If you want to improve your credit score this year, start by setting financial goals and knowing where you stand today. The five FICO credit scoring factors can guide you the rest of the way.
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Here are 10 ideas you can use to get your credit and scores in tip-top shape for 2019:
1. Know your financial goals for 2019
Now is the time to dream dreams and write them down. Imagine embarking on a journey with no destination in mind. You could end up anywhere! Once you have goals, it’s much easier to develop a plan that will get you where you want to go. Whether it is to buy or lease a car, buy a home or just qualify for a great rewards credit card, your credit score will play a big role. Once you have a goal, the steps I have outlined below will help you get there as quickly as possible.
2. Know where you stand financially
This means coming up with a spending plan you can live with. Great credit and a great score start with managing your payments. This requires that you have the money to make those on-time payments. Figure out your income and all of your expenses and see what is left to make at least one of those dreams come true this year. If you can’t tell where your money is going each month, try tracking your expenses for a while. This can be an eye-opening experience and good for your wallet as well. A cash surplus helps make a fat credit score more likely.
3. Know what you owe
Get a copy of your credit report. The clock starts over on Jan. 1 for your opportunity to score your annual free copies at AnnualCreditReport.com. Federal law entitles you to one free credit report from each of the three reporting agencies every year. Additional free reports can be had if you are turned down for credit or are charged a higher rate due to information used from your credit report. Some states allow you free reports more than once a year, so check with your state to see if you are entitled to more.
A good practice is to spread one report from each of the three major bureaus out over the year (January, May and September, then start over again the next January). This allows you to see your reports from each agency for free every year at intervals that will keep you informed. Each time you get one, go over it with a fine-toothed comb to be sure everything on there is yours and is accurate. If you find any mistakes, dispute them immediately. Errors are not uncommon, so this can be a worthwhile exercise.
4. Know your score
Several credit cards and websites offer free access to check your credit scores. If you have access to one of these, be sure to take advantage of the service. The federal free annual credit report law only applies to free credit reports, not free credit scores. If you don’t have a card or other service that will give you your score free, you will have to pay for the score. If you are planning a purchase that will require a certain level of score, like a mortgage or new car, this is a worthwhile expenditure that should be made about six months in advance to allow for any corrections to your credit file.
5. Know what is important to your score
The most important factor is payment history because 35 percent of your score comes from this one category. If you haven’t done so before, make 2019 the year you pay your bills on time, every single month of the year. I like using online payments from my checking account. This way I can set up a payment as soon as the bill arrives and it will go out when it is due. No more forgetting to mail a check or burying a bill in the mess on your desk!
6. Know your credit card balances
You should know both the total amount of debt you have, as well as how much is on each card relative to your credit limit. This is what is known as credit utilization, and follows closely behind payments in importance to your score at 30 percent. While many experts say to stay below about 35 to 50 percent of your limit, less is more here. Those consumers with the highest credit scores keep their utilization in the 5-to-10 percent range. Check your card statement to find out what your credit limit is. It can change, so check periodically.
7. Know when you need to apply for credit and when you don’t
Opening new credit accounts or taking on new debt should be done carefully because 10 percent of your score comes from new credit. Additionally, every credit application you turn in will result in a small ding to your score via a hard inquiry. Too many dings can add up to one big deduction. If you are shopping for a home or car loan, you don’t have to worry. The credit scoring models will consider multiple loan inquiries like this as one if they are done over a relatively short period of time.
8. Know how old your accounts are
Separate from payment history is the length or history of your credit accounts. At 15 percent of your score, this category is not nearly as important as payment history, but the age of your oldest accounts is still important. Be cautious about closing accounts that you don’t use much because a longer positive history counts for extra points.
One exception to this is if the card charges you a monthly or annual fee, especially if that fee is high. It will be worth it to you in the long run to seriously consider if you want to keep such expensive cards to improve your length of credit history when free cards will do just as well.
If you are concerned that an account will be closed by the creditor due to non-use, start using the card for things you plan to purchase anyway like gas or groceries. When the bill comes, pay it in full. This will keep the card active and keep you from adding to your credit card debt.
9. Know how to beef up your score two ways
First, if you are looking to add some points to your credit score, one area that is often neglected is credit mix. This scoring factor is worth about 15 percent of your score and can make a real difference in your overall score.
Credit mix is the type of accounts you have. Lenders like to see a healthy mix of installment and revolving debt. Installment debt has a fixed payment and would be like your car payment, a furniture loan or your monthly mortgage payment. Credit cards are revolving debt that allow you to make only a minimum payment if you don’t want to or can’t pay the balance in full. Using credit cards wisely shows spending discipline. Being able to keep up with fixed as well as variable payments signals stable financial health.
Second, check out the new Experian Boost program. Available in the first quarter of 2019, the Boost program will give you credit for paying your utility and mobile phone bills that you already pay. If you have a limited or thin credit history or have a low score, adding these positive payments to your credit file could give your score a significant “boost.”
10. Know what not to do
Be very cautious about agreeing to co-sign for a loan or other credit account for anyone. Wanting to help a friend or family member is understandable, but if you co-sign you must be prepared to monitor whether payments are being made and be willing and able to take on the debt yourself should something happen to the other person.
Remember, you are co-signing because a professional who makes a living giving loans has said they don’t believe the borrower can make the payments. If you think you know better, think again. If you are comfortable with that, by all means co-sign away. If not, see if there is another way you can help that does not involve your name (and credit) on their loan.
Happy New Year and remember to keep track of your score!