If you want to take steps to improve your financial health in 2016, your credit score is one area where a little bit of work could make a huge impact. Because of the way credit scores are determined, small changes can drastically improve your situation over the span of a few months to a year. And none of the changes to consider are rocket science, either.
If you plan to buy a house, finance a car, or take out a loan to start a business any time in the future, a good credit score should be one of your top priorities. These easy strategies can help you boost your score over time – or at least get things moving in the right direction.
5 Easy Ways to Improve Your Credit Score in the New Year
Pay down debt
According to credit reporting agency Experian, you should focus on paying off debt rather than just moving it around. If you rely on the FICO scoring method, you'll see that 30 percent of your credit score is based on how much money you owe in relation to your credit limits. In other words, the more you owe, the worse off you are.
The amount you owe is then translated into "credit utilization," which is the percentage of your limits you're actually using at any given time. For example, your credit utilization would be 20 percent if you owed $2,000 on a total credit limit (across all accounts) of $10,000. To decrease your utilization, you need to pay down debt – once and for all.
Get in the habit of paying all bills on time
According to myFICO, late and on-time payments have the biggest influence on credit, making up 35 percent of your FICO score over time. If you want to avoid negative marks for late payments, you should go out of your way to pay all of your bills on time – and even early.
If you're bad at remembering when your bills are due, try marking them on your calendar or setting an alarm a week ahead from your due date on your phone. You could also consider using auto-pay so your bills are paid whether you remember or not, although that strategy depends on whether your bank offers it.
Ask a parent to add you as an authorized user on their credit card
If your credit profile is especially thin, you might want to consider asking a parent to add you to one of their active credit card accounts. If they are willing, all of the credit reporting that happens on their account will make its way to your credit report, too. That can be a good thing if the adult or parent in your life has an exceptionally good score and credit history, but could be equally bad if they are irresponsible. Before you ask, make sure to ask about your loved one's credit to determine if this move would help you – or hurt you.
Don't open any new accounts – or close any old ones
When you're trying to improve your credit, it makes sense to lay low for a while – as in, don't open any new accounts or close any old ones. New credit makes up 10 percent of your FICO score, and the length of your credit history makes up another 15 percent. Opening a new card or taking out a new loan could result in a ding to your credit score. Likewise, closing an old account will decrease the length of your credit history, thus harming your potential for a high score over time.
Keep balances low as possible
If you've already paid down debt to improve your score, you'll want to focus on keeping your balances as low as possible. This all goes back to your credit utilization. The more you owe, the worse your credit utilization looks to lenders – and the lower your score could potentially go. To keep balances low, only use credit for purchases you can pay off right away. Even better, you can even opt to use credit only when you have the cash in the bank to mail in that day.
With a brand new year on its way, now is the perfect time to take actionable steps to bring your credit to the next level. With some discipline and a few credit-savvy moves, you could even completely transform your credit by the time another year rolls around. So, what are you waiting for?
At the end of the day, good credit is one of the best holiday gifts you could give yourself. Check your score for free on My LendingTree now!