DEPLOY YOUR CREDIT-BUILDING FUND
Once you’ve settled on how much to spend on spiffing up credit, you need to figure out how to apply it. The first step is to check your credit reports for accuracy, say both Zwelling and McClary. You may find an error that’s holding down your score. Request free annual credit reports from the three major credit bureaus by using annualcreditreport.com, then dispute any errors you find. Your next steps after that depend on whether you’re a credit newbie or have an established history: IF YOU HAVE ESTABLISHED CREDIT Bring all accounts current. While you’re reviewing your reports, make sure you’re up to date on payments on every account. If not, catching up on late payments is the first priority because these hurt your credit score the most. Prioritize debt payoff. If you carry balances on credit cards, you can help your credit by whittling them down. Here’s how: • Target cards where your balance exceeds 30% of the limit. After paying on time, the next-biggest factor in your credit score is how much of your credit limits you use. McClary recommends keeping all cards under 30% of their limits — and going lower is better for your score. Signing up for a free credit score on a personal finance website is an easy way to see your credit utilization for each card and overall. • If you have multiple small balances, you could zap those. Seeing debts disappear can be motivating, Zwelling says. And eliminating small balances on several cards can help your credit. • Not carrying balances month to month? Think about reducing the highest-interest debts first. Zwelling says you’ll pay less in overall interest that way. IF YOU’RE A CREDIT NEWBIE If you’re hoping to use your refund windfall to establish credit, consider a secured credit card. You make a deposit when you apply, and in many cases, your credit limit will be equal to your deposit. Because your deposit cuts the risk to the lender, these are easier to qualify for than unsecured cards. When choosing a card, check the terms and conditions or call the issuer to verify it will report your account activity to the three major credit bureaus, Equifax, Experian and TransUnion. Also, ask if the issuer will let you “graduate” to an unsecured card after a certain number of on-time payments. Once you have a secured card, use only a small portion of your credit limit and pay on time. You should have established a FICO credit score in about six months, and a VantageScore much sooner than that.
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