16 ways to improve your credit in 2016
By Dawn Papandrea
December 23, 2015
Start now to make 2016 the year that you finally straighten out your credit life, improve your credit score, say goodbye to debt for good, and start building savings. You can do it! And unlike past resolutions you've made, the plan below will help you keep going so that by this time next year, you'll be in much better financial shape.
1. First, step on the scale. Just like when you're starting a diet and fitness program and record your weight, you should see what your starting point is credit-wise. If you haven't used annualcreditreport.com to pull your free credit report from each of the three credit bureaus (Experian, Equifax and TransUnion), make 2016 the year it becomes a habit.
2. Find out what's weighing you down. If you're like 1 in 5 people, there could be a mistake on your credit report, according to the Federal Trade Commission. “Sometimes things are wrong. It could be someone else's data is on your report,” says Michael Chadwick, CEO of Chadwick Financial Advisors in Connecticut. Or, worse, it could be a sign of identity theft. Either way, get in touch with the credit bureaus immediately to dispute any error or launch an investigation, if necessary.
3. Watch your “credit calories.” Debt utilization is the amount of available credit that you're using, and it's the second-biggest factor in your credit score. “Aim to get your credit card balances below 50 percent of your available limits, and your credit score will improve,” says Wayne Sanford, author of “The Real World of Credit.” So if you have a $5,000 credit limit, owing more than $2,500 will send up a red flag. Once your debt utilization falls below 50 percent, take steps to bring it below 40 percent, then 30 percent, until you get as close to debt-free as possible.
Aim to get your credit card balances below 50 percent of your available limits, and your credit score will improve.”
— Wayne Sanford,
author of “The Real World of Credit”
4. Pay down a bill. Of course, there is one surefire way to improve your credit, and that's to decrease the amount of money you owe. If you get a holiday bonus or have some cash stashed away in a savings account, consider putting a chunk of it toward your biggest debt for an instant credit score boost. Just be sure to leave a small emergency fund intact.
Know your score
5. Take advantage of free tools. In addition to your free credit report, check out other free credit monitoring tools, says Katie Ross, education and development manager at American Consumer Credit Counseling in Massachusetts. “Many credit card companies now offer credit score monitoring, and scores can be found on statements or by going online,” she says. “It's a huge motivator and keeps me in tune with what is happening with my credit score — good or bad.”
6. Make better decisions based on your credit status. “When it comes to improving one's credit score, information is power,” says Laks Vasudevan, vice president of products and innovation at Discover. Discover is one of a handful of issuers offering free credit trackers. “Such information is critical when making a key purchase of a home or car, or when applying for a personal or student loan,” she says. Ross agrees, adding her credit score is always in the back of her mind when making daily purchasing decisions.
7. Try for a credit utilization jump-start. One way to get an immediate improvement on your utilization ratio is to increase your credit line, if you qualify, says Sanford. “Every year, credit card companies allow for a credit line increase, so if approved, you can increase it by 10 to 20 percent, which will in turn lower your ratio, and will typically result in an increase in credit score,” he says. Just be aware that this will work only if your account is in good standing, meaning you never had a late payment, and you're not close to maxing out the card.
Many credit card companies now offer credit score monitoring, and scores can be found on statements or by going online. It's a huge motivator and keeps me in tune with what is happening with my credit score — good or bad.”
— Katie Ross,
education and development manager
at American Consumer Credit Counseling
8. Get your payoff priorities straight. Throwing money at your various balances haphazardly isn't the best approach to digging out of debt. Instead, strategize, says Jim McCarthy, certified financial planner at Directional Wealth Management in New Jersey. “Make a list of your debts, and start a snowball strategy,” he says. Here's how it works: Choose the account with the highest interest rate, or the lowest balance (for a quick boost of motivation). Pay monthly minimums on all debts except the one you want to pay off first – on that one, you'll throw as much money as you can toward it. Once you conquer the first bill, move to the next one on the list.
9. Put more cash in your pocket. More money in hand means you can pay your debts faster. Try taking on extra work and side gigs, find ways to trim your bills and get a better grip on monthly expenses. One suggestion: “Talk to utilities about going on an equal payment plan throughout the year,” says McCarthy. That way, a high seasonal electric or gas bill doesn't thwart your payoff goals. Or cut the cable cord or home phone.
10. Evaluate how you're paying Uncle Sam. Another temporary trick that could help is to consult with a tax professional about your tax return and withholdings, says McCarthy. “Increase W-4 exemptions so that you neither owe tax nor get a refund — refunds are like tax-free loans to the U.S. government,” he says. Then you can use any extra bucks in your paycheck toward your snowball plan.
Mind over money
11. Never have another late payment. Paying your bills on time is the No. 1 factor determining your FICO score, so to make sure it never slips your mind, set up automated payments or text/email alerts to remind you when a due date is approaching.
12. Change your spending mindset. If mindless shopping is what got you into trouble, you have to break the cycle. “Put your credit cards in a drawer for one week and see how you do,” suggests Leslie Tayne, a New York attorney specializing in debt management and debt resolution and author of “Life & Debt.” “If you don't have the credit card in your wallet, then you are empowered with the ability to determine if the purchase is an impulse buy or a necessity.” After one week, choose one card to keep in your wallet for emergencies. After a month, if your other cards don't leave the drawer, you likely will have learned you don't need them.
Put your credit cards in a drawer for one week and see how you do. If you don't have the credit card in your wallet, then you are empowered with the ability to determine if the purchase is an impulse buy or a necessity.”
— Leslie Tayne,
a New York attorney
and author of “Life & Debt”
13. Don't give up your coffee run. “One of the biggest mistakes people make when they need to get out of debt is that they decide they must sacrifice everything they love,” says Beverly Harzog, consumer credit expert in Atlanta and author of “The Debt Escape Plan.” “We're all human and we need a few things to look forward to. For instance, if you love your latte, then keep your latte. But be sure you pay for it by cutting something else in your budget.”
Maintain your debt loss
14. Love the debt-free you. It's easy to sink back into old habits, but when temptation arises, think about how getting out of debt changed your life for the better. Your new mantra could be: “Don't purchase unless you have a solid plan to pay the debt off,” says Ross.
15. Start reaping the rewards of good credit. Once your credit score improves, look into lowering your interest rates, or compare cards to find ones you can maximize. Going forward, perform an annual maintenance on your wallet.
16. Celebrate – you earned it! Getting your finances in better shape is hard work that takes sacrifice and diligence, so it's OK to reward yourself from time to time. Just remember that success doesn't happen overnight, and you will slip up. As long as you keep forging forward, you'll make progress on improving your credit and have no regrets.