Realistic New Year’s Credit Resolutions

Many people are going to try to lose a lot of different things come New Year’s. A few extra pounds. Bad habits they no longer want. Debt they’ve accumulated.

Let’s face it, losing these things can be a lot of work. And downright difficult.

But, if one of your New Year’s resolutions is to gain some points on your credit score, it doesn’t have to be difficult. There are several steps you can take that could increase your credit score and are relatively easy and painless. Certainly less painful than quitting smoking.

Here are seven steps to consider taking next year that could just give your credit score a boost.      

1. Check Your Credit Reports

Your credit score is based on the information contained within your credit reports, so it’s important to periodically audit that information and verify its accuracy. It’s also a good way to identify any potential fraud or identity theft you may not otherwise discover. And what better time to start being more involved in actively monitoring your credit than the new year?

Inaccurate or erroneous information in your credit reports from any of the three major credit bureaus—Experian®, Equifax®, TransUnion®—could be costing you points on your credit score as well as money and opportunities. FICO credit damage data indicates that, depending on your credit history and how late a payment is, a single late payment could reduce your FICO® Score by as much as 180 points! So, if a late payment is being falsely reported in your credit report(s), that could conceivably drop you an entire credit score range or two. 

Such a drop could result in you being denied future credit—or paying higher interest rates or receiving less favorable terms if you are granted credit. It could even result in you being denied employment or paying more for your auto insurance, as many employers check potential employee credit scores and many automobile insurers consider your credit score in deciding whether to insure you and in calculating your premium.  

The good news is that it doesn’t have to cost you anything to check your credit reports. By federal law, you’re entitled to a free copy of each of your credit reports annually, which you can easily get by visiting AnnualCreditReport.com. Even more good news: Because of COVID-19-related scams, you can get a free weekly credit report from each of the three credit bureaus until April 20, 2022. Yet even more good news: Checking your own credit reports does not generate a hard inquiry, so doing so will not harm your credit score in any way.   

2. Dispute any Errors or Inaccuracies in Your Credit Reports

Simply checking your credit reports is not enough. If there are errors or inaccuracies, you’re going to want to dispute them to get them corrected, which, depending on the error, could give your credit score a boost.

There’s an actual process for disputing credit report errors as outlined by the Consumer Financial Protection Bureau. Credit bureaus have up to 45 days to investigate your dispute claim, so the sooner you get started, the sooner any errors might be rectified.

3. Start Paying Your Bills On Time, Every Time

Payment history is the number-one factor in calculating credit scores in the two most popular consumer credit scoring models. It accounts for 35% of your FICO^® Score and 40% of your VantageScore^®. So, if you want to positively influence your credit score, consistently pay your bills by their due date.

You don’t have to pay your outstanding balance in full each month to accrue a positive payment history—although, doing so should help save you money in interest and contribute toward making your debt more manageable. But you do have to make at least the minimum amount due, and it must be received by the creditor by the payment due date in order for your payment not to be considered late or missed.

If you’re missing payments because you don’t have the funds, then it’s a good idea not to make any additional purchases with your credit cards until those accounts are current. If you’re missing payments because you’re forgetful or just plain lazy, then consider setting up payment alerts or auto-pay for affected accounts.  

4. Take Steps to Lower Your Credit Utilization Ratio

Your credit utilization ratio is a mathematical expression of how much of your available revolving credit you’re using, and it’s another important factor in calculating consumer credit scores. For most Americans, credit cards are the primary type of revolving credit they’ll have. The actual formula for calculating this important ratio is:

SUM OF OUTSTANDING REVOLVING CREDIT
SUM OF REVOLVING CREDIT LIMITS

Lowering your credit utilization ratio could contribute toward increasing your credit score. Because this ratio is a simple fraction, there are three ways you can lower it:

• Reduce the Numerator by Paying Down Revolving Credit Balances: By not adding to your outstanding revolving credit balances and paying down the balances you already owe, you reduce the numerator (top) of this fraction, which lowers its value.

