Habits to Cultivate for a Better Credit Score

When it comes to effectively managing your personal finances, the right credit score can make all the difference. Not only will a good credit score make it easier to obtain the financing you need for major purchases, but it can also help you tap into the lowest interest rates available, which can lead to thousands of dollars saved.

The laundry list of benefits makes obtaining a good credit score a worthy financial goal. But sometimes, the path to a good credit score is more difficult than it has to be. Without the right habits, you might be putting more distance between yourself and your credit goals.

The good news is that the right money management habits can help you work your way toward a better credit score. Let’s explore how to cultivate habits that may change your credit score for the better.

Key takeaways:

•     Small steps can lead to big changes in your credit score
•     A better credit score is just one reason to improve your money management habits
•     Anyone can cultivate good credit habits

The Importance of Habits

As with most things in life, the outcomes of money management stem from a series of smaller choices along the way. There’s no single action you can do that will transform your credit score or financial situation. But if you continue to make the right choices, your financial situation can improve and your credit score can grow. On the flip side, consistently making negative financial choices will lead your financial life in a bad direction.

“Every action you take is a vote for the type of person you wish to become,” says James Clear in Atomic Habits. He continues, “Small habits can make a meaningful difference by providing evidence of a new identity. And if a change is meaningful, it is actually big. That’s the paradox of making small improvements.” In other words, the right habits move you in the direction of your goals.

For example, someone that wants to lose 50 pounds can’t make that happen overnight. But if they consistently show up to their workouts and commit to eating healthy every day, then eventually they’ll see the fruits of those small choices.

If your goal is to improve your credit score, then even seemingly small habits can add up to a big change over time. Although you likely won’t see a major change to your financial situation or credit score overnight, making the right choices every day can push you closer to your ultimate goals.

Habits to Build for a Better Credit Score

The right habits can put you on the path to a better credit score. Before we dive into the habits, it’s worth noting that none of these habits will transform your credit score overnight. But if you stick with these habits, it’s likely that you’ll see results at some point. As you work on building these habits, remember to practice patience along the way.

Pay Your Bills on Time

Payment history accounts for 35% of your FICO score, which makes it the most important factor. After all, a major part of creditworthiness is that you are able and willing to regularly pay your bills on time.

If you are looking to build credit, one great habit is to make paying your bills on time a top priority. When you consistently pay your bills on time, that should improve your credit score. Although it might take some time to see results, this is one habit that is sure to build good credit.

For those that struggle to keep track of all their payment deadlines, take advantage of technology in the form of automatic payment options. Most bill providers offer a way to automatically pay your bills. Plus, some bill providers will even offer a discount for signing up for an auto payment option.

If you are aware of the deadlines but simply don’t have the funds to make a payment, take the time to evaluate your financial situation. A careful review of your income and expenses can help you determine ways to cut back in order to make your bill payments on time.

For those with a one-time cash crunch on their hands, consider reaching out to your lender ahead of the deadline. Some lenders are willing to offer a temporary extension to help you avoid the hit to your credit score, especially if you’ve consistently made on-time payments in the past.

Never Max Out a Credit Card

When you open a credit card, the maximum credit limit might seem like a pot of gold. But it’s important to stay well below your credit limit to avoid a hit to your credit score.

Your credit utilization ratio is included as a part of your FICO score calculations. Typically, experts recommend keeping your credit utilization rate less than 10% for FICO scores and less than 30% for VantageScores. If your credit utilization ratio is higher than 10%, that can negatively impact your FICO score.

So, how can you calculate your credit utilization ratio? Essentially, it’s a measure of your revolving account balances compared to your credit limit. For example, let’s say that you have a credit card with a $10,000 credit limit. If you are carrying a $4,000 balance, then your credit utilization ratio would be 40% for this credit card.

In the best-case scenario, you should only put charges on your credit card if you can afford to pay them off at the end of the month. If you cannot pay off the balance each month, you’ll likely get stuck with a growing balance due to the notoriously high interest rates tied to most credit cards.

But even if you have to carry a balance, do your best to keep the balance as low as possible. Not only will this habit have a positive impact on your credit score, but it will also help you avoid paying sky-high interest charges on purchases.

