How To Improve Your Credit Standing

Whether you’re financing or refinancing a house or just want a new car or boat there’s always the question of credit: Will your credit score be good enough to get you through the application process?

A credit score is not a measure that can be quickly changed: if you want good credit in the future the time to take a new approach to money is now. Here are three ways that are sure to increase your credit standing and not cost a dollar extra: Scheduling, consolidation and tax planning.

Home Loans require an improved credit score

Will your credit score be good enough to get you through the home application process?

Scheduling

Everybody has bills. Whether your bills arise from student loans, car payments, credit card debt or whatever one thing they share in common is that a missed or late payment can damage your credit. The solution to is to adopt a pay-now payment plan. It works like this:

Pay each bill the day it’s received. Not a week later or just before the due date. The logic of this approach is that bills have to be paid. By waiting to the end of the payment period  bills are more likely to be late, and that’s something we want to avoid.

At first it can be difficult to schedule payments with delivery-date precision. To make this work you have to get a calendar and plan out bills and payments. Then start by paying one or two regular monthly bills when they come in. Next month add another debt to the project, and so on.

What’s the benefit of this approach? No late fees, no credit dings and — in time — a higher credit score.

Consolidation

Many of us have multiple accounts. There are savings accounts, checking accounts, mutual fund accounts, holiday savings accounts, and accounts scattered across different institutions in different places.

However, Promothesh Chatterjee at the University of Kansas School of Business says lots of little accounts can keep you from the promised land of timely payments.

“For years, the conventional wisdom has been that spreading your money across various accounts encourages you to save,” Chatterjee said. “Nowadays, the average American has multiple liquid accounts, typically a combination of checking and savings accounts. But our research finds this is the wrong strategy to encourage saving. We find that individuals are more likely to save if they have only one primary account, rather than many accounts.”

For vet and military family who may have moved several times and set up multiple accounts as a result, Chatterjee said if you can’t centralize accounts than the alternative approach is to central accounting.

“If you’re really opposed to consolidating, you can at least try to reduce the vagueness of having money across multiple accounts by utilizing software and services that provide a consolidated view of all of your accounts in one place,” Chatterjee said. “This type of aggregate reporting could help reduce vagueness and enhance savings.

“But the take-home message remains: Consolidating multiple accounts into one account will help encourage you to save your hard-earned money.”

A good way to follow Chatterjee’s advice is to have both a checking account and a savings account with the same institution. The checking account should have overdraft protection, a form of account insurance that might cost $25 a year.

Have all payments and deposits made into the checking account. Use checks and a debit card to make payments from the checking account. At the end of each month take excess money from the checking account and drop it into the savings account.

Tax Planning 

It’s possible to use the tax system to build up savings by reducing the number of dependents you claim. The result will be that either you have paid additional money into the system and owe less, or you will have paid too much and are owed a solid refund — cash you can stick in a savings account.

Traditionally, some have objected to claiming fewer dependents on the grounds that over-payments are really an interest-free loan to the government. Given today’s low interest rates taxpayers are not losing much by over-paying and in return they’re getting a type of forced savings.

The IRS reports that the typical refund for 2012 was $2,803. However, those who filed electronically got better results — the average direct deposit refund was $2,985.

In either case, a nice chunk of change — and perhaps a chunk that could be larger with fewer claims for dependents.

For details and specifics speak with a tax professional.

Photo courtesy 401(k)2013