2018 is quickly coming to an end, and it’s been quite a year. There’s been a fair share of scandals, triumphs, loses, tragedies, and inspirational moments, both public and private, that will set the stage as we prepare to transition into 2019.
New Year’s represents, for many, a chance to start over, to let the confidence that our victories have brought us, and the lessons we’ve gleaned from mistakes, set the stage for a new, improved version of ourselves.Whether it’s shedding a few pounds, taking more time to focus on family, or finally getting that Harley Davidson you’ve been eyeing the past year, New Year’s resolutions are a great way to get the most out of a new year.
If you haven’t thought about what you’re going to do in regards to your credit in 2019, there’s few things you could focus on that will have a great impact on you and your family. It affects so many diverse areas of your financial life, and credit is like your physical fitness – no matter how good you are, you can always get a little better.
To help you take that step, and commit to fixing your credit, or elevating it from good to excellent, here are four great New Year’s resolutions you should make to improve your credit.
1) Reduce Your Utilization of Credit
Strange as it may sound, one of the first things you might need to look at to improve your credit in the new year is to spend less of it. Credit exists to help us out in times of need, or afford things that we just need more time or money to pay off than what we currently have, but overly relying on credit can cause your score to suffer considerably.
Credit utilization is one of the five factors of your credit score, and accounts for 30% of your overall score. Creditors want to see you using the credit they’ve extended to you to some degree (otherwise you’re just gaming the system), but do so responsibly. The general rule you should stick to, to help raise your credit score, is to use no more than 35% of your credit limit at any given time. To put it in numbers, if your credit card limit is $5,000, don’t charge more than $1,750 on your card in one month.
Reducing your utilization of credit will not only help improve your credit score, but also help you really analyze your finances to determine what’s most important. Once you’ve cut out those items that were causing you to bust the 35% ratio, you’ll find that many of those items weren’t so essential in the first place, and you’ll save money.
2) Reduce Your Debts
Whether your credit score is phenomenal, or you cringe whenever someone mentions credit, we can all benefit from having less debt in our lives. No one likes having to look at a past due notice, or fend off a call from a debt collector; plus, extensive debt will quickly cause your credit score to plummet.
If you have extensive debt from credit cards, you might look at using a personal loan to pay them off, or prioritize which cards you need to pay first, based on interest rates, and channel most of your money to them. Alternately, if your debts are mostly from personal spending, you could look at eating out less, and cooking your own meals, which will improve both your health and finances.
3) Diversify Your Credit
Many people are completely unaware that your mix of credit plays a role in determining your final credit score, but this is certainly the case. The three credit bureaus want to see several different types of credit before they’ll assign you a higher score, because it shows that you’re both organized and responsible enough to hand the different requirements for each type of credit.
For example: the payment due dates, interest rates, and minimum payment amounts for a standard bank credit card will be completely different than those associated with a mortgage, and you have to be able to manage both effectively. This validates your commitment to keeping your credit and finances in order, and in turn, will yield you a better credit score.
Don’t misunderstand me: applying for too much new credit, all at once, can be detrimental. Not only will the hard inquiries made on your score drop your credit score, it will create the impression that you’re desperate for credit. Instead, choose three different credit cards, such as one for your grocer, your gas station, and your bank, and apply for them throughout the year. Wait four to six months in between each, so it’s not so hard on your credit score.
4) Pay Off Your Credit Cards in Full
In the same vein as reducing your debt and your utilization of credit in 2019, you should make a conscious effort to pay off your credit card balances in full, rather than just meeting the minimums. While this won’t directly improve your credit score, since all you have to do to remain in good standing with creditors is pay the minimum, it will have some ripple effects that will improve the rest of your financial life.
First, when you pay off your credit card in full, it makes managing your credit easier. Since you want to reduce your credit utilization, you need to be aware of how much you have on each card at any given time. This is a lot easier to do if your balance is reset at the end of the month, rather than having to track the remaining balance from previous months, especially if you’re using multiple cards.
Second, by paying off your balance in full, you’re avoiding the risk of accruing interest, which will make paying your bills easier, and help you reduce debt.
Finally, by paying off your balances in full each month, you’ll be able to enjoy more peace of mind, knowing that your finances are in order, and no one is going to be calling or emailing you about your balance, which will allow you to focus on the other important areas of your life.