Credit, though not a perfect system, is still an important one. Whether or not you agree with the finer points of how scores are calculated or how your information is commodified, you cannot deny the usefulness of the credit system as a whole. The idea that one can simplify complicated human behavior by assigning them transparent numerical values is admittedly quite alluring.
Philosophizing aside, it really is better to have credit, even bad credit, when wading into the modern financial world. Lenders, employers, and the like trust people with credit scores because they believe those people can be effectively analyzed for risky behavior, whereas people without any credit at all appear unpredictable and therefore are always a risk, especially in serious financial transactions like buying a house or a car.
And of course, though it’s better to have credit, it’s best to have good credit, which comes with the cultivation of good habits.
In the last two installments of our Credit Repair 101 series, we’ll reveal which practices are keeping your credit score down, and which will help you start building your credit back up.
So what’s got your credit in the dumps?
1. Not paying your bills on time
This seems like the obvious place to start, considering that your payment history accounts for 35% of your FICO Score. Even one late payment can negatively affect your score, whether or not you had sufficient funds at the time of charge. Although we understand that payments can sneak up on you, the FICO Score is only a mathematical formula and lacks any capacity for human empathy, regrettably.
2. Spending more than you have
It’s quite easy to forget about any future bills or installment payments in your day-to-day life, especially when you’ve got a credit card. Credit cards, unlike physical money, do not disappear into the cash register upon payment. You have no immediate sense of loss or depleting resources when you use a credit card; in fact, if you feel anything, it’s probably a sense of contentment and happiness as your purchase is handed over to you and the plastic card with its seemingly-bottomless funds is fitted snugly back into your wallet.
You won’t have to deal with the financial consequences of using your card until the end of the month, and in the moment, it’s hard to remember that every little expense is adding up, waiting to sneak back into your life on some un-payable bill.
Worse yet, racking up your credit bills negatively impacts your credit even more than accumulating other types of expenses because FICO factors credit utilization into its final calculation of your score. Credit utilization is the ratio of how much you owe on your credit card to how much credit you have available to your account, and bringing those numbers too closely to one another is a major indicator of risky behavior in credit analyses.
Click here to learn more about different types of credit utilization and how to maximize your own credit
3. Using automatic bill payments
Although they sound like a good strategy to counteract missed payments, automatic bill payments have the potential to break your bank account by overcharging it. Not being able to pay your bill will hurt your credit score, yes, but overcharging your account will make it difficult for you to pay off any of your other bills, like groceries or rent.
Additionally, automatic bill payments distance you from the payment process: it’s easy enough to spend $10 a month on a streaming service when you don’t consciously or physically have to repay it month-to-month, or even to re-evaluate that charge every time it’s due.
4. Carrying around multiple credit cards
This confounds the problem we brought up earlier of credit cards leading to irresponsible spending- if one card is maxed out, you’ve got another waiting in your wallet to swipe on that nifty new purse or discount deck furniture.
In fact, carrying around multiple credit cards can negatively impact your score even before you use them: opening too many credit lines gives lenders the impression that you are in debt and need a large amount of resources immediately. This is a high-risk behavior and since you should always be aiming for a low-risk profile (lenders, like rabbits, are easily frightened), it’s best to try and keep the number of plastic cards in your wallet to one or two.
5. Skipping out on insurance
If your house burns down, you’ve still got to pay off the mortgage in addition to all the other new fun costs you’ve acquired, namely a new house and furniture (and possibly insurance on both). Insurance payments are a hassle, but they’ll protect you from the potentially life-ruining debt created by accidents and disasters.
Now you know what to avoid, but even once you’ve discontinued all of these bad habits, you still have to build your credit back up. So how do you turn your poor credit score into a value companies can trust? Essentially, what behaviors and habits should you cultivate?