new years resolutions

How To Improve Your Credit Score In 2017

How To Improve Your Credit Score In 2017

The New Year is a great time to set new goals, and it gives people the fresh start they need to make the changes they desire. At the beginning of each year, around two-thirds of Americans vow to make their lives better by having a New Year’s resolution. Out of those two-thirds, only 8% achieve their goals. Improving credit scores and getting out of debt is among the most popular resolutions each year. With so many people desiring to improve their credit scores, why do most fail? The answer is that most goals fail without having a concrete plan in place. If improving your credit and getting out of debt is one of your resolutions this year, having a roadmap ensures you will improve your credit score in 2017.

A credit report is simply a compilation of information obtained from lenders that an individual has used. The information in a credit report determines your credit worthiness as a borrower. In a nutshell, a credit report is a measuring tool to analyze how a person manages debt and their likelihood of repaying a loan. A credit report also depicts a person’s spending behaviors. Debt to income ratios could indicate if a person is spending more than their ability to pay.

Credit affects many important areas in life. Everything costs more with poor credit scores, which often makes it even harder to improve your credit score. While resolving to improve your credit score may not be the most glamorous New Year’s resolution, it may be one of the most important. The financial freedom and self-discipline that comes from seriously improving your credit score will be an investment you cannot afford not to make. Here are the steps to keep your resolution and improve your credit score this year.

1. Take an honest assessment of your credit

The first step in improving a credit score is to know exactly what needs improvement. In order to make an effective get out of debt plan, take some time to understand your current credit situation. Set aside a day and time that you can truly delve into your finances to create a plan.

A crucial part of improving your credit score is being honest with yourself. One of the most overlooked steps in improving credit is understanding your own behavior with money and debt. Use credit card statements and bank statements to track spending habits. Did an emergency arise that caused you to max out a credit card? Maybe an unexpected car repair, loss of income, medical situation, or natural disaster forced you to use credit cards more than you would have liked. Perhaps impulsive spending led you to high credit card balances. However you ended up with credit card debt, it is wise to learn from it, so you could plan for the future. Having a savings account to handle life’s emergencies can protect your credit score and your wallet.

Credit card debt does not always signify a money issue. It’s often a behavioral issue. Changing behaviors and relationship with money will not just propel you to improve your credit score, it ensure that bad habits will not surface again once your credit goals have been met.

2. Clean up your credit report

According to the FTC, millions of people have errors on their credit reports that can result in a lower score. Carefully check your credit report to ensure all information is being reported accurately. Once a year, you can obtain a free copy of your credit report from all three credit bureaus. If you suspect fraud, inaccurate information, or need to update your personal information, you can contact the credit bureaus individually to find out their dispute process.

To find out where to obtain a free copy of your credit report, check out our blog post on how to get your credit report and credit score for free.

Professional credit repair companies can help you clean up your credit report. However, it’s important to choose the right one, since many credit repair companies are ineffective scams.

3. Understand how credit scores are calculated

Many people have lower credit scores because they do not understand how it is calculated. Depending on your situation, aiming to eliminate all credit card debt may not be possible in one year. Around 30% of your credit score stems from credit card balances. Aim to reduce the debt to income ratio by paying off 20% or more of credit card balances.

Another credit score buster is applying for too much credit in a short period. Apply for credit only if it is absolutely necessary. 10% of a credit score is calculated by the number of hard inquiries. Another 15% of a credit score is determined by the age of the accounts. Having too many new accounts or inquiries could put a significant dent in your score, so avoid opening new lines of credit if possible.

4. Change spending habits

Knowing how to allocate your income will be a beneficial asset during this process. Is there something you can sacrifice to get to your credit goals faster? Maybe skipping your daily latte for a short period or avoiding take out lunches will speed up the process of paying off a credit card or increasing your emergency fund. It is wise to be mindful of how money is spent. Small purchases here or there may seem fine, but they eventually add up quickly. Look for ways to be smarter about money and use the savings to improve your financial health.

5. Be responsible with the credit you already have

To successfully improve your credit score this year, you will have to take care of the credit you already have. Establishing a history of paying bills on time will be viewed favorably and will have positive impacts on your credit score. If paying bills on time has been a struggle in the previous year, commit to paying bills on time this year. It is vital that all payments are made on time, every time. A late or missed payment can stay on your credit report for up to seven years. A person with an excellent score could potentially lose around 90 points because of a missed or late payment.

If you think you will be late with paying your bill, do not wait until the last minute to contact the lender. Contact the creditors right away and set up alternative payment arrangements. Most creditors and banks have automated payment options available to make paying bills on time easier.

6. Adjust expectations and work hard

While “improving credit” and “getting out of debt” are some of the most cited New Year’s resolutions, they are often the ones people break the quickest. Like many resolutions, improving credit scores takes hard work, patience, and a change in behavior. These things normally do not happen overnight. Create a realistic budget and stick to it. This will keep track of bills and spending habits. Wallethub.com suggests breaking credit goals down into smaller goals to maximize your ability to follow through with your plan. For example, setting a deadline to order credit report, increase emergency funds, and create a budget could be mini-goals that pushes you closer to your ultimate goal.

