Have you made a resolution this year to be one of those lucky people who qualify for a credit card for good credit? You know the advantages of such cards, which can include a lower interest rate that can significantly reduce the amount of money that you pay out over the year if you carry a balance each month. Those cards may also offer better rewards deals.
You’ll also benefit from the peace of mind that comes when you know that your finances—and your credit rating—are in good shape.
Here are five ways that you can improve your credit standing for 2014.
- Get caught up on any late payments—and get on a schedule so that you meet your payments on time each month. Making payments even a day or two late can cost you plenty in late fees and it doesn’t help your credit score either. (Wouldn’t it be better to put the money that you’re paying in late fees towards paying down your credit card debt?)
- Improve your debt to income ratio by reducing the amounts that you owe. Credit bureaus look at your debt to income ratio—the amount of money that you owe each month vs the amount that you bring in.
To figure your debt to income ratio add up your monthly payments for mortgage, vehicle loans, student loans and any minimum monthly payments that you must make on your credit cards. Divide that total by your monthly gross income (the amount you make before any taxes are taken out of your paycheck).
The number you come up with is your debt to income ratio. To qualify for the really good credit cards (and the best credit card rates) you’ll want to keep that debt to income ratio below 28 percent.
- Reduce your credit utilization rate. According to FICO, which is the standard credit score used in the U.S., your credit utilization rate is figured by dividing the outstanding balance of a credit card account by your credit limit on that account. So if you have a $5,000 limit on a particular credit card and your account balance is $1,000, your credit utilization rate is 20 percent.
According to FICO, the higher your utilization rate, the more likely you are to default on your credit payments in the future. So keep your credit utilization rate as low as you can. (But don’t stop using a credit card entirely—lenders like to see that you can use credit responsibly.)
Your credit utilization rate is figured both for your individual accounts and also for the total credit that you have available on all your credit cards.
- Do not close out credit card account, even if you’re not using those accounts. Closing a credit card account can actually harm your credit score because it can increase your credit utilization rate.
Suppose that you have three credit card accounts, each with a $5,000 credit limit, so the total credit available to you is $15,000. You owe a total of $4,000 on all three cards, giving you a credit utilization rate of about 26 percent.
Close one of those accounts, and the total credit available to you now goes down to $10,000. If you still owe $4,000, your credit utilization rate shoots up to 40 percent! That’s not going to help you qualify for lower-interest cards.
- Check your credit report to make sure that all the information is correct, and get any errors fixed. You’re entitled to a free credit report from each of the three major credit reporting bureaus (Equifax, TransUnion and Experian) once each year. (If you’ve been a victim of identity theft, you may also be eligible for additional free reports.) The better your credit score, the more likely you’ll qualify for credit cards that offer great terms for responsible credit users.