A good credit score can help you get better rates for a cell phone plan, cheaper car insurance and more, while a weak one can negatively impact your financial health. And while building or boosting your credit isn’t an overnight process, with some planning, patience and consistency, you can see your choices pay off in the long run. For inspiration, check out these common habits of creditworthy cardholders.
Identifying specific savings goals allows you to come up with small steps you can take to help achieve those — and to figure out where credit card use can fit in (with rent, car payments, utilities or other regular expenses, for example). “By allocating money in your monthly budget for your credit card payments, you’re establishing good credit, which can help you have access to better loan interest rates and other financial opportunities that support your savings goals,” says Markia Brown, a board-certified credit score consultant in Los Angeles and founder of financial education and counseling firm The Money Plug.
Let’s say you’d like to save $10,000 over two years; being specific about this number enables you to calculate how much you’ll need to set aside from each paycheck to achieve it. That includes factoring in your expenses, including the amount you’ll need to make monthly credit card payments on time and avoid carrying a high balance, which will help strengthen your credit history. The bottom line: A proactive approach (thinking ahead about how you can build credit) is better than being reactive (say, scrambling to cover a purchase you can’t afford), says Brown.
That’s because spending beyond your means can be a slippery slope. “If you’re looking to build credit to cover your living expenses because you can’t make ends meet, you’re taking the wrong approach,” says Sarah Newcomb, a behavioral economist and founder of the Thrive Financial Empowerment Center.
If you have a bad credit history or no credit at all, applying for and getting approved for a secured credit card is one of the best ways to help establish a credit history, Newcomb adds. A secured card requires putting down a deposit as collateral where the deposit is usually equal to the credit limit. “You're signing a contract with the lender that basically says if you don't pay your bills, you're backing it up with these assets that you already have, so it makes you less of a risk.
They look for a credit card that fits their lifestyle and financial habits by weighing the costs, benefits or features, and terms associated with a credit card. They might also steer clear of high annual fees, says Newcomb, who tends to prioritize ones with low or no annual fees unless the card benefits outweigh their annual cost. “If you get discounts from using the card, or points toward travel, then the annual fee may be worth it,” she notes, but you’ll want to avoid being seduced by perks you won’t use. “I don't dine out often, for example, so discounts at restaurants don't help me out much,” Newcomb says. Instead, look for ones that offer rewards for purchases you’re already making; think cash back for groceries or gas, for example, if you routinely spend the most in those areas.
On average, they have more than one card or other credit type, such as a mortgage or student loan, to maximize their credit mix (the combination of credit accounts they have). “The average good credit profile [meaning a score in the 670 to 720 range] has about three credit cards, one short-term loan and one long term-loan,” says Brown. Keep in mind that a short-term loan is typically something you can pay off in two years or less, such as rent-to-own furniture, and a long-term loan is more of a commitment – for example, a car loan or student loans you pay off regularly.
The combination helps demonstrate to lenders that you can make your payments reliably over time, which is one of the major factors of a good credit score. “What lenders really want to know is: Do you pay your bills on time?” says Newcomb. “And can you have access to money and not use it?” Having a mix of credit may help you check these boxes.
“You want to think, what am I already spending money on that I can be rewarded for, instead of what can I spend more money on?” says Brown. The idea is to use a credit card instead of a debit card, check or cash for a regular expense you know you can afford, such as a utility bill or streaming subscription. Using it for these expenses versus large, unexpected purchases can help you establish a record of making reliable payments, which credit lenders like to see, and avoid carrying a balance and accumulating interest you might not be able to cover.
One of the best things you can do to establish good credit is to set up on-time payments, says Newcomb. “Automation is a lifesaver because one thing that hurts people’s credit is forgetting when the bill was due,” she says. And it’s typically as simple as selecting the “Set up Auto Pay” or “Schedule Payments” feature on your banking or credit card app, or the website.
Consulting a financial expert or advisor can help you make proactive decisions to build credit and resolve credit issues before they become too big to manage. But you’ll want to make sure these sources have legitimate credentials, notes Brown. When hiring certified financial counselors, therapists, coaches and education instructors, keep your eyes peeled for acronyms like CFP (Certified Financial Planner), CFC (Certified Financial Consultant) and AFC (Accredited Financial Counselor) that indicate affiliation with accredited organizations, she advises, because “these certifications mean we have to adhere to a code of ethics.” Don’t be afraid to ask for verification either, she says. “No professional is going to be upset that you asked for proof of their certifications.”
For more advice on building and maintaining credit, visit Citi Financial Pathways, a new source of articles that can help you make informed decisions for your financial future.