Decreasing Credit Card Balances and Paying Bills on Time Can Improve a Credit Score

Starting things off on the right foot can set a precedent for the rest of the year. This is equally important when it comes to finances and credit. Experts believe maintaining a good credit score and staying on track with your finances can be a great way to do this.

We had a conversation with one of these experts in order to determine what the best credit resolutions are for 2014.

Randy Padawer leads consumer advocacy strategy for Lexington Law Firm. Padawer has a Ph.D. in clinical psychology and his research interests range from personality testing to consumer credit. He has been featured in publications as diverse as the Journal of Personality Assessment, the Journal of Consulting and Clinical Psychology, and Smart Money Magazine.

Q: What were the biggest credit and finance trends you saw in 2013?

A: Perhaps the most significant credit-related trends noted by many consumer advocates during the past year underscored an emerging economic recovery. For example, even though auto financing reached a five-year high in 2013, Equifax, one of the three major credit bureaus, reported that delinquencies for such loans had decreased by 11 percent year over year. Consumers seem to be qualifying for more credit generally, and they are apparently handling their accounts more responsibly.

Q: What tends to worry consumers most about their finances or credit?

A: Consumers continue to worry about their credit scores which took a serious hit during the recent economic recession. Average scores in the United States tumbled from 720 to 705 during that period. The reason has to do with the fact that negative items can be reported to the credit bureaus for a maximum of seven years and ten years for bankruptcy-related listings. Even when negative credit reporting unfairly resulted from predatory lending practices that defined so much of the recent consumer credit landscape, their residual impact continues to linger. Effective, ethical credit repair in such cases requires a substantive understanding of applicable consumer protection laws and targeted interactions with creditors and other data furnishers.

Q: What are some of the most effective things people can do to improve their credit and finances in 2014?

A: The basics still apply. In that regard, remember that credit cards are simply licenses to borrow money that eventually must be repaid and with relatively high interest rates in tow. Supercharge your credit score by paying your bills on time and by keeping credit card balances as low as possible. Be careful about how you share personal information online, buy a good computer virus protection package, and enroll in ongoing credit monitoring with one of the three national credit bureaus.

Q: What common financial resolutions do consumers make that tend not to help improve the state of their credit or finances?

A: Perhaps the worst New Year's resolution one can make with respect to consumer credit is this one: "This year, I'm going to close all my unused credit card accounts." While that may sound like the most sensible and conservative way to proceed, the fact is that this seemingly responsible act can tank your credit score. One of the most significant scoring factors is what's termed the utilization ratio – your outstanding credit card debt divided by your summed lines of credit. When you close unused accounts, you lower the amount of credit that isn't used, your calculated utilization ratio increases and your credit score nosedives.

Q: Once consumers have made their finance and credit resolutions, what is the best way they can stick to them?

A: It's far easier to stay on track if you make a firm personal commitment to responsible money management. Along those lines, never confuse a credit card's line of credit with unspent money awaiting your indulgence. And if you do become financially stretched, don't make the mistake of trying to borrow yourself out of trouble. You won't extract yourself from the ditch by digging it deeper.