For those of us with big financial plans or New Year’s resolutions, like buying a house or a new car, having our credit scores can play a huge role in getting what we want. But more credit is easier said than done. What are some steps you can take? Experts share five ways to build and protect credit in 2023: Pay off holiday debt, apply for new credit sparingly, increase your credit limit, report your rent and utility bills, and regularly check your credit reports for errors.
You have big financial plans for 2023. Perhaps they include buying a house or car, or getting a new travel rewards credit card to help pay for your next trip. There is an essential part of these plans that you may not have considered: building your credit score.
Having a better credit score can expand your access to credit and make borrowing more affordable. For example, a score of 700 against a 650 might 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 some of the ways experts suggest increasing credit in the new year.
1. Pay off holiday debt
When the holiday celebrations are over, you might be stuck with leftover debt from buying food, travel, and gifts (in addition to regular bills, of course).
If missed payments aren’t made or large balances are carried forward 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 use compared to your limit) are the two biggest factors that affect your credit score.
So make a plan to pay off your vacation 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, financial wellness expert at GreenPath, a nonprofit credit counseling agency based in Farmington Hills, Michigan.
“If you’re only paying the minimum, unfortunately, it’s going to take longer to pay off the debt. Interest rates have gone up, so paying the minimum is not a recipe for success,” says Arevalo. He adds that knowing your budget lets you know if you’re in a position to make more than the minimum payments on your debt. Maybe you earned an extra paycheck in December or a holiday bonus that you can put towards paying down debt.
One strategy to consider is to pay over the minimum on recently opened accounts first, says Todd Christensen, director of education for Money Fit, a nonprofit debt relief service based in Boise, Idaho. Christensen says this strategy, which he refers to as a “debt landslide,” can build credit because FICO scores and VantageScore give more weight to activities on new and recently used accounts.
“Paying off balances on new accounts will help build credit faster than paying off 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 from now on.
2. Don’t apply for credit too often
Applying for new credit too many times in a short period can raise a red flag and negatively affect your score. With each application, you will get a tricky question about your balance that may cause your score to drop a few points.
“If I’m applying for a credit card once or twice a month, it kind of gives me hopelessness,” says Kate Melitz, a certified financial counselor in Olympia, Washington. “Despair is not a good look at credit.”
Lenders who view you as a risk may reject your application or offer less desirable terms, such as higher interest rates. Think carefully before applying, especially if you plan to make a credit-related decision — such as applying for a mortgage — within the next few months.
3. Raise your credit limit
Ask the issuers to increase your credit limits on existing accounts. Higher limits will reduce your usage, as long as your spending does not increase. To build your score, experts recommend keeping your usage below 30% of your limit.
4. Make rent and utility payments count
Not all credit scoring forms count rent or utility payments in your score because that information usually isn’t in your reports. But if you lack a credit history, there are services you can use to report payments on time and build credit. Some rental reporting services, such as Piñata, are free. Others may charge you or the landlord.
“The thing to watch is the 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 payments for rent, utilities, and streaming services made from your connected bank accounts.
5. Check your credit reports
Credit reports are records of your credit history. Staying on top of your reports is crucial because registered companies use information about them to create your score. If there’s an error on a report that lowers your score, such as a late payment report that you actually paid on time, take quick action to dispute the error with the relevant credit bureau.
“Some people worry that the report is kind of long, and there are a lot of acronyms and things like that. But like anything in life, I think it’s not as scary once you kind of get used to it,” says Arevalo.
Make checking your credit reports a regular habit. AnnualCreditReport.com offers free weekly reports through the end of 2023.
Lauren Schwann is a writer for NerdWallet. Email: lschwahn@nerdwallet.com. Twitter: @lauren_schwahn.