It's nearly the time when we're all starting to think about New Year's resolutions! One great place to start is with your finances.
Specifically, you should resolve to improve your credit, even if it's already good, since that's a goal that you can work on for the entire year and easily keep track of your progress. And building up your credit score isn't really that tough to do on a day-to-day basis. Here are three things to work on in 2015 that can give your credit a boost.
Do some "damage control"
If you have negative information on your credit report such as collections, judgments, or even missed payments, the best thing you can do for your credit score is to come up with a solid plan to get rid of it.
It will take time. There are tons of companies that advertise "quick credit repair" or something similar. Don't take the bait -- there is no such thing as a miracle cure for bad credit. Assuming the information on your report is correct, you'll probably have to either pay delinquent accounts off or deal with having them on your report.
Let's take these one at a time. Late payments are generally going to stay on your credit report for seven years no matter what you do. However, if you have some older late payments on accounts like student loans and have maintained a flawless payment history since then, write or call and ask if they'll stop reporting the late payment. It has been known to happen, and the worst they can say is "no."
Collections can often be settled for much less than the balance, so start there. Under the new FICO scoring rules, collection accounts with no remaining obligation (paid collections) will not count against your score, so try to get the best deal possible. With older accounts especially, you may be surprised how much negotiating room you have. Medical collections now have a lower weight, so prioritize collection accounts such as credit cards first.
Finally, judgments, bankruptcies, and other public records will likely have to run their course. The good news is that negative information will contribute less toward your score as it gets older. For example, a six-year-old collection account will count less than a one-year-old account. So if you have any of these on your credit, the best thing you can do is use your credit responsibly from now on.
Pay down some debt
In the FICO scoring model, which is the most common credit scoring method used by lenders, 30% of your score comes from the amounts you owe. However, this doesn't refer to the actual dollar amounts you owe as much as it refers to how much you owe relative to your available credit and your original loan balances.
So, if you have $10,000 in available credit and currently have $5,000 in balances, you are making use of 50% of your available credit. If someone else has $10,000 in balances but has $40,000 in available credit, they are only using 25% of their credit and could actually look better to lenders, even though the dollar amount of their balance is higher.
If you have revolving accounts like student loans, the scoring formula also considers your current loan balance relative to the original balance. Many borrowers are on income-based repayment plans that barely cover the interest, and while this may be good on your wallet, it isn't doing your credit any favors. If you took out $50,000 in student loans and still owe $49,000, it doesn't look great for scoring purposes.
So going into 2015, make a renewed effort to pay down the balances on your credit cards and your loan accounts. Over time, your score will go up and up.
Open a new credit card... but just one
The other way to improve your credit utilization ratio is to apply for, but don't use, a new credit card. If you currently have $5,000 in credit card debt and $10,000 in total limits, by increasing your available credit to say, $15,000, you lower your credit usage from 50% to 33% without paying a cent.
Now, it is true that new accounts and credit inquiries can hurt your credit score. However, the drop from a single new inquiry or credit account tends to be very small and is temporary. Just don't go overboard and apply for seven new credit cards, or anything like that.
And remember, building your credit is a marathon, not a sprint. It's completely worth it (in my opinion) to sacrifice a few points in the short term to build a solid credit history.
Another option, if you don't want to open a new card, is to simply request a limit increase from your current credit card issuers. Whichever path you choose, bear in mind that inquiries only count toward your FICO score for a year and the new account will actually help your credit as it gradually becomes an established account.
It's a lifelong process
As I just mentioned, credit is a marathon, not a sprint. If your credit isn't where you want it to be now, come up with a game plan to gradually get it there. It may take years, but you can achieve the credit score you want and deserve.
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