Quick: what's your credit rating? Don't know? That's a problem. Your credit score is a snapshot of your financial health and can have a far-reaching impact. Nicole Lapin, a financial expert and author of Rich Bitch: A Simple 12-Step Plan For Getting Your Financial Life Together, explains: "It's connected to anything you do with borrowing money — from the rate you get on your credit card to a mortgage or car loan." In addition, Lapin points out, "sometimes employers look at it or landlords before you rent to see how responsible you are."
You knew that, right? But did you know maintaining a good credit score goes beyond avoiding late payments? Or that not using any credit at all can negatively impact your score? With the help of Lapin and Bethy Hardeman, chief consumer advocate for monitoring site Credit Karma, we've discovered the 10 habits of people with good credit.
1. They Have Available Credit — and Don't Use It
Having credit available that you don't use is important. "Credit utilisation — the amount of debt on your credit cards divided by all of your credit limits — is a major factor that goes into calculating your credit score," according to Hardeman. "Try to keep your credit card balances under 30 percent, aiming for less if your budget allows it." For example, if you have a total $10,000 credit limit, put less than $3,000 on your cards. This approach will also help you avoid overspending.
If you're confident about your spending habits, you can also call your credit card company and ask them to increase your limit to improve your ratio. If it's increased to $20,000, but you still spend under $3,000, your score will be better off.
Your amounts owed relative to your available credit accounts for about 30 percent of your score. And when a high percentage of your available credit is being used, it signals to credit-reporting agencies that you might soon miss a payment. That being said, you want to use your cards! FICO says that using a small amount of your credit is often better than not using any of your available credit at all.
2. They Never Cut Up Cards
"You might think you need to go cold turkey to beef up your credit score," Lapin explains. Wrong. Even if you're trying to cut back your reliance on credit cards because you've overextended yourself, Lapin suggests keeping a consistent bill on a card, like a utility bill or autopayment, to show that you are a steady payer.
3. They Keep Old Accounts Open
The length of credit history accounts for about 15 percent of your score, according to FICO. To get that number, credit rating agencies average the age of your credit. Say you have two cards. If you've had one card for 15 years and another for five years, your average length would be 10 years.
"Try to keep your credit cards open, as long as you're not paying any annual fees to do so."
"Try to keep your credit cards open, as long as you're not paying any annual fees to do so," Hardeman recommends. If it does come with a fee, go ahead and close it, but open a free card that you can plan to have around forever, putting one or two bills on it. Hardeman explains that a card might "fall off" your credit report because of inactivity in seven to 10 years.
Your old cards will also help keep your credit utilisation rate low, because it ups your overall limit, assuming you're able to keep your spending in check.
4. They Pay Bills on Time Every Time
"I know this sounds patronising, but pay your bills on time," Lapin says. "It's the best thing you can do to start becoming a star student with your financial report card." That means any bill, including your student loan, car payment, or medical bill from your doctor.
According to FICO, your payment history is the most important factor, accounting for 35 percent of your score. The agencies look at: how late you were, the size of the payment, how recently it happened, and how many delinquent marks you have.
5. They Ask For Forgiveness
"If it's the first time you've been late, pay your bill as quickly as possible, and then call your bank," Hardeman advises. "Explain the situation to them and remind them that it's your first time. They may be willing to consider it a fluke and help you. This may help keep a late payment off your credit report, keeping your payment history perfect."
If the delinquency has already hit your credit report, you can ask them to contact credit reporting agencies to correct the mark. You can also ask for a "do-over" if you miss another type of bill — like medical bill or loan payment.
6. They Use Their Credit Cards Like a Debit Card
Just because the credit card company offers a minimum payment doesn't mean you should take them up on it.
In addition to paying your bills on time, it's important to not carry a balance. Just because the credit card company offers a minimum payment doesn't mean you should take them up on it. "Using your credit cards and paying them off in full at the end of the month will show you're using your credit responsibly," Hardeman says. Plus, it avoids expensive interest payments.
People with good credit never put a large payment on their card if they know they can't pay it off in the next 30 days. That means no overextending yourself as you wait for a raise or year-end bonus.
7. They Set Up Direct Payments
I get it. You're busy. So to avoid missing a payment when life gets in the way, take a moment to set up a direct payment of your full monthly credit card balance from your checking account. Do this as soon as you open new accounts. It will also hold you accountable, since you know you can only spend as much as you have in your checking. Hardeman also has this tip: "If you don't like your current due date, you can always call your bank and ask them to change it."
8. They Use Free Credit-Monitoring Services
Credit Karma is a free credit-monitoring service that will give your credit score instantly or send you free reports every week. It also keeps you up to date on all your accounts and the factors that impact your score. You can break your score down by "credit factors" and get a snapshot in how you do in each category (and how important each category is). One of the best things about Credit Karma, in my experience, is that it will email you if something seems wrong. If you miss a payment on accident, for example, you can quickly address it with your credit card company.
With sites like Credit Karma, you can "make sure you know how your credit looks before a lender or landlord takes a look," Hardeman says. She notes that you can also file a dispute for free directly with the credit bureau on Credit Karma if you catch any errors on your credit report.
9. They Aren't Afraid of Opening New Accounts
"My FICO scores will drop if I apply for new credit" is classified as a myth by FICO. Opening new cards does lower your average age of credit, but it also ups the amount of available credit you have. The main thing to avoid is having a lot of money owed on a lot of cards. It indicates overextension.
Consumers worry too much about about hard inquiries.
Hardeman believes consumers worry too much about about hard inquiries. She explains that "hard inquiries generally occur when a bank or lender checks your credit report to make a lending decision. You typically authorise them to take a look at your credit report as a part of the application." While hard inquiries can lower your credit score, Hardeman admits, it generally only drops by a few points. "Remember that hard inquiries make up only 10 percent of your total credit score."
10. They Don't Rush to Pay Off Their Loans
People with good credit aren't scared of student loans, car payments, or mortgages. In fact, they know a healthy mix of credit types, including planned installment loans, can help your score. It signals that you are reliable, and it helps build your history. Hardeman says it's simple: "Using credit responsibly will help you build a positive credit score."
Now that you know these 10 secrets, you're on the way to building a strong score, too.