The beginning of the year is the perfect time to take stock of your finances to make sure you are on track for the year, especially after spending so much money during the holiday season. If you are going into the new year with less-than-stellar credit, or just want to give your good credit a tune-up, there are some easy steps you can take to get on the right credit track.
Assess Your Credit Situation
First things first, you need to know what your credit situation is before you can do anything about it. Getting your credit score from sites like Credit Sesame or Credit Karma can help, but neither one shows you your true FICO score, which is the score lenders use. Some credit cards, like Barclaycard and Discover, will give you a free FICO score with your bill each month. Or you can go to MyFICO and pay to see your FICO score.
While having your score may give you a good idea of what kind of shape you are in, what you really need to see are your credit reports. You have three credit reports from the three main credit bureaus (TransUnion, Experian and Equifax), and by law, you are able to receive a free copy of each report once a year. Go to annualcreditreport.com and get your three credit reports.
Then sit down and go through those reports and find out where you are having issues with your credit, whether it’s late payments or high debt. Once you have a better idea of where the problems are, you will be able to make a better plan to fix them.
Decrease Your Credit Utilization Ratio
One of the main factors of your credit score is your credit utilization ratio, which basically takes your total credit limit from all your credit cards and compares it to your total balances, showing how much of your credit you are currently utilizing. The lower the credit utilization ratio, the higher your credit score will be. There are basically two ways to lower your credit utilization ratio:
- Pay Off Credit Card Debt: This is the easiest way to lower your credit utilization ratio. It’s simple math; the smaller your overall credit balance, the less credit you are utilizing, which will bring your credit utilization ratio down. Even if you can’t pay off all your debt, paying even a little can help you see a bump in your credit score.
- Increase Your Credit Limit: It may seem unusual to apply for a new credit card if you already have credit card debt, but being approved for a new card will raise your overall credit limit, which will lower your credit utilization ratio. Even if you don’t plan on using it, applying for a new card can help you increase your credit score. If you have bad credit and want to use this method, you can apply for a secured credit card (which doesn’t rely on credit checks for approval, but will make you put down a deposit), which can help raise your credit limit. Just remember to apply for a secured card that reports to the credit bureaus.
Control Your Interest Rates
This doesn’t necessarily impact your credit score, but it can help you get credit card debt under control. Most people don’t know the interest rates they are paying on their credit cards, which can be dangerous, because if you have a high interest rate and you are only paying your minimum balance every month, the majority of your payment may be going to your interest rate, making it nearly impossible to pay down your debt. There are two good ways to get your credit card interest under control:
- Balance transfer credit card: If your credit is good enough to apply for a balance transfer credit card, that might be the best option. Many of these cards offer a 0 percent interest rate for the first year to year and a half, which gives you a lot of time to pay down your principal balance without paying any interest. Specifically look for a card with a low or no balance transfer fee, which can really add to your debt if you have a lot of it to transfer.
- Credit card debt consolidation: Your other option is applying for a consolidation loan that will combine all your debt in one loan with a lower interest rate. Basically, the loan is used to pay off your current credit card debt, but then you have to pay off the loan. Having the lower interest rate should help you pay off the loan faster. Here’s more info from one of the top debt consolidation companies.
Fix Errors on Your Credit Report
One of the main things people don’t realize is that you can have errors on your credit report that may be dragging down your credit score. Some errors can be simple, like misspelling your name or having the wrong address, but there can be errors in how lenders are reporting to the credit bureaus, and those errors should be fixed immediately. There are two ways to get errors fixed on your credit report:
- Do it yourself: The easiest and cheapest way to fix errors is to do it yourself. You can go to the websites of the three credit bureaus, which all have step-by-step instructions on how to report errors. It does require a little searching, research and filling out forms, but in the end, it’s free.
- Hire a credit repair service: When you hire a credit repair service, one of the first things they do is attempt to fix errors on your credit report. The most reputable services have been doing this for years, so they know the best way to not only fix blatant errors, but also errors that you may not have even noticed. It does cost money, but on the plus side, they can also help you raise your credit score through other methods, like negotiating with lenders or using legal loopholes to get derogatory marks taken off your report. Here is a good list of the top credit repair services.
While it may end up being some work to get your credit in order, having a clean credit report will give you better peace of mind going into the new year.