7 New Year’s Resolutions for Better Credit
According to recent research by Statistic Brain, 41% of Americans usually make New Year’s resolutions, yet only 44.8% of those who do, manage to maintain them longer than six months. That same research found that financial resolutions rank third in popularity, behind only losing weight and general self-improvement. And effectively managing your credit can play a major role in improving your finances.
So here are seven credit resolutions for you to consider for 2018. They won’t make your waistline smaller or help you quit smoking, but they don’t require an expensive gym membership or going “cold turkey” either. They could even help improve your physical health as well, given there may be a correlation between one’s credit score and cardiovascular health.
RESOLUTION #1: Consistently Make Payments on Time
Payment history is an important factor in calculating your credit score, determining 35% of your FICO® Score. Late payments stay on your credit report for up to seven years, and just one payment that’s 90 or more days late can be as damaging to your credit score as a bankruptcy.
The good news is there are plenty of ways to help ensure your payments are on time, including setting up automatic text and/or email reminders. Paying online or over the phone, which eliminates any potential delays associated with the mail, is also an option with most credit card companies and lenders.
RESOLUTION #2: Pay More Than the Minimum Due
There are several good reasons to pay more than the minimum amount due each month, including saving you money on interest, increasing your available credit, paying down balances quicker, and potentially raising your credit score by decreasing your credit utilization ratio (CUR).
CUR = Sum of Your Outstanding Revolving Credit Balances ÷ Sum of Your Revolving Credit Limits
Your CUR determines up to 30% of your credit score. The smaller the sum of your outstanding balances, the smaller your CUR will be, which could raise your score.
RESOLUTION #3: Address Your Debt
If your debt situation is out of hand, denying it only prevents you from taking the necessary actions to do something about it. And there are actions you can take, including changing behavior that contributed to acquiring too much debt in the first place, prioritizing debts to more effectively manage them—even seeking a credit counseling.
RESOLUTION #4: Get the Most Out of Your Credit Cards
Are you using your credit cards to your full advantage? For example, are you earning cash back rewards, travel miles, or other benefits for credit card purchases? If not, 2018 may be the year to apply for a rewards card. Or, if you’re paying a high interest rate on an outstanding balance for one card, and another card with a lower rate is offering a balance transfer, it may make sense to make the move.
RESOLUTION #5: Be Smart About Opening & Closing Credit Cards
That store credit card you were tempted to open might have earned you a 10% discount on that day’s purchases, but it probably also dropped your credit score a few points. In addition, store cards tend to charge higher interest rates than traditional credit cards, and they can be less beneficial to your credit score. This is because a store card typically offers a lower credit limit, so making charges on it can quickly raise the CUR of that card above the recommended 30%.
When you apply for credit, whether you’re granted it or not, it counts as a “hard inquiry” on your credit report, which can lower your credit score several points. Hard inquiries also stay on your credit report for up to two years, where they’re visible to other potential lenders who may interpret an abundance of inquiries as desperation on your part to obtain credit.
While closing credit cards you barely or never use may seem like a good idea, it can actually damage your credit score two ways:
1. Its credit limit will no longer contribute to the sum of your revolving credit limits, which could result in a higher CUR.
2. If it’s an older account, it could lower your score because the length of your credit history makes up 15% of your FICO Score.
RESOLUTION #6: Start Building a Credit History
If you’ve never used credit, you’re not creating a credit history, which means you’ll almost certainly have a harder time obtaining credit in the future. This is particularly true with younger consumers like Millennials—two-thirds of whom don’t have a credit card—according to a 2016 Bankrate survey.
If you’re new to credit, think about applying for some in 2018. If you can’t get a traditional credit card (Visa®, Mastercard®, etc.), then applying for a store card may make sense because they are often granted to applicants with credit scores that don’t qualify for traditional cards. If you can’t get any credit card, consider becoming an authorized user on someone else’s account, which can be a good way to start building a credit history without a credit card account of your own.
RESOLUTION #7: Monitor Your Credit Reports & Address Any Errors
Monitoring your credit reports regularly is a good way to discover any fraud and/or identity theft and to catch any errors, a distinct possibility given the FTC found that one in five consumers had an error in at least one of their three reports.
Finding errors is only half the process; if mistakes are found, it’s up to you, the consumer, to dispute them. The first step, however, is to get a free copies of your credit reports from each credit reporting agency, which you’re entitled to once a year under federal law, and thoroughly scrutinize each one for accuracy.
Change is never easy. But with a little dedication and effort, you could experience a difference in your credit situation next year that’s measurable and quantifiable—in your credit score. Here’s hoping you’re part of the 44.8% of resolution-makers still plugging away and making things happen six months from now.