December 30, 2016 – By Mike Cetera
One of the problems with New Year’s resolutions is that they don’t come with an instruction manual.
I want to lose weight. I want to pay down debt. I want to live life to the fullest. OK, how?
That’s the problem I hope to solve here. I asked a number of personal finance pros to weigh in on how to keep or build good credit in 2017.
“I think it’s important for consumers to realize it’s a process,” says Heather Battison, a vice president at TransUnion, one of the three big credit bureaus. “It’s really about building the right practice, if you will. Start at the beginning of the year. Make it part of your daily ritual, your weekly ritual.”
Think of these eight tips as a how-to guide to the obvious — and maybe not so obvious — ways you control your own credit destiny.
Be Responsible About Debt
This is the key to good financial health. It starts with always paying your credit cards and other bills on time.
Your payment history makes up 35 percent of your credit score, so late payments can have an outsized impact.
“If you fail to pay your bill within 30 days, not only will you most likely be charged a late fee, but credit reporting agencies will also be notified and this information can remain on your file for up to seven years,” says Katie Ross, manager of education and development with American Consumer Credit Counseling in Auburndale, Massachusetts.
But paying on time isn’t enough. If you want to improve your financial health, you have to accelerate your debt payments. That means paying more than the minimum required.
Making minimum payments means you’ll pay more interest, especially if the Federal Reserve increases interest rates multiple times, as its forecast suggests will happen in 2017.
Instead, make a plan for gradually increasing your payments throughout the year.
“The new year is an opportunity to take control of your debt by increasing the amount you pay each month,” says Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling. “A faster payoff can save hundreds or even thousands of dollars, depending on the amount owed and the fee structure.”
Check Your Accounts and Credit Reports
Check your credit accounts regularly for signs of credit card fraud and to know how much you spent and what you owe, Battison says. If you find a charge that you didn’t make, report it immediately to your issuer.
Set smartphone alerts to show you when your credit card has been used. You’ll then know immediately if a fraudulent charge occurs.
Check your credit reports regularly for signs of account fraud. See a credit account that doesn’t belong to you? Someone may have used your personal information to open an account.
Freeze your credit to prevent criminals from opening new accounts in your name.
3 Things You Should Avoid To Protect Your Good Credit
- Never take out a cash advance. Interest rates on cash advances are often 10 to 15 percent higher than on regular purchases, Ross says. You’ll also pay fees for taking out the advance. While this act in and of itself won’t damage your credit, adding to your debt could. If you need extra cash, dip into savings.
- Avoid closing a credit card account. This could hurt your credit utilization ratio — how much credit has been extended to you versus how much you use. Closing an account reduces your available credit, which could hurt your credit score. “Closing a credit card account can also hurt you because you may lose the associated history with the card because keep in mind that credit works just like trust,” says Steve Repak, a Charlotte, North Carolina-based CFP professional and author of “6 Week Money Challenge.” “It takes a long time to get, but only a short time to lose. It would be better for your credit score to cut up a card and not use it in comparison to closing the account altogether.”
- Avoid closing credit cards with a balance. This is even worse than just closing an existing account. “When you close a credit card that has a balance, your available credit or credit limit on that card is reduced to zero and it looks like you have maxed out the card,” Ross says.
3 Things You Should Consider To Build Credit
- Get a co-signer. Young adults, especially, could benefit from this, Ross says. Get a parent or guardian to co-sign on a credit account. “Co-signers on an account are equally responsible for the loan,” Ross says. “Therefore, the loan is on their credit reports as well, making a positive or negative impact depending on how the credit is managed.”
- Get a secured credit card. This also would work for people with little or no credit, Ross says. “When choosing a secured credit card, stick to a reputable bank and make sure you read all the fine print,” Ross says. “Some cards have extremely high interest rates and unreasonable fees and are looking to prey on people with low or no credit.” Also, make sure the card you pick is reported to all three credit bureaus, which will help you build good credit.
- Consider a gas credit card. Use a gas card to show creditors you are trustworthy by always paying your debts on time, Repak says. “At the end of each billing cycle, you will pay that balance off in full, and keep in mind that it is not true that you must keep a rolling balance to build your credit,” he says. One reason paying in full is important: The annual percentage rate on gas credit cards tends to be high.