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Good habits are the foundation of a stable life. Little things like exercise, hygiene, meditation and reading can have a tremendous impact if done consistently. It’s about taking a holistic approach to improving and maintaining yourself day in and day out.
The same holds true for your finances. By forming a system of healthy habits and using tools like loan repayment calculators, you can avoid the stress that most people associate with managing their money. You may still have setbacks and downturns, but the road to your financial goals will be smoother and less complicated.
The best way to start is by paying closer attention to your credit habits. Here are some of the best ways to do that.
Pay Every Bill on Time
By far, the best thing you can to improve your credit score is to pay every bill on time. Punctual payment accounts for 35 percent of your credit score, and it’s one of the best ways to build your score quickly.
Despite the benefits and ease of paying on time, nearly 26 percent of Americans admit to regularly making late payments on their credit cards. If you can afford the bill, don’t let this avoidable mistake destroy your credit score.
There are two ways to ensure you never miss a payment. The first is to set up autopay on your credit card from your bank account. Every month, the credit card issuer will deduct the amount due from the checking account you selected. This strategy is fool-proof and guaranteed to succeed, as long as you have the funds to cover every bill. Watch your credit card statement for the first month after you enroll in auto-pay, as it can take one or two billing cycles to kick in.
You can also pay manually, creating calendar reminders for each separate due date. If you notice that your due dates all fall on the same week, you can choose one day to make all the payments. This plan is a great way to feel more connected and aware of the money you’re spending, but it’s also harder to maintain. Don’t use this method if you struggle with reminders.
Late payments won’t show up on your credit report until they’re 30 days past due. That gives you a little bit of leeway, but it’s still best to pay before the due date. If you’re struggling to find the money to pay on time, that’s probably a sign that you need to cut back on spending.
Use Less Than 30% of Available Credit
How much credit you utilize makes up 30% of your total credit report. This number only applies to credit cards, which have a total credit limit, and not installment loans.
Credit bureaus ding consumers who use more than 30% of their available credit. If your Chase Sapphire Preferred card has a $12,000 credit limit and you have a $5,000 balance, you’re using 41.67% of the card’s credit limit.
Using too much credit makes the bureaus think you’re relying too heavily on credit cards to fund your lifestyle. Even if you pay off the balance every month, the utilization will still be reported to the credit bureau.
There’s no easy way to avoid utilizing more than 30% of your available credit. You have to log onto your credit card account to check the balance and then divide it by the available credit.
If you find yourself going over 30% every month, try this trick: Pay half of your credit card bill before the billing cycle closes. The billing cycle date determines what balance is posted on your credit card bill. If you pay before the billing cycle closes, it won’t go on your credit report.
It works like this. You spend $6,000 a month on your credit card, which has a credit limit of $11,000. If you wait until the cycle closes, the credit card issuer will report a credit utilization percentage of 54.54%.
If you pay half of your credit card bill, $3,000, a few days before the billing cycle ends, you’ll only have a credit utilization percentage of 27.27%. This method isn’t the easiest to implement, but it will prevent negative credit scores.
Open New Accounts Carefully
Opening too many new accounts is a great way to tank your credit score. Credit bureaus get nervous when a customer opens several credit cards or loans in a short period of time, as it can often be a sign of financial instability. This component is responsible for 10% of your credit score.
Opening a slew of new accounts at once also drags down the average age of your credit history, which counts for 15% of your credit score. Lenders want borrowers to have the highest credit history age possible. If you’re young and have a relatively new credit history, you should avoid opening multiple new accounts.
When you want to open a new account, whether it’s a travel rewards credit card or home equity line of credit, consider if it’s really worth taking a ding on your credit score.
Monitor Your Credit Report
Ignorance may be bliss, but knowledge is power when it comes to credit. You can’t improve your credit if you don’t monitor your credit report for errors and identity theft. In a 2012 report, the Federal Trade Commission found that 26% of credit users had a mistake on their credit report affecting their overall score. Chances are, you or someone close to you falls into that category.
The only way to find a mistake is by regularly checking your credit report for free at AnnualCreditReport.com. You can also sign up for a paid credit monitoring service or use a free site like Mint. Credit card issuers sometimes offer free monitoring as part of their perks.
As more and more companies announce hacks and data breaches, identity theft doesn’t seem to be slowing down anytime soon. By staying on top of your credit report, you can catch problems early before you need access to a new line of credit.