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New Year, New Start for Your Credit Rating

New Year, New Start for Your Credit Rating

Thursday, January 12, 2023/Categories: Everyday Money Management

The New Year is traditionally a time for fresh starts and life-improving resolutions. It's also the time of year when money worries can be at their highest as the expenses of the holiday season appear on credit card bills. Put these two factors together, and the New Year is an ideal time to put your finances on a more solid footing. Cleaning up your credit rating is one of the best long-term ways to do this. Here's how to build a better credit score in eight simple steps.

1. Obtain Your Credit Reports
You're legally entitled to request a free copy of your credit report from each of the three major credit reference agencies, namely Experian, Equifax, and TransUnion, and this is the first step to take. Once you've received them, check all the entries carefully for any mistakes or inaccuracies. For example, check that all your personal details are correct, that your record doesn't contain entries relating to a similarly named family member, and that all the debts you've paid off are marked as cleared.

If you spot anything wrong, you can request that the mistaken entries are corrected, and the agencies must comply if you can show that you're in the right. This step is more important than you might think: even small errors can tip the balance for your credit rating, making it harder and more expensive to get finance of any kind.

2. Pay Off Small Debts
As you check your files, you might find you owe small amounts you were unaware of. For example, if you missed a small payment without realizing it, many companies simply enter the default into your file rather than going to the expense of chasing you to clear the debt. If you find any of these overlooked items, pay them off if you can, and contact the creditor to ensure your file is updated to show the debt has been satisfied.

3. Reorganize Your Debts
If you own several credit cards with very different balances, it can make sense to spread what you owe more evenly between them. The amount of each credit limit you've used is known as the account utilization, and the higher the figure, the worse the impact on your credit rating. Ideally, no single credit card should be at more than 30% of its credit limit, so evening out your utilization levels can be worthwhile. However, take care not to shift a large amount from a low-interest card to a more expensive one, or the credit rating improvements will be outweighed by the higher charges you'll incur.

4. Ask for a Credit Limit Increase
Another way of reducing your account utilization figure is simply to ask for a credit limit increase. You may or may not be successful, but it's worth asking if your standing with the card issuer is reasonably good.

5. Pay Early When Possible
Your utilization amount for each card is calculated over a full statement period, so the earlier you can pay your monthly bill, the more it'll reduce your utilization, and the better it'll be for your rating. Even paying a few days early each month can make a significant difference if your account utilization is relatively high.

6. Go Easy on New Credit Applications
While you're trying to improve your credit standing, it's important not to apply for too many new lines of credit. Every application you make adds a small but important negative score to your file, which can quickly add up if you receive a lot of rejections. Perhaps even worse, suddenly being approved for a large number of new credit lines will increase your credit risk by making it easier to get into serious debt problems.

Lastly, if at all possible, avoid applying for short-term loans and other forms of emergency credit. Having applications for these products on your file sends strong signals that your financial situation is less than ideal and can discourage mainstream lenders for years into the future.

7. Cancel Dormant Accounts
If you've not used a particular account for a year or two, and it's not carrying a balance, formally closing the account will help to reduce your overall credit availability, reducing the risks of you getting out of your depth financially. If in the future, you're making an important credit application, such as a mortgage refinance, your lower overall debt potential will be seen as a positive by lenders.

8. Build Some Positive File Entries
While it's important to keep your combined credit limit to a sensible level, if you're really struggling with credit rating problems, then opening a new card account aimed at bad credit customers can be a good idea. Every payment you make on these accounts will add a positive entry to your file, helping to offset historical black marks, and slowly but surely improving your score.

Unfortunately, there's no instant fix for credit rating problems. Nonetheless, each of these steps can make a small but useful difference, and when they're added together, you can expect to see a real improvement in your rating over time.