Everyone would love to have a higher credit score. It’s one of most important aspects of our financial lives, determining everything from whether or not we’ll qualify for a loan, to what kind of house we can afford, to whether or not we’ll get a competitive interest rate when we buy a new car. With so much riding on it, it’s no wonder that we want to keep that score as high as is humanly possible.
But for many people, it can be difficult to even know where to start, or even if you’re doing anything wrong in the first place. Credit agencies aren’t always crystal clear about what they’re looking for, and even amongst the three major credit agencies, the scores can vary. With this conflict of information, where can you look to see what works, and what doesn’t?
While you can’t always mimic what others do, or what others say you should do, in your own life, it might be helpful to examine the habits of people with high credit scores. People are people, and sometimes, if it can work for others, it can potentially work for you. With that in mind, let’s look at four financially healthy habits that people with high credit scores have, and discuss why those habits allow them to enjoy a higher score.
Pay Their Bills on Time
First and foremost, people with high credit scores pay their bills on time, and always make their minimum payments, at least, when they pay their bills. This is the most important tactic that anyone can implement when trying to improve their credit score.
Your financial history is defined as a summary of your trends in meeting your financial obligations, and paying your bills by the due date specified in your agreements. It accounts for 35% of your cumulative credit score, the highest ratio among the five main factors. Every creditor and agency you work with is different, and while one may give you until the middle of the month before your payments are due, another won’t wait until after the first of the month to start flagging you as a missed payment.
Paying your bills on time not only shows that you can manage these different requirements, and keep track of them, but that you’re responsible with your money. People who do so are granted high credit scores, because they’ve proven that they are trustworthy individuals, who are much more likely to be able to handle any additional financial obligations they incur.
Limit Their Credit Utilization
Credit is there to allow you to buy the things you need, when you need them. If there were no opportunities to pay for things that you couldn’t afford just based on your checking account balance, there would be no need for credit or loans. So, there’s nothing wrong with using the credit you’ve been extended, but people with high credit scores are very careful about how they do so.
Lenders and credit agencies like to see you use their assets, but not excessively. When you start making extensive purchases using credit, you’re indicating to your creditors, lenders, and the credit bureaus that you may rely more on other people’s’ money to afford things, rather than your own income. Not only is this degenerative to your credit score, it can quickly create a recurring cycle that can lead to high amounts of debt.
By contrast, people with high credit scores tend to use their credit on purchases that they could afford with money they already have, and keep their utilization ratio at 35% or less. To apply this tactic in your own life, take a look at how much you’re charging on your credit card in a month. If your card has a limit of $3,000, and you’re charing $1,500 dollars per month, you’ve already reached 50% of your utilization ratio, and that’s just on one credit card.
I know it can be tough, especially when using a debit card or cash will quickly drain your account, which can get tense when you’re waiting on your next paycheck to come in, but in the long run, it will help keep your credit score healthy. That’s well worth the sacrifice you’ll have to make.
Keep a Low Balance on Their Credit Cards
Tying in with our previous point, people with high credit scores keep a low balance on their card, as often as possible. While you should never exceed 35% if possible, you can do just as much damage to your credit score if you never use your accounts at all.
In general, if you’re spending at least 10% of your credit limit each month, you’ll remain in good standing with your credit agency. After all – why should they bother extending credit to you if you never use it? That only indicates that you’re trying to get credit for the sake of diversifying your portfolio, and trying to take advantage of the system. That will get you flagged by the credit bureaus, so if you’re going to get a card, you do need to make use of it.
Again, a good rule of thumb is to use your card for common purchases, that you’re going to have to buy regardless, such as gas and groceries, and then pay off your full balance at the end of the month. You’ll get the credit for using your card, while avoiding going overboard with your utilization.
Check Their Scores Regularly
It may seem like a no-brainer, but people with healthy credit scores didn’t get those scores by pure accident. Instead, they educated themselves on what affects their credit, just like you’re doing now, and then took steps to improve it. Part of that routine includes knowing what your credit score is at any time.
Some people are very hesitant about checking credit scores, because they’ve been told that a credit check will lower their score. While this isn’t technically incorrect, what they fail to understand is that there are two types of credit checks, hard inquiries and soft inquiries, and that only one of them will bring down your score.
A hard inquiry can only be made by an entity other than the credit holder (that’s you), and even then, only in certain circumstances. Any time you apply for a loan, apply for a new credit card, or request an increase in your credit limit, a hard inquiry will be made against your score. This will reduce your score by anywhere from four to 19 points, but in most cases, you’ll know before one is made.
By contrast, a soft inquiry on your credit will still yield all the details of a hard inquiry, but without affecting your score. Anytime you personally check your own score, it counts as a soft inquiry, and your score won’t change at all.
With that in mind, understand, at least two to three times a year, you need to be checking your credit score.