Three steps to building your credit score: Improve your credit to enhance your financial well-being

Why does having a good credit score matter? People with lower credit scores pay higher interest rates when they borrow money. And if you’re trying to rent an apartment or get a mortgage, your credit history will be closely reviewed. Those with lower scores could pay more in fees and deposits – or be denied outright. Looking for a job? A 2021 recent study found that credit or financial checks are included in 51% of employer background screenings in the U.S.

How is your credit score determined?

Improving your credit score starts with knowing how it’s determined. The three main credit bureaus (Equifax, TransUnion, and Experian) look at several factors to determine your credit score.

• Payment history is the biggest consideration in calculating your credit score. Your payment history includes "good" repayment behaviors, such as making payments on time, and "bad" repayment behaviors, such as missing payments or paying your bills late.
• Credit utilization refers to the amount of credit you have available to use compared to the amount you're using.
• Credit history length refers to how long you've been using credit and/or had accounts open. Generally, the longer you've been using credit, the more it improves your score.
• Credit inquiries temporarily appear on your report whenever you apply for a new credit card or loan, which can cause your score to drop slightly for as long as they appear on your report.
• More serious issues, such as collections accounts, bankruptcies, tax liens, or court orders to repay money owed, will also affect your credit score.

Whatever the reason, about a third of U.S. consumers have a subprime credit score, according to 2021 data from Experian. If you have bad credit, there are three essential steps to improving your credit score. 

1. Pay your bills on time

Paying your bills on time is the most important thing you can do to build your credit score. That’s because your payment history makes up 35% of your credit score. Lenders want to know that when they loan you money, you’ll repay it on time. How you’ve paid bills in the past helps lenders determine how risky it is to lend money to you today.

Establishing good repayment behaviors will help improve your credit score over time. Here are a few ways to help prevent late payments.  

Sign up for autopay. When you use autopay, money is automatically sent from your bank or credit account to pay your bills each billing cycle. This works especially well for bills that are the same each month. You can choose which bills to set on autopay through your bank or your creditors. Automating payments simplifies paying your bills and helps prevent forgetting to pay a bill. Some companies also offer a discount to customers who use autopay.

Schedule a time to pay bills and set reminders. Schedule a specific day and time each month, such as the first and fifteenth day of each month, to devote to paying bills and going over your finances. Make a list of which bills you need to pay and when. You can even set a reminder on your phone to notify you when it's time to pay your bills.

Pay bills early. Give your payment time to arrive and allow some time for your creditor to process the payment. Holidays, weekends, and other interruptions can delay your payments and cause them to be late through no fault of your own. Avoid punishing late fees by asking your creditors how many days in advance you should submit your payment and get in the habit of paying your bills well before their due date.

2. Lower your debt-to-income ratio

Your debt-to-income ratio compares how much you owe each month to how much you earn. A high ratio – owing much more than you earn each month – can make potential lenders question if you’d be able to repay any money you borrow from them. Lenders set their own standards for good or bad ratios, but in general, the lower your debt-to-income ratio, the better.

To calculate your debt-to-income ratio, add all your monthly debt payments. Then divide that number by your gross monthly income, which is the amount of money you make before taxes are taken out. The result is your debt-to-income ratio.

Here are a few tips that can help lower your debt-to-income ratio.

Pay down high balances. Look at all your debts and figure out which ones have the highest balances. Prioritize paying off those debts to reduce your debt-to-income ratio. 

Avoid taking on more debt. It's important to pay off your debt without adding more. So if you're consistently paying off debt but still using your credit cards, your debt-to-income ratio will stay the same – and your credit score likely won't improve. You may want to implement a “24-hour rule” to give yourself time to consider any major purchase. And when the unexpected happens, such as major car repairs or medical bills, having an emergency savings fund in place can keep you from taking on more debt. 

Lower your interest on debt. Call your lender and ask for a reduction in your rate. You can also consider consolidating higher-interest debt by transferring your loan balances and refinancing your loans into a single loan with a lower interest rate.

Increase your income. Consider looking for a new job that pays more or taking on a part-time job or side hustle. Use that extra income to pay down debt and lower your debt-to-income ratio.

3. Pay more than the minimum each month

Here are a few simple tactics you can use to start aggressively paying off debt.

Pay multiple payments each month. Paying more than the minimum will bring down your debt balances faster, save you money on interest, and impact your credit utilization score, which generally accounts for 30% of your credit score. If you're paid biweekly, try to make a payment each time you receive a paycheck. 

Increase your income and cut your expenses. If making more than the minimum payments isn't possible with your current finances, make extra money with flexible side jobs you can start right away, such as food delivery or driving for rideshare companies.

Pay off debts systematically. Throwing all your extra income at your smallest debt, while making minimum payments on the others, is often called the debt snowball method. Each time you've paid off a smaller debt in full, add the payment you would've made toward that debt to your next-smallest debt. Or, try the debt avalanche method, which prioritizes paying off your highest-interest debt first, while continuing to make minimum payments on all other debts. The strategy you choose matters less than your commitment to sticking with your repayment plan.

Snap Finance is here for you

Building your credit score takes time and dedication. But its effect on your financial well-being and long-term goals makes that effort worthwhile. Check your credit report often to see how your financial decisions are impacting your credit score. 

If less-than-ideal credit keeping you from getting what you need now, Snap can help.  

We know that traditional financing isn’t available to everyone. That’s why we look beyond scores from major credit bureaus to give you the best chance of approval.1 So when life happens – the washer goes out or the tires need replaced – you can get what you need now and then make budget-friendly payments over time.

Not every creditworthy person has good credit. Snap offers financing solutions for all credit types, no matter your financial background.¹

Learn how Snap can help you shop now and pay later.

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Snap-branded product offering includes retail installment contracts, bank installment loans, and lease-to-own financing. Talk with your local Snap sales representative for more detail on which product qualifies at your store location. 

¹While no credit history is required, Snap obtains information from consumer reporting agencies in connection with submitted applications. Not all applicants are approved.