What’s your credit score? Unless you’re a part of the 1% of consumers who have a perfect 850, you can stand to improve this three-digit score in the new year.
Improving your score can go a long way to improving your overall financial health. Here’s why:
Why Your Credit Deserves to be a New Year’s Resolution
When most people set financial goals at the start of a new year, they usually focus on saving more or spending less. Improving credit isn’t as common as these heavy hitters, but they deserve all the limelight.
While you might not think of your credit score as often as your cash flow, it has a powerful impact on your finances. In a way, it’s a personal financial key performance indicator. It plays a role in the rates you pay when you borrow money, and it can impact how easily you get a job or negotiate car insurance.
This year would be a good year to boost your score in the wake of rising interest rates — especially if you plan on buying a home. Mortgage rates soared to roughly 7% in the past year, and experts don’t see them coming down too much in 2024. Boosting your score now can help you qualify for more favorable terms.
How Does Your Credit Score Work?
Part of improving your score relies on understanding how you earn it. Your score is a three-digit representation of your borrowing habits, which can be found in your broader credit report.
The major credit bureaus generate this score by evaluating five factors of your financial profile:
- Payment History | 35%: This shows whether you pay your bills on time.
- Amounts Owed | 30%: Owing a lot of money isn’t necessarily a bad thing; this section looks at whether you routinely tie up your credit card or line of credit. Carrying over balances on these accounts can make you seem like a high-risk borrower.
- Length of History | 15%: A long history of paying bills on time looks good on your record.
- New Accounts | 10%: Bureaus keep an eye out for borrowers who are opening several accounts in a short period.
- Account Mix | 10%:Being able to juggle multiple types of accounts looks favorably on your record, too.
How to Improve Your Credit Score
Improving your credit relies on working on each factor involved with generating your score.
1. Pay Bills on Time
Your payment history makes up 35% of your score, so it’s critical you always pay your bills on time. Making this a habit can help you improve your score in one of two ways:
- It adds positive payment historyto your record; if your lender shares your account with the bureaus each month, your timely payment will get added to your file.
- It keeps late payments off your record; some lenders only share your account info with the bureaus when you do something wrong. By paying on time, you don’t give them anything to report.
2. Always Pay More Than the Minimum
When it comes to your credit card or line of credit, you have the option to make a minimum payment. It’s only a fraction of your balance, but it registers your account as one time — even if you carry over a balance.
In emergencies, this minimum can help you stretch your budget. But the line of credit experts at MoneyKey don’t recommend relying on the minimum all the time. It’s not an effective way to pay off your debt, so it will take longer to bring your balance to zero. It may also increase how much interest you owe over time.
Your balance on these accounts factor into amounts owed — particularly something called your credit utilization ratio. This considers how much of your available limits you use at any given time. Your aim should keep this ratio below 10%.
This year, you should strive to hit 0% by paying off your balance in full; barring that, try to make the biggest payment your budget allows.
3. Limit Your Spending
Paying off your full line of credit budget is easier when you don’t overspend. Sit down with your budget to set these limits and try never to go over them.
Try is the operative word here. In emergencies, you might have to draw against your line of credit than in an amount you can’t pay upfront. Don’t panic if that’s the case. Just focus on the spending you can control, like when you use your credit card for everyday expenses at the grocery store.
4. Ask for a Credit Limit Increase
If reducing your balance improves your credit utilization, increasing your limit does the same from the opposite angle. As a ratio, this figure is a quotient — the interplay between your balance and limit. If you increase your limits, you can reduce your ratio.
Just be careful — you don’t want to increase your limit only to chase after it with extra spending. Only ask for this increase if you can ignore the temptation to spend.
5. Apply for New Accounts Only When You Have To
Think twice about the next time you apply for a new credit card, line of credit, or personal loan.
In some ways, packing your file with multiple personal lines of credit can reflect well, as it increases your account mix. That said, you don’t want to add an account that may ruin your payment history.
Sometimes, a new application for a personal loan can add a hard inquiry to your report, which can reduce your score for a while.
Get used to checking your credit to see the results of your hard work. While you may not be able to boost your score instantly by 200 points, you will see a difference over time. Celebrate those successes!
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