Many of us are preparing to make New Year resolutions – such as eating healthier, exercising more, being more productive and improving financial health. All of these are lofty goals, but in terms of enhancing your wallet, there are a few simple things you can do in regards to your FICO Score that can reap long-term financial benefits.
So after you pack up the holiday decorations, finish that last piece of fruit cake and send off 2012 with a bang, follow these 10 steps to help increase your financial fitness – in 2013 and beyond.
1. Get your credit report.
Your credit report is a snapshot of how lenders see you. There are three national credit reporting agencies in the U.S. (Equifax, Experian and TransUnion) and you should get a copy of your report from each. All U.S. consumers are entitled to one free credit report a year – visit www.annualcreditreport.com to find out more.
Checking your credit report – or your FICO Score – will never have a negative impact on you.
2. Check your FICO Score.
Your FICO Score is a 3-digit numeric summary of the information contained in your credit report, which lenders use to assess your potential credit risk. While there are many different brands of credit scores made available to consumers, the one that is most relevant and used by most lenders is the FICO Score.
Your FICO Score and credit report will give you a detailed breakdown of your score – review this closely, and focus on those areas where the most points are being lost.
3. Correct any errors.
You want to make sure the information in your credit file is accurate – even small clerical errors could have a big negative impact on your FICO Score. If you find an error, follow the dispute resolution processes the credit reporting agencies have created and manage. They have 30 days to investigate and resolve the dispute. If erroneous information is discovered and removed from the report during the dispute process, your FICO Score will reflect the revised information the next time your score is requested.
4. Pay your bills on time.
Perhaps easier said than done, but this is the most important factor in your FICO Score. The more frequent and recent your missed payments, the greater the negative impact on your score.
Don’t get discouraged: it’s not the end of the world if you have a history of missed payments. The FICO score is “forgiving” by design as the points deducted for reported missed payment information gradually lessen as time passes, provided there are no additional new missed payments.
5. Pay down your debt.
The amount of credit debt you carry can have a big impact on your credit score – especially debt on revolving credit (credit cards, retail store cards, etc.). A key factor in the score is your revolving utilization percent; for example, a $7,000 balance on a card with a $10,000 limit = 70% credit card revolving utilization. The higher the utilization percentage, the more points deducted.
A great goal is paying down your balances so that revolving utilization is 30% or less. In addition to helping your FICO Score, you’ll pay less on interest each month.
6. Only apply for credit when needed.
Applying for credit (an inquiry) and opening new credit could cause your score to decrease.
Does this mean you should never seek new credit? Not necessarily – but you should be mindful. If you need to get a new car or you’re planning for a student loan, take the time to research rates, lenders of interest and financing options before you apply. This strategy can help reduce the number of inquiries posted to your credit report and help you secure a more competitive interest rate.
7. Be mindful of being a co-applicant or co-signing for a loan.
Many people agree to be a co-applicant on a loan or co-sign for credit with a family member or friend without fully understanding the potential consequences. If approved, you are legally responsible for that debt.
When you co-sign a loan or are a co-applicant, the lender will usually pull a credit report on everyone listed on the credit application form and that can result in credit inquiries being posted on your credit report. In addition, that approved credit loan or line will likely be reported as a new credit obligation on your credit report shortly thereafter – including credit balances and any missed payment information all of which can have an impact on your score.
8. Think twice before requesting a line increase on your credit cards.
Imagine this: you’re planning a big purchase, or going on that big vacation next week and would like some extra credit. Why not call up your credit card company to request a line increase?
By proactively making this request, you are seeking additional credit and the credit card company will likely access your credit report to help them make the decision to grant that line increase request and by how much. That credit inquiry could impact your score.
9. Don’t close unused, inactive credit accounts.
You might have several credit cards or retail store cards sitting in your sock drawer, gathering dust. It may seem like a good idea to close them – but this type of action will not increase your score, and could potentially hurt it. If you don’t use the cards anymore, simply cut them up and dispose of properly – but don’t ask the credit card company or credit reporting agency to close them.
10. Be patient – it takes time.
This may be the hardest step of all, but it’s extremely important since changes to your FICO Score do not happen overnight. The score is complex and examines data in multiple ways to determine a consistent pattern of paying bills on time and keeping debt levels low. As you demonstrate those behaviors, the score will adjust over time reflecting your lower level of risk.
Good luck with all your New Year resolutions! Be sure to leverage the myFICO educational center as a helpful resource as your progress your 2013 course to a better FICO score.
Tom Quinn is the Vice President of Business Development for myFICO, and has over 20 years of experience working with consumers, regulators and lenders and regarding credit related questions and initiatives.