Building and maintaining healthy credit is a critical practice in today’s financial landscape. Your credit score proves your creditworthiness; it is an indicator of your financial responsibility and a signal to lenders to trust or distrust you with their money.
Credit Basics & What is “Healthy”?
Healthy credit usage is measured through credit scores, which are calculated through two main scoring models, by three major credit bureaus. The three main credit bureaus in the United States are Equifax, Experian, and TransUnion. These companies collect data about how individuals use credit, and they report on that usage to lenders and other financial institutions.
Some factors affect your credit only minimally, including the length of your credit history, diversity of credit types, and new credit applications (accompanied by “hard” credit inquiries.) The two factors that make the biggest impact on your score are payment history and credit utilization. Because of this, the characteristic that will make or break the effort to build or improve credit is: discipline. Building credit requires attention, intention, consistency, and patience.
Building Credit Without a Credit Card
It can be hard to build up healthy credit when starting (or restarting) the journey. Whether you’re not approved for the credit card you want, or you’re hesitant to use credit cards for one reason or another, there are some options for improving your credit without them. Responsible debt repayment will positively affect your credit, even if not through credit cards. If you have a mortgage, student loans, or other debts you’re paying on, they are valuable tools for improving your credit score. Consistency and history of payments are the most important factors in determining your credit score.
If you don’t have any debt to repay on, rent and utility payments could be helpful. Rent payments are not considered by every credit scoring method, but if they are sent to the credit bureaus, all three will include the data in reports. While you can’t report your own rent payments many different programs offer this service. NerdWallet wrote an excellent overview article with more details about these options.
Non-Traditional Credit Card Options
Secured credit cards act like regular credit cards but they are backed by a cash deposit. If you’re someone who has struggled with credit cards in the past, they could be a great alternative. Like with traditional credit cards, on-time and full payments will go a long way to building up better credit.
For beginners, there are two other options to help you gain traction:
Experian Boost is a special program from the Experian credit bureau. This feature allows you to link a bank account that verifies monthly utility, cellphone, and subscription payments. If you have limited debt and access to credit, something like Experian Boost can help you build a credit history through bills you’re already paying.
Lastly, becoming an authorized user on a financially responsible friend or family member’s credit account can boost your own credit health. Just being listed on a healthy account can have a high impact, especially for students, teenagers, and people who have filed for bankruptcy or are otherwise rebuilding.
Healthy Habits with Credit Card
The number one rule of using credit cards is: always pay on time. Late payments hurt your credit score and your trustworthiness in the eyes of lenders. It’s also advised that you pay your credit card bill in full, each month. If this isn’t possible, always make the minimum payment at least. You should slow or stop your credit card usage, if possible, until you can get back to a $0 balance.
If you are just starting with a credit card, begin with small charges and ease yourself in. Use the card for a few minimal payments each month like gas, utility bills, or groceries, and get into the habit of tracking the account and paying your balance in full and on time. If it’s manageable for your situation, set up automatic payments so you can’t miss a deadline.
Once you’re ready, you can make a larger purchase like travel, furniture, or home and auto maintenance. You still need to pay these off in full, to avoid accruing high interest rates. So, it’s best to save up and set the money aside for when your credit card bill comes.
Utilization – How Much Credit Are You Actually Using
Each line of credit has a credit limit, or a maximum amount of money you can borrow from the account, based on your credit score and history. Most people agree that 30% is the maximum amount of credit that you should use at any given time. Ideal credit utilization is actually under 10%, with individuals above an 800 credit score using an average of only 7%.
A couple of tips about utilization
Credit data is sent to the credit bureaus at the end of the billing cycle, so timing and utilization are correlated. Your utilization should be as close to single digits as possible, especially at the end of the billing cycle when credit bureaus are looking at the account. Credit limits are also a factor to consider with utilization. If you can get a higher credit limit, the same amount of money is a lower portion of your max. However, raising your credit limit is only possible (and responsible) when you have healthy accounts that are well-maintained.
Other tips for keeping your credit healthy:
- Start with one credit card. Lots of companies will pre-approve individuals for lines of credit but you want to make sure your accounts are manageable. It’s best to have fewer lines of credit that you’re taking excellent care of.
- Credit is real money! Don’t deceive yourself into spending more than you have. When using a credit card, imagine you’re ordering food at a restaurant. You are spending the money; you just haven’t gotten the bill yet.
- Keep track during the month of how much you’re using and owing at the end of the billing cycle.
- Keep a diverse mix of credit types and ages.
- If you only have credit cards, a small loan could positively impact your credit. If you only have loans, consider getting a new credit card.
- Older credit accounts showcase a longer credit history, which is good. Closing old accounts can be unnecessary and can negatively impact your credit.
Building up healthy credit is a life-long effort, requiring time and consistency; you cannot rush the process. Healthy credit comes from good habits, and good habits form the foundation of financial literacy. Understanding credit along with budgeting, saving, and investing will help you build the skills needed to pursue your long-term financial goals.
