Starting from Scratch: How to Build Credit – Part 4

Healthy Credit Habits

By GreenPath Financial Wellness

It is imperative that once you get access to credit, you practice healthy credit habits to ensure you are building POSITIVE credit history. Before we wrap up today, here are some important tips on healthy credit habits to practice whether you are starting from scratch or working to re-build positive credit.

Tips to build positive credit history:

• Make every payment on time every month. Payment history is the largest factor that impacts your credit score. Missing or being late on just one payment can have a quick negative impact on your credit score, and it will take a while to build back from the drop. This is why it is so important to make every payment on time every month. If you are concerned about keeping track of due dates, I absolutely recommend setting up automatic payments, so you make sure your bills are paid on time every month.
• Keep credit card balances low. We also mentioned credit utilization, or where you credit card balance is compared to the maximum limit, is the second largest factor that impacts your credit score. Strive to always keep you balance below 30% of the card’s maximum limit, and if you can keep it below 10%. Ideally pay the card off in full every month. Pick one specific small, budgeted expense to use your card for every month. Something like gas for your car, or a subscription service like Netflix. Use that card just for that purpose, keeping the balance low, and then pay the full balance off when you get your statement for the month. This is a great way to build positive payment history while keeping a low balance and avoiding interest if you pay the full statement balance off monthly.

• Don’t apply for new credit unless you need it. Of course, most of us are going to need to apply for credit from time to time, which is understood. Be sure to be strategic when you do, however, instead of frequently applying for accounts you do not need, which can negatively impact your score.  If you do want to shop around for the best rates on something like a mortgage, get all your ducks in a row and apply with multiple lenders in a short time period to have it count as one hard inquiry instead of multiple. This allows you the opportunity to shop around for the best deal without having more impact to your credit score.

• Don’t ignore bills (even if you don’t think you should owe it). Collections can stay on your credit report for up to 7 years and can have a quick negative impact on your credit score. Collection accounts can include everything from car insurance, cell phones, cable equipment that wasn’t returned, medical bills, rental leases broken early, and more sent to collections and weigh heavily on someone’s credit. Some people ignore collection accounts because they think they should not be on there because the bill was paid, or it was an error. Taking care of this as soon as you get a past due bill or a notice is so, so important – ignoring it because you don’t think it’s legitimate typically won’t make it magically go away but CAN make it much harder to take care of later.

• Review your credit reports annually. Review your credit reports from AnnualCreditReport.com annually to ensure everything looks correct and that you are aware of everything that is on there. Checking your own credit report and/or score does not impact your credit score – reviewing it for educational and monitoring purposes is different from a hard inquiry (which could impact your score). It is important to know credit scores are NOT on your free credit report. You may be familiar with some of the online tools like Credit Karma that offer free credit scores. While these can give you a rough idea of where your score may be at, it is important to take the score provided with a grain of salt as it is typically not the most accurate, up to date information. If you were to go to a credit union or bank and apply for credit, there is a good chance the score they pull will be different than what you see on Credit Karma. Your financial institution or creditor may have a free credit score monitoring tool available within your account – check with them to see. 

• Make every payment on time every month. And finally, did we mention making every payment on time every month? This is worth repeating, because it really makes a HUGE difference when it comes to your credit.

We hope you have a better understanding of what credit is, how it can impact you, and ways to strategically and responsibly build positive credit history.

This article is shared by our partners at GreenPath Financial Wellness, a trusted national non-profit.