Building a solid credit score on a small income is purely possible with the right strategies and financial disciplines such as using a secured credit card, paying bills on time, keeping credit utilization low, diversifying debt mix, and considering a credit builder loan.
Normally, small income does not affect credit directly but can significantly affect the on-time billing history, which directly contributes to the credit score.
Building the score from the ground is crucial as the credit check will ensure taking a new loan, getting a mortgage, or even refinancing any existing loans.
Here’s a step-by-step guide to help you boost your credit score even with limited financial resources.
Start with a Secured Credit Card
A secured credit card is an excellent starting point for building credit. A secured credit card refers to getting a credit card with security money (cash deposits).
For instance, if you deposit $500, your credit limit will be $500. Typically, people with zero credit history or bad credit get such secured cards.
By using such a secured card, you can pay your bills to build your credit history. However, strong dedication to financial discipline is required at the end of each month to pay the balance or, dues.
Make timely payments
Timely payments prove your ability to pay within the time. Always pay your bills on time, including utilities, rent, and other recurring expenses. Setting up automatic payments or reminders can help also ensure you never miss a due date.
Remember, your credit history accounts for 35% of the total score distribution. Even if your payment amounts are small, maintain financial discipline for at least 6 months. It will ensure your payment behavior is top-notch.
Keep Credit Utilization Low
Credit utilization holds a 30% score distribution. A credit utilization ratio calculates what percentage of your credit limit you have used. Keeping this low signals to the lender that your debt management capacity is good.
Aim to keep your credit utilization below 30%. If your limit is $1,000, try to keep your balance under $300.
Diversify Your Credit Mix
Having a mixed credit type and managing them well indicates that you are capable of handling further borrowings. It means, a well strategic debt diversification positively influences credit score.
For example, having a credit card along with two other personal loans with 30% utilization refers to effective debt management. Even if you’re on a small income, responsibly managing different types of credit can enhance your credit profile.
Monitor Your Credit Report
Credit reports sometimes show discrepancies. There can be a mismatch between your lender and credit bureau and you need to check your credit report regularly.
According to the Federal Trade Commission (FTC), about 20% of consumers have errors on their credit reports that can negatively impact their scores.
If there’s any mismatch, you should straightly dispute the inaccuracies with the credit bureaus to ensure your report reflects accurate information.
Limit new credit applications
A hard inquiry made by multiple lenders can cause credit score strain.
Each time you apply for credit, a hard inquiry is made on your credit report, which can temporarily lower your score. Per the FICO scoring benchmark, one additional hard inquiry will take 5 points roughly.
If you’re on a small income, be selective about applying for new credit. Only apply when necessary and avoid multiple applications within a short period.
Consider a Credit-Builder Loan
Credit-builder loans are designed to help people with low or no credit scores build credit. You make fixed payments into a savings account, and once the loan is paid off, you get the money. These loans report to credit bureaus, helping you build a positive payment history.
For low to moderate earners, a credit builder loan can be costly because of its upfront cost, monthly payments, and other fees such as processing charges and interest costs.
Furthermore, credit-builder loans are not a quick fix for credit issues. They require time and consistent payments to improve credit scores. For low earners needing immediate credit improvement, the lengthy process might not meet their urgent needs.
Become an Authorized User
If you have a trusted friend or family member with a good credit score, ask to become an authorized user on their credit card. This can help boost your credit score, as their positive payment history will be reflected on your credit report.
To qualify as an authorized credit card user, you do not need any credit score or history.
However, finding someone can be challenging. Moreover, if the authorized user misses any payment, the original credit user’s credit score gets hurt.
Use Rent Reporting Services
Rent is the largest monthly expense we incur. Using rent reporting services to have your rent payments reported to credit bureaus can help build your credit history.
Experian also believes that can be a valuable way to enhance your credit score, especially for those with a small income.
Stay Persistent and Patient
Building a good credit score takes time. Be patient and consistent with your efforts. Over time, your responsible financial behavior will pay off, and you’ll see improvements in your credit score.
Increase your income
Increasing income will not have an immediate positive impact on your score. However, making bills timely and keeping your credit card balance low can help you in building score.
Pay off credit card dues
Paying off credit card dues can immediately improve your credit score by reducing your credit utilization and building a timely payment history.
Since the payment history accounts for 35% and the credit utilization holds 30% of your total credit score, paying off a credit card can impact both of these scoring parameters and immediately boost your score by around 30 to 50 additional scores.
Apart from that, it will help you to maintain and re-build the score by keeping the debt figures low and maintaining regular payment behavior.
Frequently Asked Questions (FAQ)
What are the first steps I should take to improve my credit score?
Start by checking your credit report for any errors. The report is the baseline to start your effort. You can get a free report from each of the three major credit bureaus annually. Look for inaccuracies and dispute subsequently.
What if I can’t afford to pay off my credit card balance in full every month?
This is normal if you cannot afford to settle all of your credit card dues at the end of the month. Try to keep the balance at around 30% since the credit utilization ratio holds 30 percent score distribution.
Are there any specific strategies to boost my credit score quickly?
Paying down high balances on credit cards, making all payments on time, and disputing any inaccuracies on your credit report can lead to quick improvements. Additionally, asking for a higher credit limit (but not using it) can lower your credit utilization ratio and improve your overall score.
Can I improve my credit score without taking on more debt?
Yes, focus on paying bills on time, keeping credit card balances low, and avoiding opening new credit accounts unless necessary.
Does checking my credit score lower it?
Soft inquiry (query made by you) will not hurt your score. But, hard inquiries made by the lenders will potentially downgrade the score by 5-10 marks.
How can I maintain a good credit score once I achieve it?
Maintaining your score steady only requires on-time bill payments, low credit utilization, restricting hard inquiries, and monitoring your credit report for errors or fraudulent activity.
In summary, getting a good credit score for low-earning people is possible. People with less income shall focus on the basics of scoring and address them one by one. You should carefully consider the timely payments and lower debt utilization ratio to make progress in building your score.
