Excellent credit scores don't just happen. If you want access to the best financial deals and loan terms, you need to plan ahead to work toward a good credit rating. Here are 10 habits of people with outstanding credit:
1. Create a Spending Plan
People with high credit scores know how much income they have each month and where that money is going. They have a plan for their money so that they don't live beyond their means to the point where it's difficult to make payments and become overwhelmed. The first step to building a solid credit history is knowing where you stand and what you're doing with your money.
2. Pay Bills on Time
Payment history is the most important factor influencing your credit score. Missing a payment can be detrimental to your score. Even missing non-credit payments can impact your credit score since service providers might send your account to collections or report a delinquency. Those with good credit scores have a good overview of their finances and schedule their payments so that they aren't late.
3. Avoid Maxing Out Credit Cards
Those with the highest credit scores rarely max out their credit cards. Instead, they keep their use of available credit to a minimum. According to myFICO, the highest credit achievers only use 7% of their available credit. This item, called credit utilization, is the second-most important factor in your credit score.
4. Only Buy Items You Have the Cash For
In order to maintain low credit card balances, only purchase items you have the cash for. Many consumers like using credit cards for the rewards and the convenience, but you need to be careful. Save up the money ahead of time, make your purchase with the credit card and then pay off the balance as quickly as possible. You'll avoid interest and you'll avoid maxing out your credit cards.
5. Start Using Credit Early
Credit scores can only be calculated if you use credit. That means you need to begin borrowing at some point. According information from FICO, consumers with scores of 800 have an average account history length of 11 years. The oldest accounts are often at least 25 years old. While it might take you some time to work up to that point, the reality is that the earlier you start using credit, the higher your score will be down the road.
6. Use a Mix of Account Types
Credit cards are the easiest way to start building your credit history. However, you should also include installment loans in your credit mix. An installment loan has a set term that you pay regularly on, usually monthly. A small car loan or personal loan can help you maintain different types of credit, which can look good for your credit file.
7. Avoid Department Store Credit Cards and Fast Money Loans
When working on your credit score, stay away from department store credit cards. These cards have few benefits and usually come with low credit limits (impacting your credit utilization the moment you carry a balance) and high interest rates. Likewise, fast money loans, like pay day loans and car title loans, aren't viewed as favorably in many credit scoring models.
8. Only Apply for Credit When Necessary
Don't apply for credit unless you need it. Frequent credit applications in a short amount of time can reduce your credit score. Carefully consider what credit you need and be strategic about your applications.
9. Don't Get Bigger Loans Than You Need
It's tempting to take as much as a lender will give you, but this can be problematic later. People with high credit scores know that credit can be a tool when used wisely. Borrowing more than you need can lead to missed payments and overwhelming debt later. Look at where you stand and what is required and do no more than that.
10. Monitor Your Credit History
There is a chance that you are one of the 40 million Americans whose credit reports contain errors. The faulty information in your credit report can translate into a lower credit score. Regularly check your credit file so that you can fix errors in your report and avoid an unpleasant surprise when you apply for your next loan.
If you're interested in checking your credit score, you can get it for free with LendingTree's Free Credit Score.