Last week in Part I we discussed 4 tools that can help you construct the credit home of your dreams. Now it’s time that we discuss proper maintenance techniques to ensure your home stays secure and upright. In this neighborhood, the broken window theory doesn’t apply.
And so, without further ado, 6 good credit maintenance habits to build your score and show that you’re creditworthy:
1) Make 100% of your payments on time.
Not only with credit accounts but with all other accounts, such as utility bills, loan repayments, etc. Consistently paying creditors on time is the most important factor in determining your credit score. Even one missed payment can have a serious impact. That’s why your payment history makes up about 35% of your FICO score. Bills that go unpaid may be sold to a collection agency, which will seriously hurt your credit and will follow you for the next 7 years… oof.
2) Keep your credit utilization low.
Utilization is your balance when compared to your limit, often referred to as a percentage of the total. Revolving credit utilization (the average of what you use monthly) is one of the most important factors in determining your credit score and makes up about 30% of your FICO score. I recommend keeping your balance under 30% and paying in full each month as soon as you get your statement. I like to keep my revolving credit utilization around 15-20% just to have some wiggle room for emergencies. Just remember that if you don’t use your card and keep the balance at 0, you won’t build any credit score.
3) Keep accounts open for as long as possible.
In general, the longer your credit history, the better. New accounts lower your average account age, which makes up about 15% of your credit score. Unless one of your unused cards has an annual fee, you should keep them all open and active for the sake of your length of payment history and credit utilization.
4) Avoid applying for too many new credit accounts at once.
Applying for new cards required a “hard pull” (or “hard inquiry”) into your credit which will lower your score. Inquiries indicate credit seeking activity and make up about 10% of your FICO score. In general, you don’t want too much credit seeking activity so try to moderate seeking new lines of credit. Limit applications to one or two cards at a time and keep a six-month buffer between each series of applications, especially when you are first starting out. Apply for one or two and if rejected, wait six months and try again.
5) Vary the credit that you utilize.
Creditors want to know that you can mix your credit up and stay reliable with your payments. Total accounts make up about 10% of your credit score. This considers the types of credit being used and reported such as revolving accounts (credit cards) and installment loans (check out Credit Builder Loans if you want to build or improve your score). Your total number of accounts may include both opened and closed accounts.
6) Learn how to check your credit scores and reports.
Check each of your credit reports annually for errors and discrepancies. It’s like your report card – you want to make sure it looks as good as possible. A credit report is a record of how you’ve used credit in the past. Your credit scores estimate how you’ll handle credit in the future, using the information in your credit reports. You’ll want to monitor both to watch for errors and to see your credit-building efforts pay off.
Several personal finance websites, including NerdWallet, offer a free credit score, as well as educational tools such as a credit score simulator. Some credit card issuer print FICO scores on customers’ monthly statements and allow online access as well. Some offer free scores to everyone – cardholder or not: Discover offers a free FICO score at CreditScorecard.com and Capital One offers a free VantageScore at its CreditWise website. More card companies are offering these services as they compete for your business. It really is the best time for us to be consumers in the financial sphere.
So there you have it! I hope that now you feel more comfortable with starting to build your credit home and ensure that it stays standing for the years to come.