By Rebecca Lake
The new year is a chance to hit the reset button on your finances and map out a plan for getting ahead. A good place to start is by checking your credit health. Good credit can open the door to achieving important milestones, like buying a first car or a home. A higher score may translate to lower interest rates on what you borrow and your credit can affect other things, like being able to rent an apartment, get utility services in your name, or even land a job.
This year, all it takes to make a difference in your score is the right mindset and a solid action plan.
Building better credit begins with practicing smart repayment habits. Paying your bills on time is the most important since payment history carries the most weight in credit score calculations. If you fell behind on a bill or two amid the holiday rush, getting back on track should be a top priority.
It's easy to miss a payment when you're scrambling through the holiday crowds and the stress of seeing your family, says Jim Wang, personal finance expert and founder of the Wallet Hacks personal finance blog. He recommends using your bank's online bill payment system, with payments scheduled automatically, to help avoid bills being lost in the shuffle.
The other part of the puzzle is maintaining low balances on your credit card accounts. Credit utilization, meaning the percentage of your total credit limit you're using, is the second most important factor in credit score calculations. Natasha-Rachel Smith, consumer affairs editor at TopCashBack.com, a website that helps shoppers earn cashback when making purchases online, advises using 30 percent or less of your credit limit whenever possible.
If you're starting the new year with credit card debt, focus on creating plan for bringing the balances down. And remember to track your progress so you have a motivational boost to stick with it. Wang recommends using a debt payoff chart so you have a visual representation of how your debt balances decrease over time.
Your credit report includes information about your credit accounts, such as your payment history, balances, credit limits, and how often you apply for credit. Those details are used to generate your credit scores.
Knowing what's in your report can help you build a better score. For instance, if you have a spotty payment history, a consolidated view can inspire you to be more consistent. Checking your report often can also help you spot signs of identity theft or other account errors.
Wang says consumers should check their scores at least once a year and dispute any errors immediately. Errors or inaccuracies can include things from a misspelled last name to payments not being reported properly. If you're not getting credit for those payments, that could ding your score significantly. Disputing errors may take a little time but it can be worth it if getting the information corrected or removed adds points to your score.
Keeping tabs on your credit score may be as easy as logging in to your credit card account each month. Many credit card companies now offer free monthly credit scores to cardmembers, but don't feel like you need to monitor your score obsessively.
Checking your score every month isn't necessary since it probably won't change that much, Wang says, but regularly reviewing your finances, credit score included, is a good habit to develop for building a stronger credit profile.
Budgeting may not seem related to credit, but it is. If you don't have a budget, you may be more tempted to overspend, driving up your credit utilization in the process. Higher balances mean higher minimum payments, creating more pressure to keep up and increasing the risk of paying late. That can set your score back, rather than moving it forward.
Most of us are guilty of spending more than we would like to or budgeted for at some point, Smith says.
When overspending happens frequently, your wallet and finances will suffer.
Credit cards, when used responsibly, can help you build credit over time. The key is fine-tuning your budget so you get in the routine of charging purchases, then paying them in full on time each month. Doing that consistently can yield some positive results for your credit score by year's end.
Rebecca is a financial journalist from North Carolina. She has a Bachelors in Political Science from the University of South Carolina. She covers the intersection of public policy and personal finance.
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