Concluding Thoughts

Everyone could benefit from analyzing their credit reports and spending habits. Surprisingly, the most effective way to improve a credit score is to change your mind set about credit and money. By understanding your previous credit pitfalls, you can work hard at eliminating them. A healthy relationship with money, hard work, and perseverance will eventually translate to excellent credit. This year, resolve to investing in yourself by improving your credit score.

not-to-do

What NOT To Do To Increase Your Credit Score

What NOT to Do To Increase Your Credit Score

A bad credit record can cause multiple problems. With a low credit rating, you diminish your chances of being approved for new credit or loans. If you are approved, you are liable to face extremely high interest rates.

A bad credit history can also prevent you from being approved for a cell phone contract or from renting an apartment; there are also some jobs that require you to have a good credit record. The good news is that you can improve your credit rating, but it is going to be a slow and tedious process. There is a strategy to credit repair, and if you take incorrect actions, you can actually lower your credit score. Here are some tips on what NOT to do when trying to repair your credit history.

1. Apply for Multiple Accounts

Despite the fact that new credit plays an important role in keeping your account active, applying for too many accounts, particularly in a short time span, can affect you negatively. Every credit application made places a hard inquiry on your file, and having multiple hard inquiries can lower your score from this risky behavior.

2. Co-sign a Loan

Unless this is your son or daughter, or other close family member, and you are okay with potentially ruining your credit score for their benefit, do not become a co-signer. Even if you are confident that the individual will be able to make payments on a loan agreement, it is best to refrain from becoming a co-signer. When you vouch for someone else’s loan, the following occurs:

  • Their account is placed on your credit file.
  • In certain instances, it increases your credit utilization ratio.
  • If the individual is unable to pay, you will have to take responsibility for the debt.
  • If no payment is made, your credit will suffer.

Improving your credit is and should be an individual process; you can reduce the risk of further damaging your account by simply saying “NO.”

The bottom line is this. Repairing your credit can prove very challenging; the amount of time that it takes for you to recover is dependent upon the severity of the damage. However, you shouldn’t allow your current situation to have a negative effect on your long term future. Ensure your financial security by taking a proactive position.

3. Maximize your Credit Limit

When you max out your credit, your credit utilization ratio is affected. In fact, you don’t want your credit utilization ratio to be anywhere near 100%. If your ratio is high, it implies that you are a risk, and this will have a negative effect on your credit score.

To be safe, you should aim for a 25% or lower ratio. For example if your credit card limit is $5,000, make sure that you keep a balance of $1,250 or less.

4. Close your Old Accounts

Age is a virtue in the credit scoring world. While you may think that it makes sense to close any accounts that you are not using, this can actually damage your credit score as it will increase your credit utilization ratio.

For example, you might have two credit card accounts and both of them have a $10,000 limit. You don’t use one of the cards and it has a zero balance. The other card has a balance of $3,200. Since you don’t use the card with the zero balance, you choose to close the account meaning that you lose $10,000 in available credit which will raise your utilization score from 16% to 32%. This spike in your credit utilization will lead to a lower credit score. Keep your accounts current and active to assist in improving your credit score.

5. Spend without a Budget

Credit repair begins with budgeting! By creating a budget you are able to identify:

  • Saving and spending habits
  • Your overall progress
  • Areas that need to be improved

The above three points can hurt or help your credit depending on how they are monitored. In order to create an effective budget, you will need to keep track of your monthly expenses. Check out our guide on how to budget effectively.

6. Ignore your Credit Report

A study conducted by the Federal Trade Commission discovered that one out of five consumers had at least one inaccuracy on their credit reports. Even the smallest mistake can have a negative effect on your credit score.

People who know their FICO scores are at an advantage when it comes to obtaining the best credit terms for them. Rather than searching for ways on how to fix your credit report, take an active role and review your credit score on a regular basis.

7. Miss Payments

When you are trying to rebuild your credit, missing a payment is going to have a negative effect on your credit score, and when you are in the rebuilding stage you can’t afford to have such blemishes on your record.

If you can’t afford to pay off the full balance, make sure that you at least make the minimum payment. If you are unable to make a payment at all, call your creditor to make alternative arrangements. Your credit card company would prefer to make an affordable payment plan with you than mark your debt as uncollectable.

Try and Find a Quick Credit Repair Fix

Debt is like being overweight: you didn’t gain it over a short period of time and you won’t lose it over a short period of time. There are several companies offering a quick fix. Don’t fall for it! Ask yourself this simple question: “What can they do to improve your credit rating that you can’t do for yourself?”

On the other hand, if you do hire a credit repair company to assist you and they fail to deliver what they have promised, you can sue them. Legally, such companies are not permitted to charge you any fees until they have been successful in their claims. If you have made an advance payment and been cheated out of your money, you are permitted to sue them in federal court. You can either take this action alone or join with others to form a class action lawsuit. However, it’s best to prevent it from ever getting to that state. View our top reviewed credit repair companies here.

Final thoughts

While it is essential to avoid the above information when rebuilding your credit, the worst thing that you can do is to leave your credit as it is. Rebuilding your credit history is not an easy assignment, but don’t give up. Stick to your goal, be disciplined and allow positive momentum to assist you on your quest towards excellent credit.