Resolution: Improve Your Credit Score

If one of your financial resolutions is to improve your credit score, you can make a lot of progress on building a better credit score in a year’s time. The key is to commit yourself to a few simple habits, take it one day at a time, and track your progress monthly.

Improve your credit score from poor to good

If your credit score is poor or average, there is only one way to improve your credit score. It isn’t easy, but it isn’t a secret. The way to improve your credit score is to pay your bills on time, get out of debt, and eliminate errors (if applicable). It’s hard work, and it takes time. There are no shortcuts.

In 2009, resolve to pay every bill on time. To make sure this happens, don’t take changes by paying your bills on their due date—pay them as soon as you receive them. And, use electronic bill pay whenever possible. Your check can never get lost in the email, and your financial institution maintains a record of the date you paid.

Next, do not apply for credit all year. Especially if you’re trying to build credit to buy a home or a car, do not apply for credit this year. No matter how tempting the offer, applying will hurt your credit score. Period.

Monitor your progress. For between $12-$15 a month you can sign up for credit monitoring that will give you monthly access to your score and credit report so you can see your progress. (Compare credit score monitoring offers here). I know from experience, that if you pay down your debts on time and do not apply for new credit, you should see your credit score go up by a few points every month.

Improve your credit score from good to excellent

If you already have good credit but want to get excellent credit, improving your credit score becomes more of a game. Contrary to common sense, paying your bills on time is enough to build good credit, but not to build excellent credit. To get an excellent credit score, you need to have just the right credit profile.

That means having two or three credit cards that have been open for many years, have high credit lines, and have balances of no more than 30% of your credit line. You’ll also need a few years of history of paying one or two installment loans like auto loans or student loans.

If you have more than a couple of credit cards, cancel the newest cards or the cards with the lowest credit lines. If you only have one card or a card with a low credit line, consider getting a new credit card. (The Discover More Card is a great one for improving a good credit score to excellent because it typically comes with a generous credit lines).

Of course, don’t use all of that credit line! Use a small amount—say 10% to 20%. Yes, that means you’ll have to pay interest on a balance. That’s because a good credit score tells lenders a customer is a good credit risk; they’ll likely repay the loan. But an excellent credit score tells people they’re a great credit risky (they’ll pay), but they will still be profitable. And credit card users that always pay their balances in full aren’t’ profitable. Sneaky, huh?

Or, you could just decide that good credit is good enough.