The new year is a great time to check in with your personal finances, including your credit. Whether you have fair or excellent credit, there are always actions and tweaks you can make to better leverage the credit you have or try for a bigger overhaul. Here are five steps to consider:
1. Get your credit card utilization rate down. One of the major factors impacting your credit score is your credit card utilization rate, the ratio of your credit debt to your total available credit. Generally, a good rule is to keep your utilization rate at less than 30 percent. If you find yourself hovering at or exceeding 30 percent, and you have an excellent payment history with the credit card issuer, you could request a limit increase to have more flexibility. And if you've got an upcoming major purchase, like a new home, it's a good idea to pay down your balances as much as possible, regardless of your utilization rate.
2. Check your credit report for errors. A Federal Trade Commission (FTC) study found that 25 percent of consumers have an error on their credit report. Most of the time, the errors came from outdated information, mistaken or fraudulent accounts, and incorrect account details. You can get copies of your credit reports from the three major bureaus from annualcreditreport.com for free once per year. You can get reports from two of the three bureaus at any time from creditkarma.com.
3. Keep old accounts open and in good standing. A common misconception is that the fewer open lines of credit you have, the better. Banks actually like to see that you can manage your credit, and oftentimes, more lines of credit are viewed as a big positive. When people are overhauling their credit, many will simply close credit card accounts they aren't actively using, but you should take note of which of your accounts have been open the longest. It's a good idea to keep an older card open to help retain a long credit history, as the longer your credit history, the higher your credit score. Many consumers assume closing accounts they're not using makes them look better to lenders, but it can have the opposite effect. It's also important to keep your accounts active month-to-month. Some credit card issuers will stop reporting your account to the credit bureaus after a long period of inactivity.
4. Evaluate your lines of credit. If you have great credit, there may be an opportunity to open a new line of credit to transfer balances and take advantage of an interest-free introductory period. For some, a new rewards card could present a nice opportunity to take advantage of an introductory rewards offer. It's not only wise to manage your credit well, but if you are in the position to, you can make your credit work for you. Keep in mind that every time you apply for a new credit card, auto loan, or other credit product, a hard inquiry is placed on your credit report. Depending on your situation, one or more hard inquiries could lower your score.
5. Use reward cards strategically. If you have good to excellent credit and do not typically carry a balance, you may want to consider leveraging credit cards that come with rewards, such as cash back or travel perks. However, if you tend to carry a balance, note that these cards also generally have the highest interest rates, potentially negating the benefits. Many assume that using reward cards isn't worth the trouble, because the percent of return is generally small. However, a little effort can go a long way toward accumulating rewards or cash back, and if you manage these sorts of cards well, most dollars that you spend can work for you in return. There is a plethora of reward cards to cater to different spending habits and rewards preferences, so ensure that you take the time to understand your spending patterns and choose the best cards for your interests and your wallet. And beyond rewards themselves, there are other great perks depending on what is most valuable to you, such as concierge service, free memberships or access, and price matching. A little research will go a long way.
Many people don't realize that checking your credit score regularly, even once every other month, ensures that your credit is operating at maximum strength. Knowing your credit and making the above tweaks ultimately improves your fiscal health. You become more financially aware, can leverage credit towards key life purchase decisions (home, cars, insurance, etc.), and achieve greater financial freedom.