If you hope to earn a great credit score, these are the three key habits you'll need to adopt.
Image source: Getty Images.
When your credit score is good, you have lots of opportunities in your financial life. You can get approved for credit cards that offer great rewards, can borrow for big purchases, and can rent any apartment you’re able to afford. But, earning a good credit score and reaping all these benefits isn’t effortless -- you’ll need to work at it.
To make sure you earn the best credit score you can, try adopting these three habits of people whose credit scores are excellent.
1. Spending money responsibly and living within your means
If you want a good credit score, you need to be financially responsible. That’s because you’ll need to avoid maxing out credit cards, which can lower your credit score. In fact, using more than 30% of the available credit on any card could cause your score to drop.
Maintaining a very low credit card balance requires you to have enough money to cover your costs without relying too much on credit. You can only do that if you’re responsible with your spending and don’t spend more than you earn.
You’ll also need to ensure you have money to pay your bills when they’re due so you don’t fall behind, as delinquencies are extremely damaging to your credit. Payment history is the single most important factor that determines your credit score, and being 30 or more days late could lead to a drop in your score of more than 100 points. If you live on a budget, don’t spend more than you earn, and have money in the bank, you won’t have to worry about this happening to you.
2. Taking out different kinds of loans
Having a mix of different kinds of credit is another of the key factors that determines your credit score. Lenders like to see you’ve been responsible with different kinds of borrowing, which means your score will be lower if you only have one credit card or only have a car loan. If you borrow from a mix of different lenders and pay them all back, on the other hand, this helps to establish you as a very responsible borrower.
To establish a nice mix of different kinds of credit, consider taking out a short-term car loan and paying it off quickly. You don’t want to take out a big loan that will take you years to pay back because this is too costly. But, if you borrow a small amount and repay it in a few months, your interest costs will be low and you’ll have another kind of loan on your credit report.
If it makes financial and personal sense for you to buy a home, a mortgage is also a good loan to have on your credit report. Personal loans and student loans can also help you to establish a good mix of credit -- as long as you don’t borrow more than you need and you always pay on time.
While it’s good to have a mix of different kinds of credit, you don’t want to borrow too often or too much all at once. Average age of credit is another factor in your credit score. It’s calculated based on all the accounts you have open, and a longer average age of credit is better. Plus, each time you apply for new credit, you will get an inquiry on your credit report -- and too many inquiries hurts your score.
To build the best score, gradually apply for new loans and types of credit as your life progresses. You may decide to get a credit card in college, a car loan after graduation, a personal loan to help start a new business after working for a few years, and a mortgage after you’ve saved up a down payment. If you get all these types of credit a few years apart and are responsible with paying back all you borrow, your credit score should be in great shape.
3. Monitoring your credit report for mistakes
If you’re doing the right thing with your credit, the last thing you want is for your score to be lower because your report contains black marks due to other people’s bad credit habits. You also don’t want your score to fall because someone steals your identity, applies for credit in your name, and doesn’t pay back what was borrowed.
Unfortunately, mistakes on credit reports are very common, with the FTC reporting around one in five credit reports has an error on it. To make sure your credit doesn’t suffer due to a mistake -- and to catch identity theft early -- check your credit report on a regular basis.
When you do the responsible thing and keep tabs on your credit, you can dispute problems right away and your score should never fall due to inaccurate info about your borrowing behavior.
Adopting these habits will help you build good credit
The habits you need to adopt to build good credit aren’t a mystery. If you keep your credit balances low, have a mix of different credit, pay your bills on time, and make sure your report is error free, you should earn an enviable credit score that makes you attractive to landlords and lenders alike.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.