Here’s the simple truth: Your low credit score is costing you a fortune.
Folks with the best credit get the best terms when it comes to mortgages, car loans and credit cards. They get the lowest interest rates and the lowest fees. They get the biggest sign-up bonuses. They’re more likely to get the benefit of the doubt when asking to get a fee waived or a credit line increased. Add it all up and you get an awful lot of reasons to make 2016 the year you get your credit in shape.
How exactly do you that, though? Well, it won’t always be easy and it won’t always be quick, but the good news is that it can be done. The truth is that you have more control over your credit than you think. You just have to put in the work.
Here are some ways that you can boost your credit score in 2016.
1. Get your credit report, and report any errors you find.
Any move to boost your credit score must begin with checking your credit report. Get a free copy of your report from all three credit bureaus — Experian, Equifax and TransUnion — once a year from AnnualCreditReport.com, and go over them thoroughly. Make sure everything you see is accurate, and if something isn’t, report it immediately. Some things to look for:
— Accounts you don’t recognize.
— Late payments you didn’t make.
— Closed accounts listed as open.
— Credit limits that are too high or too low.
If you see any inaccuracies, gather up any evidence you have and notify the credit bureau in writing. The bureau then has up to 45 days to investigate, and if the piece of information cannot be verified in that time, it must be removed.
2. Get a new credit card, and use it sparingly.
A new credit card helps reduce your utilization rate, which is the second-most important factor in credit scoring formulas. Here’s how: Say you have a card with a $5,000 limit and a balance of $2,500. That makes your utilization rate 50 percent, well above the recommended total of 30 percent or less. However, add another $5,000 limit card and suddenly your utilization is slashed. Now you have $10,000 in credit and a $2,500 balance for a utilization rate of 25 percent. That decrease will likely help your score creep higher; It will also likely offset any temporary drop that can come when you sign up for a new card.
Don’t add too many cards at a time, though. Ten percent of the credit scoring formula focuses on new credit. Applying for too many cards at once or applying too often can make it look like you are experiencing some financial problems and make you appear riskier to a lender. Even though it could reduce your utilization even more dramatically, applying for too many cards in too short a time can actually hurt you.
Also, be careful about getting a new card if you’re planning to get a new mortgage or car loan in the near future. You don’t want that small temporary credit hit that comes with a new card to drag your score lower when you apply for another loan.
3. Make payments more frequently.
Consider paying your credit card bill twice a month. Even if you don’t increase the total amount you pay in a month, paying multiple times in a month can help your score. Here’s how: A credit report is a snapshot of your finances at a moment in time. If you have a balance on your card at that moment the snapshot is taken, it can drag your score down, even if you intend to pay that balance in full at the end of the month and never pay any interest. However, if you make multiple payments each month — say on the 1st and 15th of the month — you improve the odds that your balance will be low when that next snapshot is taken.
Lower balances bring lower utilization rates. Lower utilization rates bring higher credit scores.
4. Make larger payments.
This one goes without saying. Those with the best credit scores tend to pay their balances off at the end of every month. If you can’t do that, you absolutely must pay more than the minimum. Once again, lower balances bring lower utilization rates, lower utilization rates bring higher credit scores and higher credit scores save you money.
5. Pay off the card that is closest to being maxed out.
Your utilization rate isn’t just about comparing your total balance to your total available credit. Individual card rates have an impact, too. If you have multiple cards, try paying down the one with the highest utilization rate. If you can get a good deal, you can also consider moving part of that card’s balance to a new 0 percent balance transfer card. That way, you’re reducing your utilization and reducing the interest you’ll pay at the same time.
6. Become an authorized user.
Countless parents have done this to help jump-start a child’s credit, but it can work with all ages. Here’s how: The account holder makes another person an authorized user on the account. The other person then receives a card with his or her name on it, which can be used to make purchases on the account. Most important, the entire payment history of that card is then included on the authorized user’s credit report — potentially taking a credit novice from zero to solid credit in a flash.
Be careful, however. Different issuers and credit bureaus view authorized users differently. Also, account holders should know that authorized users are not legally responsible for paying off the balances they accrue. In addition, an account holder’s mistakes — late payments, maxed-out cards, etc. — can bring down an authorized user’s score and vice versa.
7. Commit to keeping it simple.
The bottom line when it comes to credit is this: If you pay your bills on time, every time for many years, keep your balances low and don’t apply for new credit too often, your credit score is going to be just fine. Many of us tend to overthink credit, but it really is that simple.
Of course, there are things you can do to boost your credit in the short term — there’d be no need for this column otherwise — but the absolute best thing you can do for your credit in 2016 is to commit to doing the following in the long term:
— I will pay my bills on time, every time.
— I will keep my balances low by paying off what I currently have and not adding to them.
— I will be cautious in how often I apply for new credit.
If you do those three things, not only will you boost your credit score for 2016, you’ll lay the groundwork for continued growth for a lifetime.
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