The new year is a natural time to assess your life and set new goals. For many people, financial resolutions top the list of things they wish to improve in the coming year.
However, sometimes people overlook their credit as an important part of their financial health. Don’t make this mistake. If you haven’t already added any credit-specific goals to your new year’s resolutions list, here are a few to consider.
New Year’s Resolution #1: Evaluate Your Attitude Toward Credit
When it comes to overall financial health, your credit is a big deal. If you’ve been ignoring the importance of your credit or trying to avoid credit altogether in an attempt to stay debt free, your attitude toward credit may need to be reassessed, unless you are independently wealthy and can pay cash for homes and cars.
For starters, it’s important to understand that you don’t need to take on debt to earn good credit. In fact, the opposite is true. Credit scoring models reward you when you have less debt, no debt or low-risk debt, such as mortgages.
Earning and maintaining good credit will save you tens of thousands or even hundreds of thousands of dollars over the course of your credit lifecycle.
It’s also important to understand the money saving potential of good credit. Earning and maintaining good credit will save you tens of thousands or even hundreds of thousands of dollars over the course of your credit lifecycle. Savings opportunities range from lower interest rates to money saved every month on your insurance premiums. Point being: If you are spending less on interest and fees, you are able to redirect that money to something more meaningful to you and your family, like retirement accounts.
New Year’s Resolution #2: Monitor Your Credit Reports
Once you understand the importance of earning good credit, you need a plan to track your progress. Monitoring your credit scores is fine, but it is equally important to keep an eye on the data that is the basis for every single one of your credit scores, which is your Equifax, Trans Union and Experian credit reports.
It’s a good idea to review your credit reports every month. Credit reporting errors, simple mistakes and fraud can all occur from time to time. If incorrect information shows up on your credit reports, it could hurt your scores and potentially cost you time and money.
Thankfully, it’s easy and free to claim free copies of your credit reports online. If you haven’t already claimed your free annual reports from AnnualCreditReport.com, that’s a great place to start.
New Year’s Resolution #3: Improve Your Credit
Earning good credit doesn’t happen overnight, especially if you have made credit management mistakes in the past. Yet with the right plan and some dedication on your end it’s possible to begin improving your credit as soon as by next month.
Here are a few credit improvement strategies to get you started:
Stop Missing Payments Immediately
Roughly one third of the points in your FICO and VantageScore credit scores are driven from the presence or lack of negative information on your credit report. If you make all of your payments on time, none of the other more severe negative information, like defaults and collections, will ever appear on your credit reports.
Pay Down Your Credit Card Debt ...
... and then keep paying it off, every month. Roughly one third of the points in your FICO and VantageScore credit scores are driven from how you manage your debt. If you can limit the number of accounts that have balances and maintain lower balances on your credit cards, you’ll do fine in this category.
Don’t Apply for New Credit Unnecessarily
Every time you apply for credit, a credit inquiry will be posted to at least one of your credit reports. And while inquiries aren’t that problematic, they can lower your credit scores.
I know this isn’t normally realistic advice, but the age of your credit reports is an important factor in your credit scores. As your credit reports age, you’re going to earn more points organically. You can help this by not constantly opening new accounts, as they will drag down the average age of your accounts.
If you can do these things over and over, you really have no choice but to earn solid credit reports and scores. And the best news is that you don’t need a 850 FICO or VantageScore to get the best deals from lenders. If you can consistently keep your scores at or above 760, you will likely receive the best offer from any lender for any credit product.