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Good credit doesn't happen by accident. And it isn't a matter of gaming the system. Having good credit is often the result of making smart decisions. Good credit habits, such as paying bills on time, can help you attain and maintain higher credit scores—and reap the rewards that come with them.
Why Is Having Stellar Credit Important?
Cultivating good credit is key to your overall financial health. With it, you'll have access to a host of helpful financial options. Whether you want to buy a home, finance a car or maintain some extra spending capacity with credit cards, good credit expands your choices. A higher credit score can open the door to more loan and credit card options, lower interest rates and better terms.
Are you looking to rent an apartment? A good credit score may improve your chances of being approved. Good credit can even help you save on insurance.
The exact math used to calculate your credit scores is kept secret, but the factors that help determine them are well-known. The two most common credit scoring models are the FICO® Score☉ and VantageScore®. Their exact algorithms differ, but they both consider similar factors, including:
Taken together, these factors tell the story of how well you manage credit. This information is important to lenders deciding whether to take you on as a borrower and what rates to offer you if they do. Do you have a history of using credit responsibly and paying it off on time? Are you taking on a lot of debt? Have you defaulted in the past? The answers to these questions help lenders determine how much of a risk you pose as a borrower.
If you're planning to apply for credit soon, there are things you can do to "clean up" your credit. Paying down debt, taking care of past-due accounts, and continuing to make payments on time are a few examples. There are no quick fixes, though. Maintaining healthy credit practices over time is the simplest route to good credit—and it can help you maintain healthy finances overall as well.
Good Credit Habits to Practice Daily
To keep your credit healthy, here are four regular habits to practice every day:
1. Pay Your Bills on Time
The most important thing you can do to maintain a good credit score is to pay your bills on time. Payment history accounts for the largest share of your FICO® Score and is an important factor in your VantageScore. To make sure you don't accidentally miss a payment deadline, consider setting up automatic monthly payments for at least your minimum amount due. You should also consider reviewing your balance and making payments throughout the month instead of waiting until your bill comes due. This can help you avoid interest and make certain you don't miss you don't miss a payment. Remember: Any payment made more than 30 days past the due date can stay on your credit report for seven years.
If you're working on improving your scores and don't have many accounts, you might also explore Experian Boost®ø. This free service from Experian adds on-time utility, telecom and certain video streaming bill payments to your credit report so they can be included in your score calculation. These accounts don't otherwise show up on your credit report, but Experian Boost helps you get recognized for the on-time payments you've made.
2. Keep Your Credit Utilization Low
Credit utilization measures your credit card balances against your credit limits. Here's how this works: Add up the credit limits on all your credit card accounts to find your available credit. Next, add up all of your credit card balances. Divide your total balances by your total available credit and convert to a percentage to get your credit utilization ratio.
When it comes to credit scores, the lower your utilization, the better. As a general rule, keeping your utilization below 30% will prevent credit score harm; those with the highest credit scores tend to have credit utilization ratios in the low single-digit percentages.
3. Check Your Credit Score Regularly
It's always handy to know where your credit score stands and how it has changed: It helps you understand what effect your actions have in your scores. Beyond this, checking your credit score regularly can help you detect any problems that might be brewing and reverse course if you're getting off track. If you're in the process of improving your credit, a rising score is great positive feedback.
Checking your credit report periodically is also a good idea. Not only will you spot any negative or inaccurate information that might crop up, but you can also make sure there aren't any new accounts you haven't applied for—those may be a sign of identity theft.
4. Apply for New Credit Only When Needed
Having multiple accounts and a mix of credit types is good for your credit score. It's a signal to lenders that you have the know-how to manage different types of credit.
But too many recent credit applications can be a drag on your creditworthiness. Each time you apply for a loan or credit, the lender runs a request for your credit report known as a hard inquiry. Although one hard inquiry on its own might result in a minor and momentary dip in your credit score, many recent applications can affect your credit more noticeably. A constant stream of hard inquiries—or a recent flurry of them—may cause lenders to view you as more of a credit risk.
When you do apply for new credit, make sure you understand your creditworthiness, and only apply for credit when you think you have a high likelihood of being approved. To improve your chances of success, consider using Experian CreditMatch™, a free service that can connect you with credit card offers suited to your unique credit profile.
Good Habits and a Healthy Outlook
Developing these four basic habits can help you keep your credit in good shape. In addition, monitoring your credit can help you track your progress and keep your goals top of mind. Experian's free credit monitoring might be useful here: It allows you to check your credit score and report regularly—and can alert you to changes as they happen. With a little vigilance and consistency, you can build good credit habits and the healthy financial outlook that goes along with them.