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MoneyWatch: Managing Your Money
By Tim Maxwell
Edited By Matt Richardson
/ CBS News
The new year is right around the corner, which for many, means it's time to start contemplating goals for the coming year. According to a study by Finder, 141.1 million adult Americans, roughly 55% of adults in the U.S., believe they'll be able to accomplish their New Year's resolutions.
Many Americans use the start of the year to adjust their lifestyles. Career advancement and health improvements are common goals shared by many. But you can also use the start of the year to improve your finances, including your credit.
Start by getting a free copy of your credit report and FICO score to discover where you currently stand.
4 ways to improve your credit in 2023
Improving your credit is an excellent way to strengthen your financial profile and save money on loans and other forms of credit. Consider these tips and strategies to help you improve your credit in 2023.
- Check your credit to see where you stand
- Repair your credit
- Reduce your debt-to-income ratio
- Consider debt consolidation
Check your credit to see where you stand
The first step to improving your credit is to get copies of your credit reports to get a clearer picture of your credit profile and identify areas of improvement. Experian and TransUnion are two major credit bureaus that create credit reports based on your credit history. Because creditors and lenders don't always report to each bureau, your credit reports may differ slightly from one bureau to another.
For a more complete view of your credit, it's also wise to learn your credit score, which you can often find on your bank or card issuer's site. Each of the three major credit bureaus generates two types of credit scores—a FICO Score and a VantageScore. Each scoring type uses a 300-850 point credit scoring scale but assigns tier's differently. Generally, the higher your score, the better your credit.
By answering a few brief questions you can get your credit scores from all three credit bureaus for free right now.
Repair your credit
Fixing credit report errors is one of the fastest ways to improve your credit. Once you receive your credit reports, carefully review them for inaccuracies or accounts you don't recognize. If you discover erroneous information, file a dispute with the appropriate bureau. It's also a good idea to report the issue to the appropriate lender or card issuer, who can send the correct information to the bureaus.
If you don't want to do the leg work yourself, you can enlist a reputable credit repair service to work on your behalf. Credit repair companies offer to help you repair your credit for a start-up fee of around $100 and a monthly fee after that. Some companies may send "goodwill intervention letters" to your creditors. The purpose of this letter is to call upon a creditor's kindness and request the removal of a negative mark because the mistake does not reflect your otherwise exemplary payment record.
Many credit repair companies are legitimate, but sadly, that is not always the case. Check a credit repair service's record by searching the Consumer Financial Protection Bureau's complaint database or searching the company on the Better Business Bureau (BBB) website.
Start improving your credit with Lexington Law Credit Repair now or use the table below to explore top credit repair services.
Reduce your debt-to-income ratio
Lowering your debt balance on revolving credit accounts like credit cards is another way to influence your credit score positively. That's because your credit utilization ratio is the second most crucial factor in your credit score, making up 30% of your FICO Score.
Credit utilization ratio is the amount of available revolving credit you're using. Credit experts recommend maintaining a credit utilization below 30% of your credit limit - the lower, the better.
Your debt-to-income ratio (DTI) is another critical factor lenders consider when deciding whether to approve your credit application. That's the percentage of your gross monthly income you use for monthly bills like rent, credit cards, student loans and other debt. You'll typically need a DTI below 43% to qualify for a mortgage, but some lenders prefer DTI ratios below 36%.
To lower your DTI, review your account statements to identify spending you can cut, such as streaming services and gym memberships you no longer use. On the other side of the equation, look for opportunities to boost your income, such as volunteering at work for overtime or taking on a side hustle after hours.
Consider debt consolidation
Consolidating your debt is a common strategy to accelerate your debt repayment schedule. A debt consolidation loan or a balance transfer credit card are options worth considering, though you may need good credit to qualify.
Debt consolidation loan
A debt consolidation loan allows you to combine several high-interest credit cards into one loan, ideally with a lower interest rate. Instead of paying multiple credit card payments, you'll pay one monthly payment until the loan term ends.
According to the most recent data from the Federal Reserve, the average interest rate for credit cards is 18.43%, while the interest rate on a 24-month personal loan is substantially lower, averaging 10.16%. By paying less interest charges, more of your payment will go towards your principal balance to pay off your debt faster.
Not sure if a debt consolidation loan is right for you? Get a free savings estimate from National Debt Relief now and find out.
Balance transfer credit card
With good credit, you may qualify for a balance transfer credit card with an introductory 0% annual percentage rate (APR) when you bring your balance from one or more credit cards.
Depending on the card, you could enjoy up to 21 months without interest, saving you hundreds or even thousands of dollars. As such, a balance transfer card can make it easier to pay down your debt quickly, with more of your money going directly toward your principal balance each month. Keep in mind, balance transfer cards typically come with a fee, usually 3% or 5% of the balance transfer amount.
The bottom line
Improving your credit typically takes time. Follow the steps above and practice good credit habits, like keeping your credit utilization low and making consistent on-time payments on your credit accounts. Remember, your payment history makes up 35% of your FICO credit score.
Finally, only apply for credit when you need it because you should never pay interest on money you don't need.
