8 Healthy Credit Habits You Need to Start Practicing Today
Like so many other worthwhile goals in life, building a good credit history takes time. The secrets to long-term credit success are not sudden heroics but daily decisions and healthy credit habits made over time.
None of the following credit habits are complicated. In fact, most of them should make your life simpler. Start practicing them today, and you should see results before long.
- Give yourself credit
- Keep balances low
- Make bill paying easier
- Maintain enough — but not too many — open credit accounts
- Be loyal to your oldest credit accounts
- Consider your mix of credit
- Check your credit history regularly
- Beware of new and unnecessary debt
Give yourself credit
“Having no credit is as bad as having bad credit,” said Deborah McNaughton, author of “The Get Out of Debt Kit: Your Roadmap to Total Financial Freedom,” and host of “The Money Manager Show” on KKLA in Los Angeles. It’s crucial that you build credit, and that you do so under your own name.
If you have little or no credit history, and you need to build credit immediately, starting in early 2019, you will be able to request an alternative credit score through FICO based on your record of responsibly managing your bank accounts.
Paying bills using someone else’s account won’t help. Unless you’re an authorized user on the account, the payment history won’t appear on your credit report — even if your spouse is the account holder.
You should at least be an authorized user on any accounts you use regularly and that you are sure are in good standing. Better yet, open a credit account in your own name, and start building your own credit history and score.
Keep balances low
The less you owe when your banks report to the credit bureau, the better. The credit scoring model compares your total consumer debt (which could be the amount you owe at any point during the billing cycle) to your available credit. The result is your credit utilization ratio.
Thirty percent of your FICO Score is based on amounts owed, and credit utilization is a big part of that. For example, if you have $10,000 in available credit, and your consumer debt is $7,000, you are using 70% of your available credit. For purposes of the credit utilization ratio, it doesn’t matter if the $7,000 has been there for two weeks or two years. It’s all the same. Most credit experts recommend keeping your ratio below 30%.
Make bill paying easier
One missed payment, 30 days or more overdue, can dramatically lower an otherwise pristine credit score. After the damage is done, there’s not much you can do but wait for the negative mark to fade farther into the past.
To avoid missing payments, consider making bill paying easier. Here’s how:
- Set up automatic payments. You can set up payments of a set minimum amount, and then pay any additional amounts as needed. Or you can create an automatic payment of your entire balance every month, up to a limit you set.
- Keep all your bills in one place. If you still receive paper bills, have one handy place where you keep them and nothing else. If you get bills by email, be sure to flag or otherwise mark them before they’ve disappeared into your mailbox.
- Simplify your financial life. The fewer bills you have to pay, the less time it takes to pay them — and the less likely it is that something may go wrong.
Maintain enough — but not too many — open credit accounts
There’s no set perfect number of credit cards and other accounts to have open to maximize your credit score.
“You need at least two or three credit cards, plus other types of credit, to establish a credit score,” said McNaughton. “The key is, you have the credit cards, but keep the balances at least below 30% of your available credit.”
More accounts can hurt your credit score, especially if you keep balances on all of them. “I would say three or four cards is a healthy number,” said McNaughton. “If you have several, that’s OK. Just make sure the balances of some are zero.”
Maintaining fewer cards with balances doesn’t just improve your credit score directly. It also greatly simplifies keeping track of your spending, balances and due dates, making it less likely that you will miss a payment.
Be loyal to your oldest credit accounts
Getting a new credit card can sometimes be a great idea. New cards increase your total credit limit and may have better rates. And then there are credit card rewards!
However, old credit card accounts, like old friends, should not be forgotten. Fifteen percent of your FICO Score is based on your length of credit history, and holding accounts longer is better. (This portion of your credit score is a primary reason you can’t build a perfect credit score instantly.) Too much bouncing from one new account to another could hurt your score.
Consider your mix of credit
Credit-scoring models view you more favorably when you have different types of credit rather than just, say, a lot of credit card accounts. Your credit mix accounts for 10% of your FICO Score.
A good mix of credit might be a credit card or two, a mortgage and an installment loan, such as a loan for a car or furniture.
Check your credit history regularly
Checking your credit history can help you catch reporting mistakes, find identity theft fraud early and know what potential creditors see when they check your report. You can get your free credit reports once a year at AnnualCreditReport.com.
Beware of new and unnecessary debt
In the enthusiasm over building credit, it may seem like a good idea to spend money just to prove you can pay it off. That’s counterproductive and unnecessary. You can have a high credit score without going into debt or buying things you wouldn’t have purchased otherwise.
It’s important to learn about how credit scores are calculated and the effect credit decisions make on your score. However, remember that if you take excellent care of your total financial life, your credit will, for the most part, take care of itself.