A robust credit rating is a key component of a strong financial foundation. There's a reason consumers' credit histories are important to landlords, car dealerships and mortgage lenders. Adults who can demonstrate a track record of sound financial decision-making and responsible money management are seen as safer bets by landlords and lenders than those who have shaky payment histories.
Young adults may not recognize the significance of a strong credit rating until their financial reputations have already taken a hit. Indeed, the Urban Institute reported in late 2024 that 16 percent of young adults between the ages of 18 and 24 with a credit record had debt in collections. Such individuals and older adults who have struggled to make ends meet without taking on debt may one day aspire to own a home or secure a favorable auto loan, and each goal is more difficult for consumers with poor credit ratings to achieve if they cannot restore their reputation in the eyes of prospective creditors. Thankfully, consumers can take three simple steps to rebuild their credit.
1. Start paying on time. One of the fastest ways to build debt is to skip or miss payments on consumer debts like credit cards. When that happens, consumers must pay percentage-based interest charges, which can be especially high on credit cards. When borrowers don't pay on time, relatively small debts can quickly balloon, costing consumers sizable amounts of money and threatening their financial reputations. In addition, the financial experts at NerdWallet point out that late payments can stay on a credit report for more than seven years, which underscores the significance of paying bills on time each month.
2. Utilize as little credit as possible. Credit utilization ratio is one of the variables reporting agencies like Experian use to determine consumers' credit ratings. Overutilization of credit adversely affects a credit score, so consumers with poor credit histories are urged to avoid using credit cards when they have funds available in their savings or checking accounts. Consumers now have readily available access to information that determines their credit scores, and that includes their credit utilization ratio. Monitor that ratio and make a concerted effort to keep it low. Data from Experian gathered in the third quarter of 2022 revealed that the average utilization ratio among consumers whose credit scores were considered excellent was 6.5 percent, while those whose scores were considered fair had a ratio of 56.1 percent. Individuals whose scores were considered poor (between 300 and 579) had an average utilization ratio of 82.1 percent. The disparity in these ratios underscores their significance in relation to building a strong financial reputation.
3. Apply for a secured credit card. NerdWallet notes that secured credit cards can be the right vehicles for individuals who need to start over in relation to their credit histories. The credit reporting agency Equifax notes secured credit cards require cash deposits that are used to insure purchases made on credit. Secured credit cards are ideal for borrowers who have been deemed high-risk due to past mistakes. Payment histories on secured credit cards can be recorded and shared with reporting agencies, which makes them a valuable asset for individuals who need to demonstrate an ability to pay bills on time.
Consumers can consider these three strategies and others as they seek to rebuild their credit and get back in the good graces of lenders.