice doesn’t have to be forever, just until you can save enough for a security deposit.
Another option is to choose a secured card that does not require an upfront deposit. These cards work more like prepaid cards, except that the issuer reports your payment history to the credit bureaus. You transfer money into the account and then make purchases with your card up to that amount. If you need the money back, you can transfer the funds out at any time. Many of these cards don’t require a credit check, but you may have to have a bank account with the provider or set up direct deposit to qualify.
I don’t use credit
You have to use credit to get credit. Without using credit, you cannot establish a positive payment history or demonstrate to lenders that you’re reliable. The survey found that 8% of Americans say this is their biggest roadblock.
Not using credit can seem like a brag. You are living within your means and don’t need to borrow money. Being financially responsible without debt is a good thing. The problem is that you must show you can borrow and repay responsibly to establish good credit. There’s no need to go into debt, but you do have to borrow.
A good score can help you secure a loan with favorable terms when the time comes to buy a car or a house. It can mean you don’t have to put down a deposit for utilities or can help you get the apartment you want. Lots of people look at scores and reports to determine if you’re responsible.
Even if you don’t need to rely on a line of credit, getting and using a card is a good idea. It’s actually preferable that you use it sparingly (get a low utilization rate), but you have to use it (a utilization rate of 0% is no good). Get a credit card, use it to make a few purchases per month, and then pay your bill in full and on time. That’s all you have to do.
If you’re worried about overspending, you can use your card to pay for one subscription and then put it away. It’s only for that. Set up autopay so that your bill is paid in full and on time every month without you having to think about it.
Unfortunately, credit scores are a big part of modern finances. Eventually, most people will need one, and it will help them to have a good one. Remember, you don’t have to go into debt for a good score.
Another credit card turned you down?
Filed for bankruptcy
Filing for bankruptcy has severe repercussions on your credit. According to the survey, 5% of Americans say declaring bankruptcy is the major challenge they face.
When you file for bankruptcy your score drops by at least 200 points if you had a good one, less than that if your score was already low. You’ll want to start building it up as soon as possible, but that can be tricky.
You are not allowed to apply for any new lines of credit while bankruptcy proceedings take place without court approval. You’ll have to wait four to six months if you filed for Chapter 7 bankruptcy and three to five years if you filed for Chapter 13.
When you can apply, your chances of approval are low. Certain lenders won’t even consider applicants who have bankruptcy on their credit reports. A bankruptcy filing will stay on your report for seven to ten years. That’s a long time to wait.
Proactive steps to take
Work on your score as you wait for the effects of bankruptcy to lessen.
1. Sign up for rent and service reporting. Specific programs report other monthly payments to the credit bureaus, helping you reestablish a positive payment history. You can get credit for on-time rent payments, utility bills, subscriptions, phone services, etc. Some other programs are free, while others require a service fee. Look for a low-cost program that reports to all three major bureaus, as you never know which one a potential lender may pull from.
2. Take out a credit builder loan. Credit builder loans are, in essence, a forced saving program. You take out a loan, but the money is held in a secured account. Each month, you make payments toward the loan. The lender reports your timely payments to the bureaus. Once you pay off the loan, you receive the money. It’s a great way to build a history of good payment behavior and save.
3. Apply for a secured credit card. Once again, secured cards can be handy tools. Providers have lenient requirements, so these cards can be obtained after bankruptcy. Use the card responsibly by paying on time and maintaining a low utilization ratio.
Bankruptcy has lasting effects on your finances, but it’s not the end of the world. With a bit of work and a lot of patience, you can rebuild your score.
Stop stressing over a low score
A good credit score is helpful, but it’s not everything. It does not reflect your net worth, nor is it a judgment of your character. It is a tool to help you get what you want.
If you have a bad credit score, know that you’re not alone. Address the issues when you can do so, and your score will improve.
Frequently asked questions
1. Does carrying a balance on my credit card help or hurt my score?
Carrying a balance hurts your score. When you carry a balance, your utilization ratio goes up. The goal is to keep your usage below 30% of your credit limit. Paying off your balances in full each month will help you achieve this. It also means that you’ll avoid costly interest charges.
2. Will closing old credit accounts hurt my score?
Yes, closing old credit card accounts will have a negative impact on your score. When you close an account, you shorten your credit history and reduce your available credit, causing your utilization ratio to increase. It’s usually a good idea to keep old accounts open and active. Put a small recurring charge on it and pay it off in full each month. That said, if your account has an annual fee, you may be better off closing it.
3. What steps can I take if my credit report contains errors?
If you spot errors, dispute them with the issuing bureau. You’ll have to provide evidence and explain why the item is incorrect. The bureau has 30-45 days to investigate. Fixing errors can give an immediate boost to your score.
4. What’s the fastest way to increase my poor score?
Pay down your balances, make timely payments, and request a higher credit limit. A history of on-time payments and low usage goes a long way in getting you a higher score.
Bottom line
At some point, just about everyone will need a good score. Be it for a personal loan, credit card, or a new job. A high score can open many doors that a low or nonexistent credit history keeps shut. Getting there, though, is not always so easy.
Many Americans strive for good scores but face roadblocks along the way. As these pop up, the best thing you can do is press forward. Be proactive and try to address the issues with your creditors. Take advantage of credit-building tools like secured cards and credit builder loans.
No matter the obstacle you face, it is possible to achieve a good score. It just might take a little extra work and time.
