When it comes to your credit, an ounce of prevention is worth a pound of cure, meaning it’s much easier to build and maintain a high credit score than it is to rebuild a poor credit score. Why is that? Because many of the practices that lead to poor credit put you in a situation that’s difficult to climb out of, especially if you end up in a cycle of debt.
So, just how should you keep your credit in tip-top shape? There are a few important habits you should get into immediately.
- Pay Your Bills on Time
Your credit score, which is essentially a rating of your credit worthiness to potential lenders, depends on several factors. One of the factors that affects your credit score the most is your payment history. If you have a habit of paying late or missing payments entirely, that’s going to bring down your credit. Another problem with not paying your bills on time is that you can end up with late fees. As these fees accumulate, it will become harder to pay off what you owe.
With all the automated bill payment options available, there’s no excuse for missing a bill payment. Set up automatic payments if you have trouble remembering to pay your bills on time. If you prefer to pay manually to make sure you don’t overdraft your account, set reminders on your phone or computer with all your payment due dates.
- Don’t Use Too Much Credit
The other largest factor in determining your credit score is your credit utilization, or the amount of your available credit that you’re using at any time. This factors in all your available lines of credit and all your balances, so if you have three credit cards with a combined credit limit of $20,000 and your combined balances are $5,000, then your current credit utilization is 25 percent.
Ideally, you want to keep this number under 30 percent at all times, although under 20 percent is even better. One of the best ways to manage your credit is to pay your bill in full every month, avoiding any interest charges.
- Check Your Credit Reports
You have three credit reports, each issued by one of the credit reporting bureaus, which are Experian, Equifax and TransUnion. The law entitles you to one free credit report from each bureau per year, and you should always take advantage of this. Reading through your credit reports will show you your current credit scores and what you can do to improve those scores. You may also find mistakes on a credit report. If so, you can call the credit reporting bureau that issued the report and the creditor that reported the incorrect information to have it removed.
Don’t make the all-too-common mistake of thinking that the credit reporting bureaus always get it right. Mistakes happen, and for all you know, your credit report may have an account that you didn’t open, information that should have fallen off your report a year ago or an unauthorized credit inquiry. The only way you’ll know and be able to get the issue corrected is by requesting your credit reports every year.
- Keep Your Credit Cards Open
One mistake people often make is opening and closing credit cards. The length of your credit history also impacts your credit score, so accounts that you’ve had open for years are a positive factor for your credit score. Aim to only open credit cards that you plan to keep for the long haul. If you need to cancel a card to avoid an annual fee, try to cancel cards that you haven’t had as long.
When you manage your money and credit wisely, it isn’t difficult to maintain good credit. Follow these rules and you’ll keep your credit score high.
Join our newsletter
If you like Critical Financial, subscribe and get our latest content via email.