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How to Develop Good Habits for Building Credit Score

Peter Warden
Building credit score

Building credit score points is not as difficult as you may think. 

Credit scores are calculated using complex algorithms. And the exact same event (say, skipping a payment) can have a much bigger impact on one person’s credit score than another’s. 

But, actually, it’s easy to build credit score points. You just have to apply a few simple rules to your financial life. 

Of course, it’s easier for some than others. If you’re going through tough times financially, it may be especially difficult to stay on top of building your credit score. If you aim to do your best at all times, you will reap the rewards.

Scoring Technologies, Credit Bureaus, Credit Reports and Credit Scores

FICO builds the most widely used scoring technologies. It says its products are used by 90% of the nation’s top lenders. But it’s not the only game in town. Many lenders use VantageScore as well as – or instead of – FICO. There are differences between the two

Remember, that your score is affected only by information in your credit report. Your credit report is an electronic file maintained by a credit bureau. The report lists your financial history, including:

  • Identifying information – Name, address, social security number …
  • Existence, type and age of accounts
  • Timely payments
  • Late payments
  • Skipped payments
  • Defaults
  • Credit card payments, balances and credit limits
  • Applications for new credit accounts
  • Bankruptcies and court judgments
  • Collections

Your credit report retains most information for seven years before discarding it. Some serious stuff, such as bankruptcies, can stick around for 10 years.

Building Credit Score Points is Open to Everyone

There is no reason to despair if you’ve had bad things happen in the past. Both lenders and credit scores put much more emphasis on recent behavior than historical issues. You can begin building credit score points now, even if you’ve had serious problems in the past.

It is going to take time and perseverance to get from a poor score to an excellent one. But some improvement can often be seen quite quickly. 

What Affects Your Credit Score

FICO is open about how different aspects of your financial behavior affect your score and assigns importance as follows:

  • 35% payment history
  • 30% amounts owed
  • 15% length of credit history
  • 10% new credit
  • 10% credit mix

5 Rules for Building Credit Score

Naturally, the more important an action is to your score, the more you need to be aware of it. So let’s run through the rules that flow from the factors in that list in order of importance:

1. Pay all your bills on time.

With payment history making up more than one third of your score, the timely payment of your bills should be your golden rule. Think about setting up automated payments for regular ones. 

Another idea is to have the money reach your “creditor” (the company to which you owe money) a day or two before it’s due. That way, you’re less likely to be late if your bank has a technology meltdown.

Creditors sometimes don’t automatically report all accounts to credit bureaus. And, if you’re a good payer, you may be disadvantaged if your landlord and utility companies aren’t reporting your timely payments. 

You can’t force them to do so. But, if you ask, many will oblige.

2. Keep your credit card balances low

“Amounts owed” makes up nearly 30% of your credit score. So this is very nearly as important as timely payments. But the term “amounts owed” is widely misunderstood.  This term does not refer to your mortgage or any other “installment loan.” That’s one you pay back in equal installments over a fixed period, such as an auto loan, personal loan, or student loan.

“Amounts owed” refers almost entirely to store and credit cards. And it’s nothing to do with how much you actually owe.

It’s about how close you are to your credit limit. More specifically, it is the ratio or percentage of amount owed compared to the credit limit. For example, if you owe $500 on a card with a $1,000 credit limit, you owe 50% of the maximum you could use. If you owe $250 on a card with a $1,000 credit limit, that’s 25% of the maximum you could use. This percentage number is called your “credit utilization ratio” in industry jargon.

A ratio of 30% ($300 owed on a card with a $1,000 credit limitO ratio is widely accepted as a fairly safe level. Although, in recent years, FICO has said individuals may need one that’s lower or higher. This is because the scoring algorithms are too complex for one rule to apply to all. Fico now urges consumers to simply keep theirs as low as they can – preferably at or below 10% if you’re trying to build credit score points.

3. Don’t open or close accounts unnecessarily

This concerns your length of credit history. Your score keeps a running tally of the average age of all your accounts. And the higher that age, the better. It makes your finances look stable.

Imagine you open lots of new accounts. All those short histories will drag down that average age. And closing long standing accounts will have the same impact. 

This doesn’t mean you can’t ever get new credit or rid yourself of accounts you don’t use. But open and close accounts only when you have a good reason. And try to avoid doing so while you’re working on building credit score points.

4. Don’t apply for new accounts unnecessarily

Every time a lender checks your credit before making a lending decision, your score might take a small hit. 

Why “might?” Well, there are two circumstances in which that won’t happen:

  1. When the lender makes only a “soft” inquiry. Some cards and loans offer a preliminary decision that doesn’t affect your credit score. And that’s a soft enquiry. Normally a lender makes a final hard enquiry before actually issuing a card or parting with funds/
  2. When you’re comparison shopping for a loan. If you’re shopping around for the best rate for a big loan (mostly mortgages and auto loans), your credit score should count all the lenders’ hard enquiries as just one. This happens if you approach all the lenders within a limited period, maybe 14-45 days. A federal regulator explains: “Let’s say you are looking around for an auto loan and you authorize five lenders to check your credit score(s) within a 14 day time span. All those inquiries should count as one inquiry.”

A hard inquiry typically reduces your score only a bit. After a few months of timely payments, your score should bounce back, perhaps higher.  

5. Have different sorts of accounts

Credit scores differentiate between cards and installment loans. It’s good to have a mixture of the two. Ten percent of your score depends on having a healthy credit mix. So maintain a number of those different types of accounts if you can. Just remember that your score is more likely to be harmed with a high credit utilization ratio than by having a small credit mix. If you have a habit of maxing out on credit cards, it’s better to avoid them.

Other Tips

Actively monitor your credit score and credit report. Doing so can help you spot:

  1. Reporting errors that you need to get corrected
  2. Attempts to hijack your identity
  3. Things you’re doing that are harming your score

To keep an eye on your report, visit the website AnnualCreditReport.com each year. That site’s run by the Big 3 credit bureaus. And you can order a free copy of your report annually from them.

But perhaps the most important tip for building credit score is to keep your score in mind whenever you’re spending, borrowing or paying bills.


Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Published April 27, 2022 Updated: May 11, 2022
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