The new year is a time for a fresh start and new possibilities, but it’s also a time for overly optimistic New Year’s resolutions. Let’s be honest — it was probably a bit much to vow to run a marathon if 26.2 seconds of jogging leaves you winded.
But improving your credit situation in 2015 is a plan worth keeping. Here are three credit-related resolutions and the Nerds’ advice on how to stay on track.
Resolution No. 1: Pay off your credit card debt
If you vowed to pay off your credit card debt this year but haven’t made much headway, there’s plenty of time to pay your balance down once and for all. Some planning suggestions:
- Pay your balance off by the end of the year: If you want to pay off your credit card debt before 2016, here’s a simple hack: Each month, divide your balance by the number of months remaining in the year. You can also do this for shorter- and longer-term goals. Want to pay off your debt in six months? Pay one-sixth of the balance today. Or if you want to pay off a very large balance in five years, divide it by 60 to come up with a manageable monthly payment.
- Pay off your balance ASAP with budgeting: If you want to pay off your credit card as soon as possible, create a budget for your needs (and a few select wants), then funnel the rest of your income into credit card payments. If you find your budget is tight, increase your income and/or reduce your expenses.
- Pay down your balance in chunks with windfalls: As the year progresses, you might get cash gifts, a tax refund, rebates, a returned security deposit or other cash influxes. Apply such windfalls toward your credit card debt.
Regardless of your timeline, it’s key to start paying off your debt today. Credit card debt is a particularly expensive method of financing, and you should aim to never carry a balance again. This brings us to our next credit resolution.
Resolution No. 2: Stop carrying a balance on your credit cards
If you resolved to pay off your credit card in full each month and then woke up Jan. 1 to a large, over-budget bar tab, all is not lost. Today’s the day to start paying off your balance in full.
First, determine how much you can afford to pay off each month. For example, if you use your credit cards for groceries and gas, ask yourself how much cash you actually have to pay for these things. If you don’t have the cash to pay off your credit card by the due date, tweak your budget and start spending more appropriately for your income level. Otherwise, you’re paying interest on your daily purchases.
Reduce interest now by making multiple payments before the due date if possible. Credit card interest is calculated not on the end balance, but on the average daily balance. Bring this amount down by making payments early and often until you can pay off your balance monthly.
Resolution No. 3: Improve your credit score
If your credit score isn’t as high as it should be, you have most of 2015 left to improve it. Some tips:
- Pay your bills on time, all the time. Payment history is the biggest influencer of your credit score. Don’t miss a payment for the rest of the year.
- Stay well below your credit limit. Your debt balances should be low — under 30% — compared to your credit card limits. And remember, your balances may be reported mid-billing-cycle, so you’ll want to keep them low at all times.
- Avoid applying for too many credit accounts. Applying for new credit triggers a new credit penalty and lowers your length of credit history. Avoid getting too many new credit accounts, especially in a short period of time, by doing your research on the best credit card for you before submitting an application.
- Check your credit reports. Credit reporting agencies aren’t perfect, so you need to be your own advocate. Pull all three of your credit reports each year (don’t worry; it’s free!) and check them for errors. If you find errors, dispute them so they stop dragging down your credit score.
These four tips will help raise your credit score from good to great (or poor to great), but you have to be patient. Time can heal all credit wounds, but only if you’re doing your part to prove financial responsibility.
Bottom line: If you’ve slipped up on any of your credit goals for 2015, don’t wait until January 2016 to start over. Whether you resolved to pay off your credit card debt, stop carrying a balance or improve your credit score, today’s the day to start being smart with credit so Future You can reap the benefits.