By Rebecca Lake
Welcoming January 1st with a few financial resolutions may leave you wealthier and wiser in the new year. As you're drafting your list, don't forget to leave room for these credit related resolutions and give your financial health a boost.
Identity theft is no laughing matter and resolving to put a firm line of defense in place is a must. Freddie Huynh, who served as lead data scientist at FICO before joining Freedom Financial Network as vice president of credit risk analytics, says there are several things you can do to protect your credit, starting with a credit freeze.
A credit freeze restricts access to your existing credit file, making it more difficult for anyone to open new accounts in your name, Huynh says.
You can request each of the three credit bureaus to place a freeze on your credit report, which could prevent an identity thief from opening new lines of credit without your knowledge. (Note: depending on which state you live in, there may be a fee to freeze your credit.) But it won't stop a thief from stealing information from existing accounts.
You'll still need to monitor your bank and credit card statements for fraudulent transactions, Huynh says.
Setting up alerts with your bank and credit card issuers is a smart way to do that. You can receive texts or email notification when a new purchase hits your account, or when your balance reaches a certain limit. While you're logged in your accounts, take time to update your passwords to make them more secure. And of course, be wary of phone or email scams that could put your credit at risk.
When it comes to applying for new credit, Huynh says it's better to choose a card you plan on keeping for the long term.
The longer you hold a card with a positive payment history, the more valuable it is in your credit score determination, he explains.
As you evaluate credit card options, consider how you spend. Do you charge small purchases frequently, or reserve your card for the occasional large purchase? Do you mostly make everyday purchases or travel? Do you want to earn rewards or take advantage of promotional APR offers? What kind of cards does your credit score qualify you for?
If you can't get a unsecured credit card, you might consider a secured card instead. Secured cards require a cash deposit, which acts as collateral towards your credit limit. If you're using a secured card to build credit, be sure that your spending and payments are reported to the credit bureaus each month.
Earning miles, points or cash back with your credit card does you no good if you don't put those rewards to use. If you haven't checked your rewards balance lately, it's time to take a second look.
For example, if you have a cash back rewards credit card, consider whether you could redeem some of those rewards as a statement credit against holiday shopping. Or, if you've accumulated a decent number of miles on a travel rewards card, you may want to get a head start on planning your summer vacation.
If you've seen a big jump in your credit score, that can be an incentive to look for a premium rewards card to replace a card that yields a lower rewards rate.
Use a high credit score to apply for only the cards that come with best rewards programs and bonus offers, says David Bakke, a personal finance expert and contributor to MoneyCrashers.com.
Remember, however, that rewards cards that offer upper tier rewards or additional card perks like complimentary airport lounge access or concierge service may charge a higher annual fee. Weigh your credit spending habits and the amount of rewards you could earn against the fee to make sure the cost is worth it.
Payment history has the most impact on your credit but your credit utilization ratio, the amount of money you owe on your credit card as a proportion of your credit limit, is a close second. When it comes to how much of your credit limit you should be using, less is more. Resolving to pay down some of your credit card balances could help add points to your score.
Denise Wimbish Myhand, founder of the Money Matters Financial Literacy Club, recently paid off $45,000 in debt. She credits staying motivated as the foundation of her strategy. For example, she tracked her debt payoff progress regularly. She also celebrated her wins each time she reached a milestone. And she used affirmations to stay positive and focused on her ultimate goal.
Checking your credit score routinely can also be a great way to keep the momentum going if your score is climbing while your debt is dropping. It's relatively easy to do if your credit card includes free credit score access as a feature. Or, you could sign up for a free credit monitoring service that includes your score.
As you track your credit score in the new year, pay attention to any changes that might cause it to go up or down. Ask yourself what behaviors may be driving your changes. Then, focus on sticking with good habits (i.e. paying on time, limiting how often you apply for credit) so you can see your credit resolutions through.
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.