5 steps to tackling your credit in 2016

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5 steps to tackling your credit in 2016

As 2015 winds down, you're probably thinking about resolutions you'd like to make for 2016. Maybe you'd like to move into a bigger and better house, or refinance your current mortgage to save some money. Or maybe you'd like to get a new job or upgrade to a new phone plan.

However, did you know that all of these dreams could be impacted by your credit health?

So maybe your goal for 2016 should be to get your credit in tip-top shape instead. After all, having great credit doesn't just come in handy when you want a new credit card. In addition to the aforementioned situations, it could also save you thousands of dollars of interest, as lenders often use your score to determine the rates you'll pay to borrow.

Ready to start working on improving your credit health? Start with these five easy steps.

1. Pull your credit reports.

According to the Consumer Financial Protection Bureau, fewer than one in five Americans check their credit reports in any given year. If you want to begin tackling your credit, your starting point should be your credit report. Your reports are used to calculate your credit score, so it's important to monitor your reports regularly and ensure that they're up-to-date and accurate.

If you're a Credit Karma member, you can get free credit monitoring of your TransUnion and Equifax credit reports, meaning we'll alert you after significant changes are made.

2. Dispute major errors.

Don't shy away from all of the numbers and data on your reports -- you'll want to scrutinize everything carefully and fight any major errors you find. You can check out this sample credit report to learn what to look for and how to spot red flags.

After you've pulled your credit report(s) and scrutinized them for errors, the dispute process is fairly simple -- you can typically send a letter, marked-up credit report and proof supporting your dispute to the bureau(s) reporting the error. The bureaus are generally required to investigate the dispute and respond within 30 days.

If you spot an account error on your TransUnion credit report, filing a dispute is even easier with Credit Karma's Direct Dispute™ tool. Just log into your Credit Karma account, select the account and your reason for disputing the error, and we'll send your request to TransUnion for its review.

3. Identify the factors on your report that need work.

The work doesn't stop after getting errors removed from your report. Now it's time to look at it again... this time to see what you can improve upon. Don't forget: your credit score is typically based on the following factors:

  • Percentage of on-time payments. Since credit scores are meant to indicate how likely you are to make future payments on time, this factor is typically very important. In fact, just one late payment could significantly damage your score.
  • Credit card utilization. To calculate your utilization rate, divide your total credit card balances by your total limits. In general, it's best to keep this percentage as low as you can -- under 30 percent is typically a good rule of thumb.
  • Number of derogatory marks. Derogatory marks include negative records such as bankruptcies, foreclosures, accounts in collections, tax liens and civil judgments. These could severely damage your score, as they may indicate you've had trouble managing credit in the past.
  • Average age of open credit lines. This factor averages the ages of your open credit cards, mortgages, auto loans, student loans and other lines of credit on your report. Lenders like to see a lengthy and well-managed credit history.
  • Total number of accounts. A higher number of open credit accounts could impress future lenders, as it shows that others have trusted you with credit.
  • Total hard credit inquiries. Hard inquiries typically occur when a potential lender checks your score to make a lending decision. A multitude of hard inquiries on your report may send a red flag to potential creditors that you're desperate for credit or aren't able to get approved for other lines of credit.

4. Put together a specific game plan.

Once you know which aspects of your credit need work, it's time to come up with ways to improve those areas.

For example, if your percentage of on-time payments is less-than-perfect, question why this is the case and figure out how to solve the issue. If remembering to make payments is the problem, consider enrolling in auto-pay or setting up a monthly text or email alert. If a lack of money is the issue, look into other ways to you can make money or closely track everything you purchase and see where you can cut back.

If your utilization rate needs work, consider making payments more than once a month, asking your lenders for a limit increase or swiping your cards less often.

5. Execute (and wait).

Now comes the hard part -- carrying out your plan!

As with any other goal, you may be more likely to succeed if you find someone to keep you accountable. Find a friend who also wants to work on his or her credit and set up a system where you check up on each other regularly.

It's also important to keep in mind that improving your credit health can take a lot of time and patience. As your credit score is based on so many factors, it can fluctuate despite your best efforts to improve it. In addition, factors such as your average age of accounts depend on time passing to improve.

So don't be discouraged -- keep working toward your goals, and your credit health may eventually improve. Good luck and have a happy new year!

About the author: Jenna Lee is Credit Karma's Copy Editor. Although her specialty lies in creating witty post-it notes, she also enjoys sharing all the financial information she's learned since joining Credit Karma in February 2012. When she's not working, you can probably find her trying out a new dessert recipe or learning/perfecting any musical instrument she can get her hands on. Say "hi" @leejennaa!

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