If you haven't thought about your 2016 New Year's resolutions yet, consider adding "work on my credit score" to the list. A boost in your credit score can result in thousands of dollars in interest savings, and it can open up a whole new world of possibilities in terms of access to borrowing. With that in mind, we asked five of our contributors to share some advice for making 2016 the year your credit score soars to the next level.
Selena Maranjian: A key way to boost your credit score in 2016 -- and in any year, really -- is to get on top of your bill-paying. If you have outstanding bills, get them paid as soon as you can, and as each new bill rolls in, pay it on time.
The folks at FICO, who prepare the credit score that's used widely, have detailed just what makes up that score. Check it out:
- 35%: Payment history
- 30%: How much you owe
- 15%: Length of credit history
- 10%: New credit
- 10%: Other factors, such as your credit mix
Clearly, the most important factor is paying those bills on time. That makes sense, since a credit score is all about your credit-worthiness -- how risky it is to lend money to you. If you have a poor bill-paying record, you won't find lenders offering you the best interest rates, as they'll need to compensate for your riskiness.
Credit-rating agencies will be looking at not only how many times you paid a bill late, but also at how long you took to pay each one, and whether any unpaid bills ended up in the hands of collection agencies. If you get back to paying every bill on time, the agencies will notice, and your score will rise.
Matt Frankel: If you take another look at Selena's breakdown of the FICO scoring method, you'll notice that 30% of your score comes from the amounts you owe.
However, this refers more to the percentage of your available credit you're using, and less to the dollar amount itself. For example, using $1,000 of a $2,000 credit limit (50%) looks worse than using $5,000 of a $25,000 credit line (20%) -- even though the actual amount of debt is five times higher.
There are two ways to improve your credit usage. First and most obviously, paying down your debts will result in lower credit utilization. And, if you have the means to do so, this is the way to go, as it will not only boost your score, but it will also lower the amount of interest you're paying. But what if you don't have the money to pay down a large amount of your credit card debt?
The second way to improve your credit utilization is to increase your available credit. You can do this without opening any new accounts by simply calling a couple of your creditors and asking for a limit increase. After all, if you owe $1,000 on a credit card and your limit is increased from $2,000 to $4,000, your usage instantly drops from 50% to 25% -- well under the 30% maximum recommended by most experts.
As long as you've been a responsible account holder, they are likely to grant your request, and this could boost your score with minimal effort on your part.
Dan Caplinger: One thing that confuses many people about their credit score is the impact of opening and closing new accounts. It might seem prudent to close out old accounts that you don't use anymore, but doing so can actually have a negative impact compared to leaving them open.
As Selena points out, your credit score is determined in part by how much new credit you have and the length of your credit history. Opening up new cards can raise flags by suggesting you have a sudden need for greater credit, even before you actually start to run up balances on the new accounts you've opened. Even though having new credit can mean a lower utilization percentage, the negative impact of new credit can outweigh that indirect benefit.
Closing accounts, on the other hand, can also have negative effects. If you close a long-held card, much of your credit history can disappear, leaving you with a shorter length of credit history and hurting your score in that category. Meanwhile, if you cancel cards with high credit limits, it can increase your utilization percentage of your remaining credit, also hurting your score.
It's vital to understand the rules instead of simply using your intuition about what will affect your score. All too often, the actual impact can turn out to be much different from what you'd expect.
Sean Williams: As my Foolish colleagues have hit on above, it's generally a great idea to pay your bills on time, keep your credit utilization relatively low, and not open up unnecessary credit accounts. Your credit history is your resume for lenders that tells them, in a snapshot, whether or not they can trust you with their money.
One final trick you can use to boost your score (although it's unlikely to be boosted immediately), or to keep it from falling, is to consider negotiating with your lender.
If you're late on your payments, or you know you won't be able to make a payment, it's possible your lender will send your account to collections, damaging your credit score and leading to a major headache. However, if you're upfront about your ability to make payments and proactively seek to work out a payment plan with your lender, it's possible your past-due account, or current account with more debt than you can handle, can be negotiated to better terms. Sending an account to collections rarely results in a lender collecting the full balance of what was owed, so there's considerable incentive for the lender to work with financially troubled clients.
The same can also be said for consumers with improving or immaculate credit scores. Lenders covet responsible consumers, and having an above-average or rising credit score could help qualify you for a lower interest rate. The worst thing a lender can say to your request for a lower rate is "no." But, if they do grant your request, you'll be paying less in interest than before if you carry a balance, and your payments, on a constant balance basis, will be lower and more manageable -- presumably leading to a higher credit score over time.
Jason Hall: As Matt writes, credit utilization accounts for a huge chunk of your score. And while asking for credit limit increases will help if creditors are willing to do so, paying your debt down -- especially expensive credit card debt -- will help you even more.
Not only does carrying less total debt improve your credit utilization, it will also reduce how much you pay in interest. If you carry high balances and you're struggling to pay them down, use some of the other suggestions in this article, such as negotiating with your creditors for lower interest rates, and even payment plans if you just can't get ahead.
While some of those steps, such as a payment plan that requires closing an account, may actually lower your credit score in the short term, they'll only help your score, and your financial situation, in the long run if you're able to more quickly pay off expensive debt.
The bottom line is this: You're much better off if you take steps to take control of your credit and pay off credit card debt. Ask your creditors to work with you. You may be surprised at what happens.