Your past two years of credit activity make up more than 70% of your current credit score. While building and improving your credit in a shorter timeframe is possible, it takes about 24 months of good decision-making before you see big changes.
Here are some good credit habits to adopt during that time:
BUILD A BUDGET
Why It Matters: Creating and sticking to a budget helps you manage your finances more effectively and ensure you can meet your financial obligations without overextending yourself.
How to Do It: Set financial goals, track your income and expenses, categorize your spending, and review your budget regularly to adjust as needed.
PAY BILLS ON TIME
Why It Matters: Consistently paying all your bills on time is one of the best ways to maintain good credit. Payment history is the most significant factor in your credit score, accounting for 35%.
How to Do It: Set up reminders or automatic payments to avoid missing payments. Paying the full balance is ideal, but aim to pay at least the minimum due each month.
KEEP YOUR SPENDING IN CHECK
Why It Matters: Keeping your credit utilization ratio low helps you maintain a healthy credit score. A lower utilization ratio indicates responsible credit use.
How to Do It: Aim to use less than 30% of your available credit. If possible, pay off balances in full each month and avoid carrying high balances on your credit cards.
DIVERSIFY YOUR CREDIT MIX
Why It Matters: Having various types of credit (credit cards, installment loans) can positively impact your credit score.
How to Do It: Aim for a mix of different types of credit. For example, a small personal loan can add diversity to your credit profile if you only have credit cards. Demonstrate your ability to handle credit effectively by managing each account responsibly.
AVOID APPLYING FOR MULITIPLE LINES OF CREDIT TOO QUICKLY
Why It Matters: Excessively shopping for credit can negatively affect your credit score. Opening new loans or credit cards quickly may signal to lenders that you’re overextending your finances.
How to Do It: Only apply for new credit when necessary. Space out credit applications to avoid multiple hard inquiries in a short period, which can hurt your credit score.
MONITOR YOUR CREDIT SCORE
Why It Matters: Educating yourself on what affects your credit score and regularly monitoring your credit report helps you stay on top of your financial health and can help you catch potential issues early.
How to Do It: Check your credit score monthly using free resources from your bank, credit union, or credit monitoring services. Review your credit reports from Equifax, Experian, and TransUnion at least once a year through AnnualCreditReport.com.
DISPUTE CREDIT ERRORS
Why It Matters: Errors on your credit report can unfairly lower your credit score. Correcting mistakes ensures your credit score accurately reflects your creditworthiness.
Why It Matters: If you’re facing financial challenges, communicating with your creditors can help you find solutions before you miss a payment or default on a loan.
How to Do It: Contact your creditors to discuss payment plans, hardship programs, or other arrangements if you’re unable to meet your obligations. Being proactive can prevent negative marks on your credit report. Learn more about how to talk to creditors and debt collectors here.
Remember, credit maintenance is a lifelong journey with highs and lows.
Mastering these financial habits can help you lay a strong foundation for a healthy credit score, which opens doors to more financial opportunities and stability.