Set a Budget (And Stick to It)

Regardless of your financial goals, budgeting is a useful money management tool. If you are looking to build credit, it’s possible to leverage an efficient budget to your advantage.

When you build a budget, you’ll have a better idea of where your funds are going each month. Instead of guessing that you’ll have enough money in your account for bill payments, a budget can help you nail down the details to make sure your basics are covered. As an added bonus, a careful budget based on what you can afford to spend will lower your reliance on credit over time. With that, you are less likely to turn to credit card debt in the event of an unexpected expense.

Beyond the regular benefits of building credit, a budget allows you to set up spending priorities. If building credit is a top priority, then you can allocate funds to pay for credit-building tools.

Here’s a breakdown of some of the most popular budgeting strategies:

•     50/30/20 budget: With this budget, you’ll spend 50% of your income on necessary expenses, 30% on discretionary expenses, and 20% on saving and debt repayment. Of course, there is a lot of wiggle room in those categories. But necessary expenses generally include housing, transportation, and food. You can adjust the percentages to align with your budgeting goals. For example, you might increase the amount set aside for savings to reach a big goal.
•     Zero-based budget: In this budget, you’ll account for every single penny by subtracting expenses from your monthly income. For example, you might subtract $1,000 for housing from your monthly income of $3,000.
•     Envelope system: The cash envelope system involves putting a limit on every spending category and allocating envelopes of cash to each category. For example, you might allocate $200 for groceries in a month. With that, you can spend until there isn’t any more money in the envelope. The idea is that spending tangible money will force you to think more carefully than an easy swipe of your credit card.

Want more details on how to build a budget that works for you? Explore our full guide.

Regularly Check In on Your Spending

Whether or not you are able to stick to a traditional budget, regularly checking on your spending activity is an important habit. As you keep tabs on your spending, the goal is to make sure that you aren’t spending more than you should.

Personally, I like to check on my spending on a monthly basis. But you can check in as frequently as you like. Each time you check in, assess how your spending lines up with your long-term financial goals. If you don’t like what you see, then it’s time to make adjustments. But even if you typically stick to your spending goals, checking in will help you remember why you are choosing to spend the way you do.

Save Money Every Month

One way to build a brighter financial future is to make sure that you are saving something each and every month. Even if you are just saving $10, that’s the seed of a habit that can transform your finances over the long term.

When you set aside money each month, that often means you are practicing good credit habits. As you save each month, you’ll grow a cushion of money to fall back on when life throws something expected your way. With the help of an emergency fund, it’s often easier to get through some of the unhappy challenges that life throws your way.

However, sticking with this habit is easier said than done. After all, it’s usually more enjoyable to spend in the moment instead of saving for the future that has yet to arrive. If you feel tempted to skip this good habit, try to think of the long-term benefits of increased financial stability. Putting the cost of a potential splurge into perspective can help you stay on track.

Check Your Credit Report at Least Once a Year

Although many confuse credit reports and credit scores, the two are different things. Your credit report is almost like a report card for your credit management choices. In contrast, your credit score is more similar to your GPA, which reflects the overall picture of your credit management habits.

Since your credit score is based on your credit report, it’s essential to confirm nothing incorrect makes its way onto this record. Unfortunately, honest mistakes by lenders and nefarious identity theft activities can lead to incorrect information on your credit report. Often, incorrect information equates to negative information that drags your credit score down.

The good news is that you can have incorrect information removed from your credit report. But you’ll need to know the information is there before you can start the process. With that, it’s important to read through your credit report at least once per year. You are entitled to review a free copy of your credit report each year at annualcreditreport.com.

Check Your Credit Score Regularly

In addition to keeping tabs on your credit report, you should regularly monitor your credit score. As you build credit, checking on your credit score can help you monitor the progress you’ve made along the way.

But even after your credit score has landed firmly in ‘good credit’ territory, regularly checking in on your credit score can ensure that nothing is amiss. If your credit score falls, you’ll be able to investigate the cause as soon as possible.

The Bottom Line

Building new habits can take some time. And the reality is that it can be difficult to consistently make the right choice for your finances and credit score. After all, you might have more fun in the moment by overspending on your credit card. But in the long term, you might enjoy the financial opportunities that come with building a better credit score.

Which of these habits will you be building in pursuit of a better credit score? Leave a comment below to let us know.