It's springtime. The chaos of the holidays is long gone, spring break is over, and summer hasn't arrived yet. Excuses are easy to come by when summer is in full-swing, so why not take advantage of this temporary lull and get your finances in order now? These six tips will help you get your finances organized and get your credit score cleaned up. (Credit companies rely on these factors to determine whether to lend to you and at what rate. Check out The 5 Biggest Factors That Affect Your Credit.)
TUTORIAL: What To Know About Credit Cards
1. Check Your Credit Report
Any time you're trying to improve your credit score, your first step should be to check your credit report. You can get one free report every 12 months from each of the three credit bureaus (Experian, Equifax and TransUnion) by going to AnnualCreditReport.com. Look closely at each account on your report to make sure that there are no mistakes dragging down your score. Also, make sure that you recognize all of the accounts on your report. Unfamiliar accounts could be a sign of identity theft, though often they are just old accounts that you've forgotten about or accounts for which you are an authorized user but not the primary account holder. Don't panic until you research them further.
2. Assess Your Credit Card Debt
If you don't know the details of your debt, you probably don't have an effective plan for paying it off. Make a list of all the cards that you carry a balance on, how much you owe on each, and what the interest rate is. This way, you'll know which accounts are costing you the most and you can plan to pay them off first.
If you've living off your credit cards because you're unemployed or underemployed, assess your available balances. Also note which cards have lower interest rates and use those for your purchases if possible.
If you added to your debt last Christmas, start thinking now about how you will avoid doing the same thing this year. May isn't too early to plan for the holidays - you still have time to gradually buy gifts over the course of the year, as you can afford them, or time to save up a holiday fund so you don't have to pay interest on 2011's gifts in 2012 and beyond. A Black Friday deal isn't a deal at 30% APR.
3. Improve Your Interest-Rate Situation
It may not be possible to qualify for a new card with a lower interest rate if you have poor credit, but it might be worth trying. If you do get approved, make sure you understand the balance transfer fees before moving your high-interest debt, and make sure you'll come out ahead even after the fees. Applying for new credit does temporarily ding your credit score, but the savings from lowering your interest rate can be substantial.
You can also try calling your creditors to negotiate a lower interest rate. If that doesn't work, see if you can at least get your card's annual fee waived (if it has one). Develop a strategy before you call because you'll need a way to convince your creditors that there's something in it for them if they give you a break.
4. Prioritize Your High-Interest Debt
Whichever card has the highest interest rate is the one you need to pay off first. Keep paying the minimum on your other cards (and pay on time), and put what you can afford toward your highest-interest balance. The sooner you knock out your high-interest debt, the more money you'll have to work with each month and the easier it will be to work your way through your remaining debts and contribute to your emergency fund.
5. Create a Bill Payment System
Thirty-five percent of your credit score is based on whether you pay your bills on time, so if you want to improve your credit score, getting on top of your due dates is a great place to start. Look at recent bills and add the due dates to your credit card list. Then, use an electronic calendar system like Outlook or an old-fashioned paper calendar to remind yourself of these due dates each and every month. A checking account with online bill pay can also help you get organized by allowing you to see and pay all of your bills in one place. Some online bill payment systems, like Ally Bank's, can be synched up with your other accounts to let you know how much you owe and when it's due.
In addition to hurting your credit score, late payments cost you money. If you avoided just one $30 late fee per month you would save $360 in a year. That's money you could put toward paying down your debt instead of adding to it.
TUTORIAL: Education Savings Account
6. Start Budgeting
If you know exactly how much money you have coming in and going out every month, not only are you likely to spend less because you will be holding yourself accountable for your spending, but you'll also know how much you can afford to put toward paying down your credit card debt each month.
The Bottom Line
In the process of improving your credit score, you'll also be improving your overall financial situation. So even if you don't plan to do anything that will require you have an attractive credit score (like open a new credit card account, take out an auto loan or apply for a mortgage), taking these actions will be worthwhile. (Can't get a credit card without a credit history, and can't get a history without a card? Break the catch-22. See How To Establish A Credit History.)