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5 Tips for Rebuilding Your Credit Scores After Your 20s

5 Tips for Rebuilding Your Credit Scores After Your 20s

If you’re anything like me, your early 20s were not your most financially sound years. With a low-paying job, rent and bills to pay, and plenty of shiny gadgets tempting you at every turn, credit cards often seem to magically make it all work… until they don’t anymore.

Sadly, once you get your act together and want to start making adult purchases such as cars and houses, those foolish financial missteps can come back to haunt you. Thankfully, there are many ways to help repair your credit scores, which in turn will allow you to secure better financing on those large, milestone purchases your more mature mind is now focused on. Here are 5 suggestions to help you get there.

1. Consider Debt Consolidation

Not to be confused with debt forgiveness or bankruptcy, debt consolidation simply refers to the idea of moving all of your outstanding debts to one place in an effort to make paying them off easier. There are a few reasons why this could be a good idea, not the least of which is the path to financial freedom it provides you. Additionally, depending on how you choose to consolidate, it could serve to boost your credit scores.

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The two most popular forms of debt consolidation are personal loans and balance transfers, both have their pros and cons. First, personal loans can be good for boosting your credit scores because they will move your debt from revolving lines of credit to installments. That’s significant because your maxed out credit cards will carry more weight than installment loans when it comes to your credit utilization ratio. Since credit utilization/available credit makes up 30% of your FICO scores, paying off your credit cards with a loan should give you boost.

Sound good? Well, there are a couple of snags you should know about. As you’re undoubtedly aware, banks aren’t really in the business of lending you money for free. Because of this, you’ll want to ensure that the interest rate and APR (annual percentage rate) you’re offered on a loan doesn’t exceed what you’re paying on your credit card(s). On top of that, many lenders will charge what’s called an origination fee—a percentage of your loan amount that you pay to the lender and don’t get back. For these reasons, it’s a good idea to do the math or use a personal loan calculator when exploring your options.

Another form of debt consolidation is a balance transfer. Typically this is done by opening a new credit card with a 0% introductory rate and then transferring the debts from your other cards to your new one. Although this might save you a good amount of money in interest if you’re able to pay down the entire debt quickly, it could end up hurting even worse if you let that introductory offer end. Additionally, be aware that most cards charge you a balance transfer fee – as high as 5% of the amount you are transferring. Lastly, opening a new card will actually ding your credit temporarily since it’s a new credit inquiry, but the added credit availability will help you down the road.

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2. Keep Your Cards Open

Regardless of what method of debt consolidation you use (or don’t use, for that matter), you may be surprised to learn that closing your paid off cards is actually a terrible idea. Sure, it might feel good to call up your credit card company and tell them where to go, but closing your account can hurt your credit scores big time.

Part of the reason for this goes back to the idea of credit utilization. If you close your accounts, you’ll have far less available credit, which is a disadvantage in the eyes of FICO. Plus, a lesser (but still important) factor affecting your scores is your length of credit history. Unfortunately, when you close an account, the time you held that card no longer gets added into this average. It’s a much better idea to leave your cards open and just use them responsibly.

3. Try A Secured Credit Card

Didn’t get the “don’t close your cards” memo until it was too late? If you’ve really tanked your credit, it may be difficult to get approved for a new credit card at first. Even more frustrating, without a credit card, rebuilding your scores can be tricky. That’s where secured credit cards come in.

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What makes secured cards different from the ones you’re familiar with is that they require a deposit. The size of that deposit will depend on the card issuer and the credit limit you’re seeking, but it’s typically a few hundred dollars. Since you’re giving the card issuer collateral, these cards are far easier to obtain than unsecured ones, making them a good choice for those who are nearly out of options.

4. Pay Your Bills On Time

This may seem obvious, but it’s a huge help. Although any overdue payments you’ve made in the past will stick to your credit report for seven years (much like swallowed gum), putting those behind you and establishing a clean streak will serve you well. Additionally, while you will still see those errant payments on your report, their damage to your scores will diminish with time, so don’t fret too much.

5. Monitor Your Credit

Even if you abide by all of these tips in hopes of repairing your credit scores, how will you know if any of your efforts are paying off if you don’t bother to check? Thanks to modern technology, keeping up with your credit scores is now easier than ever, and often free.

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One place you should start is AnnualCreditReport.com, which provides you with your Equifax, Experian, and Transunion credit reports free once a year. The bummer here is that, in order to actually view your scores, you’ll have to pay. However, reviewing your report is extremely important because you may catch errors that are dragging your scores down unfairly.

As far as your scores are concerned, some credit cards now provide you a FICO score on your statement or on their website. If not, you can also try sites like Credit Karma to get a rough idea of what your scores look like. I say “rough idea” because Credit Karma utilizes the Vantage model for calculating credit scores as opposed to the more common FICO model. Because of this, you may see discrepancies, but at least you’ll be in the ballpark.

Yes, it’s true: adulting is hard. Alas, many of us make some major financial mistakes in our 20s that affect us as we attempt to be real adults a decade or so later. The good news is that, even if you’ve trashed your credit scores in the past, they do change and can recover. By paying off your debts, looking for secured forms of credit, paying on time, and keeping an eye on your credit, it will only be a matter of time before those dark fiscal days are finally behind you.

Featured photo credit: Pymnts.com via pymnts.com

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Published on September 17, 2018

How Being Smart With Your Money Leads to Financial Success

How Being Smart With Your Money Leads to Financial Success

Achieving financial success is not something that just happens. Maybe if you win the lottery or something, but for the average person like you or me, it comes from a series of small steps you take over a long period of time.

With each step, you form a new smart money habit. And with each smart money habit, you build towards financial independence.