• Increase the Denominator by Increasing Revolving Credit Limits: By increasing your revolving credit limits, you increase the denominator (bottom) of this fraction, which lowers its value. This assumes that you haven’t also increased your outstanding balances (the numerator) enough to negate any gains made by increasing the denominator.

  There are two ways to increase the sum of your revolving credit limits: (1) open additional revolving credit accounts and (2) get a credit limit increase on one or more of your existing revolving credit accounts.

• Do Both: This method provides the most bang for your buck in lowering your credit utilization ratio. If you simultaneously lower your revolving credit outstanding balances and increase your revolving credit limits, you’ll lower this ratio more than doing just one or the other.

5. Apply for Any New Credit Sparingly

Every time you apply for credit, a hard inquiry is typically generated, which could lower your credit score by as much as 10 points. So, say you apply for four credit cards in one week—that’s a potential 40 points your credit score could drop in seven days.

To avoid taking too many hard-inquiry hits, try seeing if you pre-qualify for credit cards you’re interested in before actually applying. Many credit card issuers—Credit One Bank included—allow you to do this from their website, and it typically only takes a minute or two. Checking to see if you pre-qualify for a credit card allows you to get a good idea of whether you’re likely to be approved without generating a hard inquiry. Just understand that pre-qualifying for a credit card does not guarantee you will be approved for it. To get a definitive thumbs-up or -down, you have to actually apply for the card.

Once you’ve identified a credit card you want and pre-qualify for, then you can actually apply. Applying will likely then generate a hard inquiry—but only one—which is better than applying for multiple cards, and generating multiple hard inquiries, in the hopes you’ll be approved for one of them. 

6. Don’t Close Older Credit Card Accounts

This is an easy step because it doesn’t require you to do anything. Your credit history length is a factor in calculating your credit scores, and older accounts in good standing look good to potential lenders. They show that you’ve been managing credit responsibly over time, which helps paint you as less risky.

Even if you rarely or never use an older credit card, its credit limit contributes to increasing the denominator of your credit utilization ratio, which, we now know, helps lower it. If the card has a zero balance on it, it contributes even more.

There is actually one thing you can do with older credit card accounts to continue to reap any benefits they provide. Since some credit card issuers close accounts or lower credit lines due to inactivity, it can help to occasionally make small purchases with these cards and then pay off their balances on time. This should help keep them from being closed or having their credit lines decreased by card issuers. 

It’s worth mentioning that, if you’re paying an annual fee for a credit card you rarely or never use, then it may be worthwhile to close the account. Whatever benefit your credit score reaps from keeping the account open could be negated by a pricey annual fee.

7. If You Have Little or No Credit History, Consider a Secured Credit Card or Becoming an Authorized User

Creditors want you to have a positive credit history, but you can’t build a credit history without credit. So, how do you get around this catch-22?

One option is to open a secured credit card. Because it’s secured by a cash deposit, a secured credit card is less risky to card issuers and typically easier to get than an unsecured credit card, which is what most credit cards are. Should you default on a secured credit card, the card issuer can use the cash deposit to cover or minimize any losses.

Other than requiring an initial deposit, a secured card works pretty much the same as an unsecured credit card, including typically reporting your card activity to one or all three of the major credit bureaus. If you’re using a secured credit card to build a credit history, it’s important to verify that the card issuer does indeed report account activity before applying. There are some secured cards out there that don’t.

Another option to help build a credit history is to become an authorized user on another person’s credit card. However, this will only help you if the card issuer reports account activity so it shows up in the credit reports of both the primary account holder and the authorized user. Not all credit card issuers do so.

One more caveat about becoming an authorized user. If account activity is reflected in your credit report(s), be aware that all account activity shows up—both positive and negative. So, even if you exercise responsible credit behavior, if the primary account holder does not and makes late payments or defaults on the account, that activity will show up in your credit report(s) as well. This could actually harm your credit score rather than help it. 

New Year’s resolutions don’t have to be arduous or painful. By resolving to try one or more of these steps, you may be able to give your credit score a boost that could result in a better, more productive 2022.

Credit-wise, anyway.