8 Habits to Adopt to Build Good Credit
The scariest part of change can be the unknown. But sometimes the known, as in continuing with the same behaviors that aren’t achieving the desired results, can be even scarier.
Take your credit. If a good credit score is important to you but seems to consistently elude you, it may be time to alter or abandon some of the habits and behaviors keeping it at bay and adopt new ones.
Here are eight habits you may want to adopt to help improve your credit score:
1. Pay Your Bills On Time (Or Even Early)
Make this a habit you never consider quitting. And resolve to do it consistently, because payment history comprises 35% of your FICO© Score and 28% of your VantageScore©, the two primary credit-scoring models.
Paying your bills on time is important for a healthy credit score, but making payments on credit cards early can help your credit score by reducing the outstanding balances that get reported to the credit bureaus by credit card companies. A smaller reported balance helps to reduce your credit utilization ratio, which can subsequently increase your credit score…and segues nicely into Habit #2.
2. Mind Your Credit Utilization Ratio (CUR)
Your CUR is a ratio that expresses how much of your available credit you’re actually using. It is calculated via the following mathematical formula:
Sum of Your Revolving Credit Outstanding Balances ÷ Sum of Your Total Available Revolving Credit
To potential creditors, a higher CUR can indicate that you may be overextended and you’re using more of your available credit than they’re comfortable with. A lower CUR, on the other hand, sends a message that you’re managing your credit responsibly, which makes you more attractive to potential lenders. CUR determines 30% of your FICO© Score and 23% of your VantageScore©, so it pays to pay attention to it.
Many experts recommend that this ratio be kept at 30% or less. The lower it is, the better it can be for your credit score.
3. Pay Down Your Debt
Getting into the habit of paying down what you owe to creditors is important because it can reduce your CUR. That’s because the less you owe in relation to how much total credit you have, the lower this ratio will be, which can raise your credit score. Paying down debts will also help reduce the amount of interest you’re paying on them. This won’t affect your credit score, but it will save you money.
4. Stay On Top Of Your Credit Reports
Knowledge is power, and knowing what’s in your credit reports gives you the power to make sure you’re not taking a credit‐score hit because of incorrect information. Your credit score is derived from the information contained in your credit reports, so if that information is erroneous and portraying you as a higher credit risk than you actually are, your credit score could be lower than it should be.
Luckily, you can easily check all three of your credit reports—and for free! By law, you’re entitled to a free copy of each of your three credit reports every year. To get yours, all you have to do is visit AnnualCreditReport.com and follow the online instructions. Then you’re going to want to go through each report and identify any information that looks fraudulent or incorrect.
Once you’ve identified any errors, you’ll want to contact the credit bureau and initiate a dispute. There’s information on each of the three credit bureaus’ websites on how to do this. This infographic also provides highlights of the dispute process.
5. Use Multiple Types of Credit
Your “credit mix” plays a role in determining both of your major credit scores. Having a good mix means having different types of credit. So, in addition to having revolving credit, such as credit cards, it helps your credit score to have installment accounts as well, such as a mortgage or auto loan.
Making steady on‐time payments to both account types shows potential creditors that you know how to handle an assortment of credit responsibly.
6. Apply for Credit Sparingly
When you apply for credit, most creditors do a “hard inquiry” to your credit reports, which can lower your credit score by a few points. And these hard inquiries stay on your credit report for up to two years.
So, if you’ve worked hard to get your credit score into a desired range, you may want to be careful about using your new higher credit score to open too many new accounts. Doing so typically lowers your credit score up to five points or so at a time.
7. Keep Older Accounts Open
It’s also a good idea not to close older credit accounts, even if you’re not using them much anymore. This is because the length of your credit history counts for up to 15% of your credit score. If you close an account, particularly an older one, it drops off of your credit reports and is no longer a factor in determining the age of your accounts.
It can be better to leave these older accounts open rather than closing them, in order to let them contribute to your credit score calculation. In fact, you may want to occasionally make a small purchase on a credit card you don’t use very often—and then pay the balance in full—just to make sure it doesn’t get closed by the card‐issuer for nonuse.
8. Take Advantage of Technology
Using the latest technology won’t directly raise your credit score, but it could give it a boost indirectly. Setting up text or email alerts to notify you when a credit card payment is due, for example, should decrease the likelihood of you missing a credit‐score‐lowering payment. Many lenders also allow you to set up automatic payments, or you may be able to auto‐pay your bills directly through your bank.
Banking and credit card mobile apps are also great for managing your accounts virtually any time or anywhere you get wireless service or cell phone reception, which can also help you get payments in on time. Many also offer services such as free credit scores or even credit score monitoring, which help you to stay on top of your credit.
Adopting these habits won’t guarantee you the credit score of your dreams, but you should see some improvement if you’re diligent and not just dabbling in them. And you’ve got nothing to lose—except a credit score you’re less than thrilled with—by trying.