According to statistics by FICO, the average credit score in the US has been rising significantly, and, today, it sits at an all-time high of 706.

But for that 11% of the population with a score below 550, this three-digit figure represents a major pain point, seemingly impossible to overcome. What’s more, a low credit score can impact all aspects of a person’s life, from their ability to access mortgages to their chances of achieving their financial goals.

Luckily, with the right strategy, you can build your credit score and turn your finances around.

Start working towards financial freedom with the steps below.

Start by Taking a Hard Look at Your Finances and Making a Budget

The first step to healing your finances and start rebuilding your credit score is to take a hard look at your current circumstances and make a long-term plan.

When doing so, you should look at the indicators that paint the full picture of your situation, including your household income, your debt-to-income ratio (DTI), types of outstanding debt (i.e.: credit card debt, mortgages, etc.), and assets (including insurance policies, real estate properties, and savings).

Once you have a clear idea of where you are standing, you can start crafting a long-term budget that will help you clear your debt and start bulking up your emergency funds. Ideally, you should aim to have a DTI of 43% or below and a savings account that allows you to cover at least three months’ worth of expenses.

If you are unsure how to get started, talking to a specialized advisor can help. Alternatively, consider implementing budgeting strategies such as the 50/30/20 to manage your outgoings.

Set Up Reminders and Automatic Payments

Once you have set your goals, it is time to take practical steps toward healing your debt and building your credit score. To do so, start by resolving the damage caused by late payments and missed deadlines.

This step can take time and a drastic habit change, but you can take advantage of tools such as digital reminders and automatic payments.

By turning on the Auto-Pay function on your credit cards and keeping up with your monthly bills, you can make sure to avoid late-payment fees and unnecessary scars on your credit score. In turn, this will make you appear less risky in the eyes of potential lenders and institutions.

Get a Credit Card With No Minimum Deposit (and Learn How to Use it to Your Advantage!)

When used wisely, credit cards are enabling tools that can help you achieve your financial goals, afford major expenses, and protect your finances. Even more importantly, using your credit card properly can help you build your credit score over time and gain the trust of lenders.

And yet, most Americans struggle with a growing credit card debt deriving from improper credit card usage. So, how can you ensure to be using this powerful tool to your advantage and improve your FICO score?

Here are some best practices worth keeping in mind:

  • Switch to starter, secured, or no-deposit cards to build your credit history without running into additional unsecured debt
  • Repay your credit card balance in full each month - or, at least, make payments larger than the required minimum payment
  • Always repay your balance within 30 days to avoid penalizing your credit score for up to 7 years
  • Keep your utilization rate below 30%
  • Apply for a higher credit limit

Tackle Your Debt – Starting With High-Interest Loans

Today, most American households struggle with amounts of debt they can’t control and, in 2021, the average consumer debt balance grew by nearly 4% from the 2020 levels to a whopping $96,371. Among the main types of debt affecting most households in the US are student loan balances, home equity lines of credit, mortgages, and credit card debt.

But despite how widespread it is, debt should not be considered a natural part of a family’s life. And, introducing strict measures to reduce your debt is key to building your credit score, turning your finances around, and striving toward a debt-free life.

Some strategies worth introducing include:

  • Always check your bills and statements
  • Reduce the number of credit cards you have or use
  • Tackle your high-interest loans first
  • Consider consolidating your debts
  • Look for low-interest rate debt consolidation options

Pro tip - a valid alternative to the highest interest rate method is the Snowball method. When using this strategy, you will be tackling the smallest debts first with the aim of repaying them in the shortest time frame possible. With every debt that you pay off, you’ll have more money to pay off the next smallest debt until you have regained control over your monthly outgoings.

Continue Monitoring Your Credit Score (but Avoid Hard Inquiries)

While more and more consumers have started checking their credit scores during the past two years, surveys conducted in 2019 show that nearly 40% of Americans are unaware of their FICO scores.

However, the best way to turn your finances around is to understand your credit score, as well as the factors that negatively and positively affect it. Consider using credit score monitoring platforms or apps to keep an eye on the results of your credit-building efforts.

Pro tip - only check your credit score through soft inquiries! Hard inquiries, also known as “hard pulls” can temporarily lower your credit score.

Turning Your Finances Around One Step at a Time

Like Rome, a great credit score isn’t built in a day! However, with the tips above and a well-crafted budgeting strategy, you will be able to boost your FICO score and turn your finances around.

If you are struggling to stick to your long-term plan, don’t think twice about asking for the support and guidance of an experienced financial advisor!