Sure, summer months may increase your spending. You may be running up a balance while traveling or gearing up for back to school. If you’ve dinged your credit, no need to despair. Here are 6 steps you can take to rebuild it and get it back to tip-top shape:
Know What Hurts Your Score The Most
The two credit score factors that affect you the most are payment history and credit utilization, explains consumer credit expert Kimberly Rotter. For the FICO credit scoring system how much you owe, makes up 30 percent.
Part of what makes up that 30 percent is your credit utilization ratio. In a nutshell, your credit utilization is the amount of your total credit card balances in relation to your total credit card limit. Let’s say you have four credit cards, and the total limit is $30,000. And your balance is $3,000. In that case, your credit utilization ratio is 10 percent. Generally, you should aim to keep your credit utilization under 30 percent. The lower, the better.
That being said, an all-too-easy way to ding your credit during the summer months is to run a high credit card balance. Racking up credit card debt on hotels, flights while traveling, preparing for back-to-school expenses, or entertaining out-of-town visitors. It all adds up.
Your payment history makes up 30 percent of your credit score. So you’ll want to pay close attention to spending behaviors that could hurt your credit. If you’re feeling stretched moneywise and are having trouble making credit card payments on time or are missing them altogether, that could also hurt your score.
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Figure Out What Dinged Your Score
The path to rebuilding your credit depends on what damaged it in the first place, explains credit card expert John Ulzheimer, formerly of FICO and Equifax. And how you dinged it will also be to path to repair your credit. So if you hurt your score by running up a high balance, to improve your score, you’ll need to pay it off as soon as you can.
Conversely, if you hurt your score because of missed or late payments, you’ll need to make sure you make payments on time.“The best way to do that is to stop using credit cards and stick with cash or your debit card until your balances are paid down,” says Rotter. “Once they’re at zero, you can use your cards again, but pay them off weekly until you’re confident your balances won’t get away from you.”
Paying your bills on time is something that’s within your control, says Rotter. “You can use auto-pay, or customize your due dates so they’re in sync with right after you get paid,” she says. “If you’re behind on a bill, get on a payment plan.”
Take Baby Steps
You don’t have to take it from $10,000 to zero for your score to go up, explains Ulzheimer. “It’s about scale.” Let’s say your credit utilization ratio spiked from 20 percent to 90 percent from making a lot of purchases, there’s no doubt your score went down. “Sure, you want to bring it back to 20 percent as soon as possible,” says Ulzheimer. “But in both FICO and VantageScore, if you can turn 90 to 70, it’s certainly better than 90.”
Whatever you do, be kind to yourself. Of course, nobody wants to hurt their credit score.”Life happens,” says Ulzheimer. “Try to minimize the impact or the time aspect. This means a shorter period of time that you’re impacted.” So come up with a plan to rebuild your credit as quickly as you can, and stick to it.
Budget, Budget, Budget
Yes, the ugly “B” word. Budgeting may not be fun or pleasant to do, but making sure you’re spending within your means will ensure you don’t run up a larger-than-usual balance on your credit cards. This is especially important during the times of year you tend to spend higher than usual.
Figure out how much you spend each month and on what adds Rotter. “When you get paid, you should already know exactly what you’re going to do with the money,” says Rotter. “That way, you can avoid charging anything you can’t afford.”
Plan for Major Purchases
You can’t plan for everything says Ulzheimer. But for the things you can plan, do so. Unless you can bank on paying your balance in full during each payment cycle, see if you can save for some of those big-ticket purchases you tend to make during the summer. This will help you avoid dinging your credit in the first place.
If you can swing it, a budget for the summer expenditures during the rest of the year, recommends Ulzheimer. Want $2,000 in liquid funds? If you save 200 bucks a month, after nine months you’ll have $1,800 in liquid funds. Even if you’re aren’t able to pay for everything in full, putting a bit of a balance is better than putting a lot on your card.
Carry Only One Card
Having your debt spread out among different cards hurts your credit, explains Ulzheimer. So when using your credit card for summer-related expenses, put all your purchases on a single card.
When traveling, carry two cards: One as your primary card, and another as a backup in case you lose the primary one, or you want to use it at a place that doesn’t accept your go-to one. The two cards should be from different credit card networks: For instance, some retailers may not accept Amex, so you’ll want to also carry a Visa card.
By all means, you should have fun this summer. “You should enjoy life, that’s fine,” says Ulzheimer. “There’s value in experience. Just be cognizant of the impact putting more debt on your credit card will have, and come up with ways to minimize the impact.”