Skeptical about making New Year's resolutions? If you are it is understandable. People are notorious for setting big goals at the beginning of a new year and failing to follow through with their plans. However, even if you have tried and failed before, the new year can still mark a perfect starting point for you to finally begin your journey toward better credit.
You should not view the process of achieving better credit as a race or, if you do, you should at least consider it to be a marathon. Good credit simply will not happen overnight. There are 2 essential elements which you must possess if you ever truly wish to improve your credit: a solid plan and consistency.
The 5 steps below can go a long way toward helping you to build your "better credit" plan. You can even hire a professional to construct a personalize credit plan for you and to help guide you through the credit restoration process. However, the consistency piece of the puzzle is going to be 100% up to you. If you want to truly succeed in the task of improving your credit then you have to determine that this is going to be your year to stop making excuses.
1. Pull Off the Band-Aid
Before you begin building a plan to improve your credit it is important to understand exactly where your credit stands right now. There is only one way to gain this understanding and that is by taking a long, hard look at your 3 credit reports - Equifax, TransUnion and Experian. Thankfully you can access your 3 credit reports free of charge each year via the website AnnualCreditReport.com. (Note: your credit scores are not free. However, you can still access all 3 of your scores rather inexpensively via a credit monitoring trial offer such as those found at GreatCredit101.com.)
Once you have your reports you should comb your credit reports line by line for errors (on your own with as part of a professionally guided credit analysis). Errors on credit reports occur more commonly than you would think. In fact, in 2013 the FTC estimated there to be over 40 million mistakes on the credit reports of US consumers.
Credit errors matter because they have the potential to damage your credit scores - perhaps significantly so. Even credit report errors which you may deem to be minor can potentially drive your credit scores downward. Thankfully, if credit reports errors do arise you have the right to dispute these errors with the credit reporting agencies and with your creditors. Again, these disputes can be handled on your own or by hiring a reputable professional to help you.
2. Understand that Paying Your Bills On Time Is Non Negotiable
It is important to understand that the purpose of credit scores is to show your future and even current lenders the likelihood of you making late payments. In general, most lenders will not want to do business with you at all if your credit shows a pattern of late payment history. FICO scores specifically are built with the stated design objective of predicting the likelihood of a consumer becoming making a late payment on ANY credit obligation within the next 24 months. Remember the statement above about how it is time to stop making excuses? If you do not stop justifying late payments to yourself now then you will never be able to achieve the goal of earning better credit.
3. Realize that Your Credit Card Balances Are a Big Deal
While credit cards themselves are not inherently evil the truth is that carrying credit card debt is a bad idea. When you develop the habit of charging more on your credit cards than you can afford to pay off in a given month you are setting yourself up for financial problems and you are causing damage to your credit scores. Most people do not realize that even if you pay your credit card balances on time every single month the mere fact that you are revolving a balance can have a negative impact upon your credit scores.
Nearly 1/3 of your FICO scores (30% to be exact) are based upon the "Amounts Owed" category of your credit reports. The credit scores calculated from this credit report category are primarily based upon the relationship between your credit card balances and your credit card limits - aka your revolving utilization ratio. Just remember, as your credit card balances are paid down your credit scores will generally increase. As a result, paying down your credit card balances (from the smallest balance to the highest) is one of the most effective and actionable ways that you can work to improve your credit scores.
4. Consider the Value of Asking for Help
You have the right to work on your credit alone, but it is also your right to seek professional assistance. Yes, hiring a pro is going to require an investment on your part but it could be well worth your time and money to have an expert advising you and working on your behalf. Remember, you can lose weight without a personal trainer as well but I can tell you from experience that you will probably be much happier with your results if you take the step to work with an expert.
5. Get to the Root of the Problem
The majority of credit problems stem from the same place - overspending. When you overextend yourself financially and begin to revolve credit card debt from month to month you are setting yourself up for a financial disaster down the road. It is no secret that credit card debt leads to lower credit scores and a lot of money wasted through interest fees.
Generally most overspending problems develop in the first place due to a failure to plan - that is to say a failure to budget. You have probably heard the following saying: "Failure to plan equals planning to fail." The saying is 100% accurate. In order to truly succeed in breaking the habit of overspending you need to create and follow a written budget. (CLICK HERE for a free copy of the HOPE4USA Basic Budgeting Guide.) If you find yourself cringing at the thought of writing and following a budget remember that even though doing so may not sound like at lot of fun to you the negative repercussions that you can create for yourself through overspending are much more uncomfortable to experience.
The Value of the Resolution
If you are making resolutions about your finances and credit this year then you should begin by resolving not to let your fear of failure hold you back. Take a deep breath and set a big goal. In reality you might fall short of your goal to improve your credit by 100 points over the next 12 months. However, even if you improved your credit by just 10% it could potentially make a very positive, very tangible difference in your life.
Michelle Black is an author and leading credit expert with over 15 years of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars nationwide. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.