You’ve got big financial plans for 2023. Maybe they include buying a home or car, or getting a new travel rewards credit card to help pay for your next trip. There’s a key piece of these plans you may not have considered: building your credit score.
A better credit score can expand your access to credit and make borrowing more affordable. For example, having a score of 700 versus 650 could mean getting approved for a new car loan at 4.9% interest instead of 7.25% interest.
So what can you do to get your score in shape? Here are a few ways experts suggest boosting credit in the new year.
1. Pay off holiday debt
When holiday festivities conclude, you might be stuck with leftover debt from food, travel and gift purchases (on top of regular bills, of course).
If missed payments or large balances carry over into the new year, your credit score could suffer. Payment history (whether you pay bills on time) and credit utilization (the amount of credit you’re using compared with your limit) are the two biggest factors that affect your credit score.
So make a plan to pay down your holiday debt. Start by reviewing your account statements to understand exactly how much you owe and how much you can afford to budget for repayment, says Jeff Arevalo, a financial wellness expert at GreenPath, a nonprofit credit counseling agency based in Farmington Hills, Michigan.
“If you’re only paying minimums, unfortunately, it’s going to take you a longer time to pay the debts. Interest rates have increased, and so paying minimums is not a recipe for success,” Arevalo says. Knowing your budget allows you to see if you’re in a position to make more than the minimum payments on your debts, he adds. Perhaps you earned an extra paycheck in December or a holiday bonus that you can put toward debt.
One strategy to consider is paying above the minimums on your most recently opened accounts first, says Todd Christensen, education manager at Money Fit, a nonprofit debt relief service based in Boise, Idaho. Christensen says this strategy, which he refers to as “debt landslide,” can build credit since FICO
and VantageScore scoring companies give more weight to activities on new and recently used accounts.
“Paying down balances on new accounts will help build credit faster than paying down the balance on all accounts,” Christensen says.
Protect your credit score in 2023 by setting up automatic payments or payment reminders to help you pay bills on time going forward.
2. Don’t apply for credit too often
Applying for new credit multiple times in a short period can raise a red flag and negatively impact your score. With each application, you’ll get a hard inquiry on your credit that may cause your score to drop a few points.
“If I’m applying for a credit card once or twice a month, that’s kind of showing the credit scoring model that I’m desperate,” says Kate Mielitz, an accredited financial counselor in Olympia, Washington. “Desperation is not a good look in credit.”
Lenders that view you as a risk may reject your application or offer less desirable terms, such as high interest rates. Think carefully before applying, especially if you plan to make a decision involving credit — like applying for a mortgage — within the next few months.
3. Raise your credit limit
Ask issuers to increase your credit limits on existing accounts. Higher limits will lower your utilization, as long as your spending doesn’t creep up. To build your score, experts recommend keeping your utilization under 30% of your limit.
4. Make rent and utility payments count
Not all credit scoring models factor rent or utility payments into your score because this information typically isn’t on your reports. But if you lack credit history, there are services you can use to report on-time payments and build credit. Some rent reporting services, like Piñata, are free. Others may charge you or your landlord.
“The thing to watch for is fees, that’s the main thing, and that they actually report to one or more credit reporting agencies,” Christensen says.
Experian Boost, a free feature from Experian
one of the three major credit bureaus, gives you the option to report rent, utility and streaming service payments made from your connected bank accounts.
5. Inspect your credit reports
Credit reports are records of your credit history. Staying on top of your reports is crucial because scoring companies use the information on them to create your scores. If a mistake on a report is dragging your score down, such as a reported late payment that you actually paid on time, take quick action to dispute the error with the pertinent credit bureau.
“Some people worry that the report is kind of long, there’s a lot of abbreviations and things like that. But like with anything in life, I think it’s not as intimidating once you kind of get used to it,” Arevalo says. Make checking your credit reports a regular habit. AnnualCreditReport.com offers free weekly reports through the end of 2023.
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Lauren Schwahn writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @lauren_schwahn.