So what sort of habits can you form to get on that path? Let’s take a look at smart money habits you can start today to get you closer to a financially independent future.

1. Avoid being “penny wise but pound foolish”

It’s tempting to try saving a couple cents here and there when buying small items. However, that’s not where the real money is saved. You’re putting in extra effort for something that doesn’t move the needle.

You get the most bang when you’re able to cut down on your bigger bills. For example, finding a lower interest rate for your mortgage could save you $50+ per month. And cutting your transportation bill by purchasing a cheaper car or taking public transportation can provide large gains as well.

So, look at your recurring expenses such as housing, transportation, and insurance, and see where there’s wiggle room. It’s a much better use of your time than trying to pinch pennies here and there on smaller purchases.

2. When you want something big, wait

Impulsivity can get you in trouble in most aspects of life. Finances are no different.

It’s human nature to see something and want it right then and there. It starts as a kid in the checkout line at the grocery store, and it continues on through adulthood.

We get an idea in our head of something we want, and it’s hard not to go out and get it right then.

A good example is wanting a new car. Perhaps you’ve had your car for several years. It’s crossed the 100k mile mark. Maybe maintenance is due, and you’re annoyed that you need to replace the timing belt or purchase new tires.

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So, you get the itch.

You start digging around online, and you realize you could trade in your current car for something newer and more exciting… all for a few hundred bucks a month. Then you get obsessed.

Here’s where you have to take a step back.

Your newfound obsession is clouding your judgement. Rather than giving into the impulse, wait it out.

Set a timeframe for yourself. Maybe you come back to the decision three months down the road. See if the obsession lasts.

It might, but often, a funny thing happens. Often, you forget about it. And often, you find that the new car wasn’t a need at all.

The impulse faded. And you just saved yourself a ton of money.

3. Live smaller than you can afford

You finally get that big raise. And you want to celebrate – and why not?

You’ve been looking forward to this forever. And after all, it was all due to your hard work.

That’s fine, splurge a little. However, make it a one-time deal and be done.

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Don’t get caught in the trap that just because you’re now making more money, you should spend more.

Too often, people get more money and feel like they that gives them the means to buy a bigger house, a bigger car… you know the drill. Resist.

The fact is that living smaller than what you can afford is one of the fastest ways to build savings.

But if you constantly upgrade as you begin to make more, then you’ll never get ahead. You’ll just build up more debt along the way and have just as little wiggle room as before.

4. Practice smart grocery shopping

Food… it’s one of the biggest portions of any budget. And if you’re not careful, it can be one of the biggest drains on your wallet.

But luckily, there are a few things you can do to ensure that you stay smart with your money when buying groceries.

Create a grocery budget

Set a strict weekly grocery budget. When you know how much you can spend on groceries, you can then plan your weekly menu around it.

Once you know what all you need, you can go shopping and keep a running tally as you shop to ensure you’re on track.

I tend to do this in my head, rounding for each item. However, writing it down as you go would probably work best for most people.

Make a list… and never deviate

Never go to the grocery store without a list. If you go to the store with a ballpark idea in mind, you don’t have a true ide of what you need.

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You’re not well-researched. You don’t know what the sales are. As a result, you’re going to make decisions on the fly.

These impulse decisions will lead to overspending, which will derail your grocery budget.

Eat before going grocery shopping

It’s also important to eat prior to going to the grocery store. Hunger is a powerful force.

If you’re shopping on an empty stomach, everything is going to look good. In particular, you may find a lot of ready-made, processed snacks will look enticing.

After all, you’re hungry now and that food is easily available. So subconsciously, you may lean towards those items.

Unfortunately, not only are those items typically less healthy, but they’re likely more expensive. You pay for convenience.

However, when you eat prior to shopping, then you’ll shop with a clear mind. Your hunger won’t cloud your judgement, influencing you to make poor decisions like a cartoon devil resting on your shoulder whispering in your ear.

This makes it much easier to stick to your grocery plan.

5. Cancel your gym membership

Now that you’re all set on your food, it’s time to get smart about managing your budget in terms of physical fitness. And let’s begin by avoiding the gym. The gym bill, that is.

The average gym membership costs around $60 per month. That’s $720 a year.

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Yet, two out of three gym memberships go unused. That means two-thirds of people who have a gym membership are literally giving away almost a thousand bucks a year. It’s crazy!

I recommend seeking an alternative. One good alternative is to look into fitness streaming services.

Streaming services allow you to stream hundreds of workouts like Insanity and p90x, right in your own home for around $10-20 a month. That’s $40-50 less a month than the average gym membership.

Of course, then there’s the free option. The internet is full of free workouts that you can do on your own with minimal or no equipment.

For example, there’s the Couch to 5K program, that I personally used a decade ago to ease myself from couch potato to running my first 5K race. If I could do it, anyone could.

Then there are free resources like reddit that have limitless information on workouts. The Fitness subreddit has done all the research for you, populating workout tips and detailed workout routines for anyone to use in their wiki.

There are several routines that require no equipment. And you can join in on the subreddit to become part of the community, making it easier for those seeking comraderie and encouragement in their fitness goals. All for free.

It’s baby steps… And baby steps can start now!

I’ve never met anyone that can’t stand to be a bit smarter with their money. And on the flip side, anyone can get smarter with their money. But remember, it doesn’t happen all at once.

Begin by fighting your impulses. Prepare for the week and be smart at the store. And cut monthly expenses like gym memberships that are overpriced and you probably aren’t getting your money’s worth out of anyway.

The devil is in the details. And the details can change your lifestyle and prep you for a financially independent future.

Featured photo credit: Unsplash via unsplash.com

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