If you were a little too generous with your holiday charging and you find that your credit score has suffered, never fear. Here at Keeping Score, we can help you get back on track with a few suggestions to greet the new year with your best credit foot forward.
Here at Keeping Score, we can help you get back on track with a few suggestions to greet the new year with your best credit foot forward.
Let’s review the five factors that make up your FICO score with an eye toward curing your post-holiday credit blues:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
The first thing I want you to do is to pull all three of your credit reports with a score for each. Expect to pay for the score, but not much. I prefer that you get and pay for a FICO score to find out what damage has been done as this is the score most used by lenders. There are sites that offer free scores, but not all of those offer free FICO scores.
It is important to get all three because often they don’t all have the same information and this will cause each to calculate a different FICO credit score. If you shopped (and charged) right up to the end of the holidays, you may have to wait a while before everything is reported to actually see what the damage was.
See related: Beware the aftermath of holiday credit card shopping
How to improve your credit score in 2020
According to one of the lead FICO elves (Tom Quinn, vice president of myFICO) there are five areas to focus on if you want to revive your score in 2020:
- Check your credit reports. Legislation has made this free and easy at AnnualCreditReport.com. You can order a free copy of each report every year. Many credit card issuers and websites offer unlimited free credit reports, but you may not be able to access all three (Equifax, Experian, TransUnion) at those sites.
- Check your FICO scores. Paid services such as FICO Advanced provide periodic access to your FICO scores. But many credit cards now offer free FICO scores updated monthly in your online account.
- Pay all your bills on time with at least the minimum payment and hopefully more (see below for tips). This means each and every bill each and every time.
- Reduce your credit card debt. If you are carrying a balance, consider paying down the cards with the highest balance-to-credit-limit ratio first while keeping up minimum or better payments on others.
- Only apply for credit when needed. While new credit doesn’t count as much as utilization or on-time payments, it is still important. Carefully consider your new credit options before you sign on the dotted line.
This counts for 10% of your FICO score, and you could have been dinged by accepting new credit offers while you were shopping. Every time you open a new account, no matter for what reason or reward, your credit score drops. You can recover from this drop by waiting a few months without opening any new lines.
This also counts for 10% and gives you extra points for showing that you can handle multiple types of credit such as installment loans and credit cards. So, if you bought some furniture this year for the first time and financed it, once your score settles down from the impact of new credit, it should rise to new heights as long as you pay on time and as agreed.
Length of credit history
Weighing in at 15%, this category gives you more points the longer you keep accounts open. So if you opened some new accounts for holiday bonuses and you have more than you need, consider closing the new accounts rather than the old ones. Your score will appreciate your steadfastness.
One of the biggies at 30%, utilization is just another word for how much of your credit line you’ve used up. If you have to make a choice about carrying a balance before deciding which cards to pay down, look at your credit limit. For example, if you owe $1,000 on each of two cards and one has a limit of $5,000 and the other $2,000, pay the lower limit card off first, and your reduced utilization will boost your score. (Keep in mind the scoring formula factors in both combined credit utilization and individual card utilization, though the former carries more weight.)
This factor counts for 35% of your score. Pay all your bills on time after the holidays, even if you only pay the minimum. Make sure you don’t throw out a bill that may have been mixed in with used wrapping paper or with after-holiday sales flyers.
See related: What happens when you miss a credit card payment?
Create a budget, and focus on paying off one card at a time
What happens next can be challenging if you have never worked from a budget. Simply put, a budget lists all of your income and all of your expenses on a monthly basis. Your goal is to have money left over when you subtract your expenses from your income.
If that is not the case, you are going to need to figure out a way to either bring in more money or cut your expenses. It’s as simple (and as complicated) as that.
Put away any credit cards with balances until you get your debt under control and your score back on track. Consider going to a “cash only” budget for a time. Adding charges to a card that already has a balance means you are paying extra from the minute you make a purchase.
Even a pizza can end up costing you 10 times more than the purchase price if you take your time paying off your balance. So for now, only buy that pizza if you have the cash on hand to pay for it.
One of my favorite ways to eliminate debt quickly is to commit to the maximum amount your budget can stand to pay toward your debt on a regular monthly basis. Choose the card to pay off first (while still paying the minimum on any other cards you have), and once that card is paid off, move the amount you were paying on that card to the next card on your list.
Keep going until all are paid off. This works no matter which card you choose to target first. By going “all in” and committing to the amount you have delegated to your debt, you will find your score increasing as your debt decreases.
It’s easy to get caught up in the holidays and forget about what you are doing to your score and your financial health. The new year is a great time to turn that around. Good luck to you and remember to keep track of your score!