Build a Good Credit Score with These 5 Habits

October 11, 2023

KEY TAKEAWAYS

✔ Having a good credit score can help you get a lower interest rate on such things as installment loans and mortgages.

✔ Simple practices can build your credit score quickly and easily.

✔ When you pay and how much you pay are big factors in building your credit score.

A credit score is an important part of life because a good one will help you qualify for all kinds of credit, such as loans, mortgages and credit cards. A poor credit score could prevent you from being able to borrow money for the things you need.

The good news is that you are in control of your credit rating and you can do little things to make sure it stays strong and healthy. Make these five money habits part of your life to ensure you can always get access to credit at the best rate possible.

1. Pay more than the minimum

Paying off your credit card balance is ideal but not always realistic. When other expenses take priority, you may be tempted to pay only the minimum monthly balance. However, a much better habit is paying off more than the minimum, because:

Making only the minimum payment too often can lower your credit score.
The minimum payment will do almost nothing to help you pay off your debt over time.
Paying more than the minimum means you can pay less in interest charges next month.

2. Always pay on time

On-time payments are a great way to improve your credit score. Setting up automatic payments for recurring debts such as installment loans is a great habit because late payments can stay on your credit report for up to seven years.

Another good habit to make sure you pay on time is setting up automatic payments or creating a reminder such as a post-it note, or an alert on your phone.

3. Keep only as much credit as you need and have different types of credit

It’s a myth that the more credit cards you have, the better it looks on your credit score. In reality, having too many types of similar credit products puts you at risk of getting into debt. Most experts recommend only having one to two credit cards, because the type of credit you have is one of the five factors that affect your credit score. What will help build your score is having a variety of credit, such as a credit card, installment loan and mortgage.

4. Keep your balances low

Another factor that affects your credit score is how much of your available credit you use. It’s called the credit utilization ratio (CUR). Your CUR is the percentage you owe in revolving credit (credit cards, lines of credit) vs. total available credit and is one factor in determining your credit score. To determine your CUR, add the total amount of credit you can access (all cards, lines of credit, etc.) Now, subtract how much you owe right now. Divide what you owe by how much you have available and multiply by 100. For example, a card with a $1,000 limit and a $300 balance results in a 30% credit card utilization ratio. Experts say about 30% or lower is ideal.

5. Build a strong track record

The length of your credit history is important when it comes to your credit score because if you have a long track record of paying your debts on time, lenders are likely to see you as a good credit risk. So, if you have a credit card you’ve had for many years and think maybe you’d like to close it because you have another card, it’s probably better to keep the older one and close the new one instead.

Keep up with these simple practices and, before you know it, you’re well on your way to building a strong credit score! To learn more about things that affect your credit score, check out “Avoid These 5 Mistakes That Can Damage Your Credit Score”.