How to improve your credit score even if you have debt

How to improve your credit score even if you have debt

Money | Frugal Living | Good Habits

Nia Bennett | Nov, 23 2019

Unless you are born super-rich, almost every one of us will go through stages in life where they incur debt. This could either be a loan for a car, credit card bills for having that dream wedding, loan to buy a house or a combination of things just for everyday survival. 

The number might vary but we call have debts to pay. That’s the fundamental reason why banks thrive. So while it is daunting, the ability to improve your credit score or credit rating even on a low income or whilst you have debt is easily possible.

1. Use a credit card

This might seem counterintuitive to some. I know this option was not so obvious to me because I grew up thinking, you only buy what you can afford and you do that with the money you have. This meant I always relied on my debit card and never felt the need to apply for a credit card. But with a few life experiences, I have learnt that having a credit card does not mean you are in debt. 

Start by applying for a secure credit card with zero interest and balance transfer. Most card companies will offer some deals and depending on your score you could get one for as short as six months to as long as 18 months.

The trick here is to make everyday purchases like grocery bills and fuel using your credit card and instantly pay it back. Even if you are tight on money, aim to pay back within the end of the month. Doing this regularly will improve your credit score immediately.

2. Check for errors on credit report

This might seem obvious but there are over thousands of people who don’t feel the need to review their monthly credit report because they assume it will be right. Wrong! Statements and reports can be wrong. It only takes five to ten minutes to have a look at your credit and if something looks wrong or suspicious query it immediately. Sometimes it could be no fault of yours but a dodgy credit card activity could have been the primary reason why your credit score reduced. Once you spot errors, make sure you call your bank and credit card immediately to resolve this and you will instantly see a boost in your next report.

3. Close dormant credit cards 

Often we focus on paying off our debts but in that process, a lot of us forget that the credit card won’t close down on its own. Cards remain active until we do not call the credit card company and ask them to shut it down. Sometimes this takes months, so it’s best to do this as soon as you have paid off your credit card. 

When one of my friends went to the bank to apply for a mortgage, they did a soft credit check on her. When the bank manager told her she has four credit cards under her name and asked her about it was when she realised those credit cards were still open and it was giving her a low credit score. Sometimes having too many high balance credit cards with zero debt can negatively affect your score.

4. Register to vote

A quick and easy win is to be on the electoral roll. This shows reliability. Banks and credit companies love it. So when you move to a new house, make sure you immediately get yourself registered on the electoral roll. Once you do this, within a few months your credit score will soar up.  

In fact, if you have a low credit score, it is always good to look at the suggestions that show up on the credit report. Something, like closing dormant cards or getting yourself registered to an electoral poll. These are quick tips that will drastically improve your credit rating.

5. Limit credit card applications

Your primary reason to get a credit card urgently could be because you do not have the money to pay for something right now, but if you do not have the money right now then you will not get a credit card - it’s a catch-22 situation. When we are stressed about money, we often get into a frenzy and this makes us do unreasonable things like applying for as many credit cards as possible. 

Believe me, this is the worst thing you can do. I know it can be hard to apply and wait for the outcome for the credit card application, especially if you need one as soon as possible but patience is key. Every time you make a credit card application, your credit score is checked and every time a company does a deep check it lowers your score. It’s a vicious cycle but if you are desperate, do your research and apply for the one with the lowest or zero interest. Sometimes credit card companies give you a clue by saying you have a 90% chance of getting it, some higher, some lower. Go with the one that has the highest chance and wait for the outcome. If you have applied and it got declined, wait for a few months before you reapply again.

6. Spend only what you can pay

Living your life with the money you currently you do not have is the fundamental method of how a person gets into debt. Even with a credit card, only buy things you can afford given your current financial situation. If you think you cannot afford it then it’s not worth worsening your financial situation by putting it on a credit card. 

A credit card isn’t a magical device that will help you live a luxurious life. If used wrongly this can be the thing that destroys your peace of mind with a high risk of losing your personal assets. However, if used smartly, this can be a great thing to improve your financial situation, credit score, and improve your chance to get future loans on the lowest interest rates.