You have big financial plans for 2023. Maybe they include buying a house or a car, or getting a new travel rewards credit card to help pay for your next trip. There’s one key part of these plans that you may not have considered: establishing your credit score.
A better credit score can expand your access to credit and make borrowing more affordable. For example, having a score of 700 versus 650 could mean approval of a new car loan at 4.9% interest instead of 7.25%.
So what can you do to get your score in shape? Here are some expert suggestions increase credit in the new year.
1. PAY OFF HOLIDAY DEBTS
When the holiday festivities wind down, you might find yourself with leftover debt from food purchases, travel, and gifts (in addition to regular bills, of course).
If missed payments or large balances carry over into the new year, your credit score could suffer. Payment history (whether you pay your bills on time) and credit usage (how much credit you use against your limit) are the two main factors that affect your credit score.
So make a plan to pay off your vacation debt. Start by reviewing your account statements to understand exactly how much you owe and how much you can afford to budget for repayment, says Jeff Arevalo, financial wellness expert at GreenPath, a nonprofit credit counseling agency based in Farmington Hills, Mich.
“If you only pay minimums, unfortunately, it will take you longer to pay debts. Interest rates have gone up, so paying minimums is not a recipe for success,” Arevalo says. Knowing your budget lets you see if you’re able to make more than the minimum payments on your debts, he adds. Maybe you earned an extra paycheck in December or a vacation bonus you can use to pay off debt.
One strategy to consider is paying above the minimum on your most recently opened accounts first, says Todd Christensen, education manager at Money Fit, a nonprofit debt relief service based in Boise, Idaho. Christensen says this strategy, which he calls “debt creep,” can bolster credit as ratings firms FICO and VantageScore place more weight on activity on new and recently used accounts.
“Repaying new account balances will help build credit faster than paying off all account balances,” says Christensen.
Protect your credit score in 2023 by setting up automatic payments or payment reminders to help you pay your bills on time in the future.
2. DON’T ASK FOR CREDIT TOO OFTEN
Applying for new credit multiple times over a short period of time can set off red flags and negatively impact your score. With each application, you’ll get a serious credit inquiry that can drop your score a few points.
“If I apply for a credit card once or twice a month, it kind of shows the credit score model that I’m desperate,” says Kate Mielitz, a certified financial advisor in Olympia, Washington. “Desperation is not a good look at credit.”
Lenders who view you as a risk may reject your application or offer less desirable terms, such as high interest rates. Think carefully before applying, especially if you plan to make a decision involving credit, such as applying for a mortgage, in the next few months.
3. INCREASE YOUR CREDIT LIMIT
Ask issuers to increase your credit limits on existing accounts. Higher limits will reduce your usage, as long as your spending doesn’t increase. To build your score, experts recommend keeping your usage below 30% of your limit.
4. MAKE RENT AND UTILITY PAYMENTS COUNT
Not all credit score models factor rent or utility payments into your score, as this information is usually not on your reports. But if you don’t have a credit history, there are services you can use to report payments on time and establish credit. Some rent statement services, like Piñata, are free. Others may bill you or your landlord.
“The thing to watch out for is the fees, that’s the main thing, and whether they’re actually under one or more credit bureaus,” Christensen says.
Experian Boost, a free feature from Experian, one of the three major credit bureaus, gives you the ability to report rent, utility, and streaming service payments made from your connected bank accounts.
5. INSPECT YOUR CREDIT REPORTS
Credit reports are records of your credit history. It’s crucial to stay on top of your reports, as rating companies use the information they contain to create your scores. If an error on a report lowers your score, such as a reported late payment that you actually paid on time, take prompt action to dispute the error with the appropriate credit bureau.
“Some people are concerned that the report is a bit long, that there are a lot of abbreviations and things like that. But like everything in life, I think it’s not as intimidating once you get used to it,” Arevalo says.
Make checking your credit reports a regular habit. AnnualCreditReport.com offers free weekly reports until the end of 2023.
___________________
This column was provided to The Associated Press by personal finance website NerdWallet. Lauren Schwahn is a writer at NerdWallet. Email: [email protected]. Twitter: @lauren_schwahn.
RELATED LINKS:
NerdWallet: How to Improve Credit Quickly https://bit.ly/nerdwallet-raise-credit-score
AnnualCreditReport.com: Request your free credit reports https://www.annualcreditreport.com/index.action