5 Goals to Help Your Credit in the New Year
, by Tom Quinn
As a new year starts, many of us will take stock of how the last year went... things like our accomplishments as well as challenges, and determine a set of new resolutions for the coming year. Some of the more common resolutions range from sticking to an exercise regime to spending less time on your phone to volunteering more.
Unfortunately, making resolutions is much easier than following through on them! According to Forbes, studies indicate less than 25% of us keep our resolutions after 30 days and just 8% accomplish them1. One hypothesis for this result is that resolutions tend to be aspirational while setting a specific goal is more actionable. For example, a goal of losing 25 pounds this year is more targeted than a resolution to simply lose weight.
Getting your financial health in order is another common area of focus for many people. As FICO® Scores play such an important part of your financial health, here are 5 areas of focus with possible targeted goals you should consider if you're one of the many who are determined to increase your FICO Scores in 2020.
Goal # 1 - Check Your Credit Reports
In the U.S. there are three main credit bureaus (Equifax, Experian and TransUnion) that house and maintain credit reports on hundreds of millions of U.S. individuals. They collect information about credit-related activities such as your credit obligations, credit-related public records, credit inquiries and collection activity that is used to calculate your FICO Scores. Lenders will typically pull an individual's credit report and FICO Scores, whenever a person is seeking new credit and a lender, will use this information to help in their credit granting evaluation.
As such, it's very important to periodically check your credit reports to ensure the data is being accurately reported. The easiest way to do this is to visit www.annualcreditreport.com and get access to your credit reports. The site enables all U.S. consumers to access their credit reports annually at no charge . Once you access your reports, evaluate them carefully for reporting errors and follow the dispute resolution instructions should you find inaccurately reported information. The credit reporting agency has 30 days to investigate and resolve the dispute.
Set a goal to check your credit reports within the first 3 months of the year.
Goal # 2 - Access Your FICO Scores
Once you have determined that your credit reports are error-free, you can turn your attention towards your FICO Scores. FICO Scores are used in more than 90% of lending decisions, so chances are high that the lender is also requesting a FICO Score when accessing your credit report. Having a higher FICO Score can make access to credit easier and more affordable.
For example, assume you are trying to purchase a home and need to get a $270,000 30-year mortgage loan, and your FICO Score is 652. Based on the interest rate by FICO Score ranges in the table below, you can see how interest rates (and monthly payment amount) decrease as scores increase.
| FICO Score | APR | Monthly Payment | Total Interest Paid |
| 760-850 | 3.372% | $1,193 | $159,556 |
| 700-759 | 3.594% | $1,227 | $171,588 |
| 680-699 | 3.771% | $1,254 | $181,307 |
| 660-679 | 3.985% | $1,237 | $193,208 |
| 640-659 | 4.415% | $1,354 | $217,611 |
| 620-639 | 4.961% | $1,443 | $249,476 |
Source: /credit-education/calculators/loan-savings-calculator/
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At a FICO Score of 652, the interest rate would be 4.415% with a monthly payment of $1,354.
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If the score could be increased to the low 700s, for example, the monthly payment amount could be reduced by $127 - equating to nearly $46,000 in interest over the life of the loan!
To get started, you can access your FICO Scores in a variety of places. Hundreds of card issuers and lenders provide their customers with free access to their FICO Score and educational content within their online account statements. FICO Scores, the underlying credit reports, and a deeper explanation can also be obtained at Experian.com and MyFICO.com (fees may apply).
Remember, FICO Scores are dynamic - moving up or down as the underlying information in your credit report changes. How frequently your scores change and by how much depends on several factors, including the overall composition of your credit profile, in addition to what new underlying reported information is being considered by the scores
Set a goal to access your FICO Scores within 1 month from completing Goal #1.
Goal # 3 - Pay All Your Bills on Time
Paying your credit obligations on time is the most heavily weighted credit behavior within FICO Scores (accounts for 35% of your score). If you have no reported missed payments - good job and keep it up!
If you have missed payments, collections or derogatory public records (such as a bankruptcy) they are negatively impacting your scores. The good news is that FICO Scores are forgiving and as these negative items age off your credit report they have less impact on your scores.
Set a goal to get current on all bills within the next month and create bill pay reminders going forward to help you pay on time. Track your score movement as your file (and negative information) ages.
Goal # 4 - Reduce Your Credit Debt
As a whole, American consumers carry a lot of debt. In fact, credit card debt has increased by more than 5% in the past year with NerdWallet2 reporting balances carried from one month to the next hit $443.96 billion in September 2019. They further reported that the average U.S. household with revolving credit card debt has an estimated balance of $6,849, costing an average of $1,162 in annual interest.
By any measure that's a lot of debt, but not all debt is the same in terms of its impact on your financial health. Taking on debt to buy a home may actually help you accumulate wealth over the long run if that property appreciates in value as you pay off the mortgage. From a FICO Score perspective, revolving debt (like credit cards) tends to be more heavily weighted in the score.
If you are carrying debt, evaluate how much you have, figure out the type of debt you are carrying and determine if you can allocate any extra funds to reduce that debt. Generally speaking, reducing your revolving debt may have a bigger impact on increasing your score.
Set a goal to reduce your credit card balances by an extra $100 dollars each month. From a scoring perspective, focus on paying off credit cards with smaller dollar balances first to reduce the number of credit cards with balances. Note, don't close any credit card accounts - that action won't help your score.
Goal # 5 - Only Apply for Credit When Needed
You should think twice before applying for new credit. The perks often given to entice you to apply for new credit (such as a 10% discount on that day's purchases) may be a very short-sighted benefit. The act of seeking and obtaining new credit can negatively impact your FICO Scores in several ways. First, the lender will most likely pull a credit report when you apply that is coded as a hard inquiry (meaning it can be considered by a FICO Score) which can reduce a score by several or more points.
If approved, the newly opened credit account will be reported to the credit bureaus which can negatively impact the length of credit history characteristics such as your average age of accounts. Having a shorter average age of accounts is generally riskier and can result in a loss of points.
Set a goal to not apply for new credit until you reach your target FICO Score.
Be sure to monitor and track progress on your 2020 goals as you focus on increasing your FICO Scores over time. Good luck on your journey to better managing your financial health, and best wishes for a healthy, happy and prosperous 2020!
1https://www.forbes.com/sites/ashiraprossack1/2018/12/31/goals-not-resolutions/#5fa1fad23879
2https://www.nerdwallet.com/blog/average-credit-card-debt-household/
Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.
