How to Improve Your Credit Score in the New Year
Know How Your Score is Calculated
In order to improve your credit it’s helpful to first know how your score is calculated.
The three credit bureaus use information from your credit report and calculate your score based on these metrics:
- Payment History 35%
- Amount Owed 30%
- Length of History 15%
- New Credit 10%
- Type of Credit 10%
You can get your credit reports for free, once per year from each of the major credit bureaus (Experian, Equifax or Transunion). You can track improvements in your credit score through a service like Credit Karma or Credit Sesame. I, personally, like Credit Karma (it's FREE! and they send monthly reminders to check your score).
However, it’s important to note that these service don’t give you your actual FICO score.
To get your FICO score you’ll need to pay for it at one of the major credit bureaus (listed above).
Always Pay Your Bills On Time
Your payment history is the biggest factor in determining your credit score. This means if you’ve missed payments or paid your bills late your credit score has taken a ding or two.
While you can’t immediately fix this you can make significant progress by always paying your bills on time. Even if you can only cover the minimum payment you need to make sure it gets where it needs to be by the due date.
To prevent missed or late payments set up all of your credit accounts to have the minimum payments automatically drafted from your checking account. You can always send in extra payments on the accounts at any time.
Pay Down Your Debt
The second largest component in your credit score is the amount you owe, or your debt to credit utilization ratio. This means the credit bureaus look at how much debt you have compared to how much credit is available to you.
To figure out your debt to credit ratio you simply divide your debt by your available credit. For instance if you have one credit card that has a $3,000 balance and a $4,500 credit limit your debt to credit ratio would be 67%.
According to FICO an ideal debt to credit ratio is below 30%. If your number is currently higher you need to work on paying down your debt until you get below the 30% mark. (I personally don’t like to be higher than 15%.)
Paying down your debt can positively impact your credit score fairly quickly.
Paying down your debt will require you to cut back your spending, increase your income or both. Make a plan now on how you’ll tackle your debt in 2017.
Don’t Open Any New Credit Accounts
While you’re working on improving your credit score you should not open any new credit accounts unless absolutely necessary. Applying for new lines of credit can have an adverse effect on your credit score.
Instead, work on improving your credit so that when the time comes that you need to buy a house or take on debt for any other major purchase you’re in a good position.
Also, this should go without saying but DO NOT rack up anymore debt on the credit accounts you already have. You should focus on eliminating debt and avoiding taking on anymore.
Don’t Cancel Old Credit Card Accounts
The length of your credit history accounts for 15% of your score. That means the credit card accounts you’ve had opened the longest are the biggest influence on this calculation. If you close those accounts this portion of your credit score could be negatively impacted.
Stay Consistent and Be Patient, things will improve!
You’ll find many articles claiming that you can raise your credit score by 300 points in six months. But remember, what sounds too good to be true is usually too good to be true. Instead of looking for that next method that will get you there fast do what makes sense.
If you have a lot of debt, paying it down, refraining from opening new accounts and consistently paying all of your bills on time will raise your credit score.