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Your credit score is an indicator of how you've managed credit in the past. If you've made some mistakes or had ongoing issues that have hurt your credit, you may be looking for opportunities to rebuild.
One of the best ways to improve your credit is to identify bad habits you may have developed over the years and replace them with good credit habits.
According to Experian data, people with very poor credit (under 580) are using 78% of their available credit on credit cards, compared with 5.7% average credit utilization among people with exceptional credit. Looking at this and other areas of your credit history can give you the information you need to improve.
What Are Considered Bad Credit Habits?
Some credit habits that damage your credit score involve making a decision, such as applying for several credit cards in a short period of time. In other cases, though, the bad habits you need to kick involve neglecting your credit score and ignoring the steps you can take to improve it.
Some of the most common bad credit habits include:
- Not checking your credit regularly
- Paying late or less than the minimum on your debts
- Not reading your credit card statements
- Running up balances on your credit cards
- Closing old credit card accounts
If you've developed some of these habits, don't be too hard on yourself. While negative information does stay on your credit report for seven years or more, adding positive information will help you make up for past mistakes.
Here's a breakdown of each bad habit listed above and how you can replace it with a good one.
Continuously Monitor Your Credit
You may have heard that checking your credit score hurts it, but that claim couldn't be further from the truth. Checking your credit score and reports regularly is an important step in building and maintaining a solid credit history.
If you don't check your credit often enough, you may miss out on potential issues that could have a significant negative impact on your credit score. For example, you may have forgotten about an account that went to collections or missed a payment.
When you check your credit frequently, you'll be able to see where you stand, which factors are influencing your score for better or worse, and what steps you can take to address potential issues.
With Experian's credit monitoring tool, you can get free access to your FICO® Score☉ powered by Experian data and your Experian credit report, which is updated every 30 days. The service also sends notifications when changes are made to your Experian credit report, such as a new account, a new credit inquiry or new personal information. These alerts will make it even easier to address potential problems immediately.
Build a Positive Payment History
Your payment history is the most important factor in your credit score, so even one missed payment can drop your score significantly. What's more, late payments remain on your credit report for seven years.
The more missed payments you have and the longer you leave them unpaid, the further your credit score will drop, making it even more difficult to get back on track.
The good news is that late payments aren't reported to the credit bureaus until 30 days after they're due. So if you have some recent missed payments, try to get caught up as quickly as possible. You might still face penalties from your lender, but taking care of late payments before the 30-day mark will save you from credit score harm.
As you work to start making all your payments on time, you'll also want to try to get current on accounts where you're behind. This will help stop those negative marks from damaging your credit even more and can help you stay motivated to be on time moving forward.
One way to help ensure that you always pay on time is to set up automatic payments on your accounts. Just be sure to set them on a date when you know you'll have enough cash in your bank account to cover them. Otherwise, you may be slapped with a returned payment fee.
If you can, try to pay more than the minimum amount due on your debts, especially your credit card accounts. Paying in full is ideal with credit cards because it keeps you from getting charged interest and helps your credit score.
Understand Your Credit Card Bill
If you're making purchases with one or more credit cards on a daily basis—or close to it—it can be challenging to keep up with all of those transactions. At the very least, though, make it a goal to check your credit card statements every month.
If someone managed to steal and use your credit card information, not checking your bill every month could leave you unaware of the fraud. And if they have your credit card details, they may have other personal information they can use to damage your credit. If you see a potentially fraudulent account on your credit report, you may want to explore filing a dispute.
Reviewing your credit card transactions can also help you understand where your money is going, which could help you cut back in certain areas, giving you a little more cash flow to pay down debt, save or work toward other financial goals that are important to you.
As you check your bill, look through all of your transactions to make sure you recognize them. If you're only doing it once a month, it can be tricky to remember everything, so consider holding on to receipts so you can verify your charges.
If you want to be more diligent, check your online account every few days or once a week. You may even consider using budgeting software like You Need a Budget or Mint that imports your transactions across all of your accounts into one place for convenience.
Keep Your Credit Utilization Low
Credit utilization is the second most influential factor in your FICO® Score, making up 30% of the calculation. Your credit utilization rate is the percentage of your available credit that you're using at a given time. For example, a card with a $5,000 balance and a $10,000 credit limit has a 50% utilization rate.
During the coronavirus pandemic, credit utilization rates dropped as spending went down. But the average rate is still 25%, which is high enough to be keeping credit scores down. A credit utilization in the single digits will go far toward helping your credit score.
Paying your bills on time and in full is an excellent way to keep your utilization rate low. But even then, credit card issuers typically report information to the credit bureaus based on your statement balance, not the balance on your due date. So if you rack up a huge balance relative to your limit every month but pay it in full when it's due, your rate may still be high.
To ensure that your credit utilization stays low, try to keep credit card purchases to a minimum. If you pay your bill in full every month, that's excellent. But if your utilization rate is still high on your statement date, consider making multiple payments throughout the month to keep the balance low.
Avoid Closing Credit Card Accounts
When you pay off a loan, your account is closed as soon as the lender processes the transaction. But with credit cards, you can choose to keep them open for as long as you want.
Closing old credit cards might seem to make sense if you don't ever plan on using them again. But keeping an old account open will help lengthen your credit history, which is good for your credit. It also increases your total available credit, which helps your credit utilization (as long as you don't rack up balances on the card again).
Of course, there are instances where it might still make sense to close the account. For example, if it's a secured credit card and the lender still has your security deposit, you may want to close the account to get that money back. Also, if the card has an annual fee and you don't plan on using the card again, the cost may outweigh the benefit.
Finally, if you've had issues with overspending, keeping your card may cause you to fall back on old habits. In that case, you could cut up the card and leave the account open. But if even that's not enough to curb the temptation, closing the account might be the best decision.
One thing to keep in mind is that some credit card companies will close accounts if they've been left inactive for too long. So you may want to use the card every few months for a small purchase or set it up as the payment method on a recurring bill and use autopay to make sure you never forget to pay the balance in full.
Building Credit Takes Time, But Every Effort Makes a Difference
Developing good credit habits won't happen overnight, especially if you have to tackle delinquent accounts and large credit card balances. But the sooner you begin working on improving your credit history, the more of a positive impact you'll be able to make.
As you continue to check your credit score, credit report and credit card bills regularly, pay on time, keep your credit card balances low, and keep old accounts open, you'll start seeing the fruits of your labors within a few months—and you'll be on the right track toward excellent credit.