There’s nothing like the clean slate of a new year to inspire us to do better. Unfortunately, knowing what to do doesn’t necessarily translate into getting it done.
If you’re looking to build or rebuild credit, there’s no better time than now. Here are some habits to develop — and some tips on how to make them stick.
1. Pay on time
Even one missed payment can tank your credit because payment history is the biggest factor in your score. Worse, a late payment can stay on your credit report for up to seven years. So getting payments in on time is more important to your credit than any other single thing you can do.
Signing up for automatic payments can work well for monthly bills with a set amount, like a car payment. Automatic payments for bills with varying balances, like credit cards, could lead to overdrawing. On those, you could opt to autopay the minimum to ensure the account is never late and make a separate payment to keep your balance down. You can also set up email or text reminders about approaching due dates.
If a late payment is unavoidable, Terry Griffin, a senior vice president at credit bureau Equifax, recommends contacting the creditor to try to negotiate a lower minimum or interest rate temporarily.
2. Keep an eye on balances
Ideally, your credit card balances should stay well under 30% of your credit limits. Credit utilization — the percent of your credit limit you use — is the second-biggest factor in your score.
Many cards let you set alerts to let you know when your balance nears a percentage of your limit or a dollar amount you choose.
Of course, it’s best to pay the full balance every month. In reality, your refrigerator may fail the same month that your car needs a new transmission. You might need to carry a larger-than-normal balance for a while.
Whittling down balances will help your credit quickly. As soon as lower balances get reported to the credit bureaus, your score won’t penalize you for the past.
3. Save for a rainy day
Information about your savings isn’t in your credit report, so it does not directly affect your credit score. But having an emergency fund can protect your score by letting you keep up with bills after a job loss or avoid a high balance when you have unexpected expenses, for instance, Griffin says.
Arrange to have a set amount of every paycheck sent to a savings account. Even a few hundred dollars can help keep unexpected bills from becoming financial disasters.
4. Monitor your credit reports and scores
You’re entitled to at least one free credit report every 12 months from each of the three major credit-reporting bureaus. It’s smart to check those annual reports and dispute any errors you find.
But you should monitor your credit more frequently: A big change in your score could suggest identity theft. Sign up for a free online credit score and report that updates regularly. Many banks, credit card issuers and personal finance websites offer them.
If you don’t plan to apply for credit in the near future, freeze your credit. You can still check your credit score and use your credit cards, but a frozen credit file makes it difficult or impossible for a fraudster to open new accounts in your name.
5. Think twice before applying for new credit
Applications can shave a few points off your score because the lender or card issuer does a “hard inquiry” to check your credit. If you’re approved, the new account reduces your average age of credit, which also can hurt your score.
Set alerts to help these habits stick
“Atomic Habits” author James Clear recommends making it as easy and attractive as possible to establish and maintain new habits. Your credit accounts almost certainly have options to help you stay on top of due dates and credit utilization.
Setting up alerts will only have to be done once. You can schedule an hour or so — put it in your brand new calendar planner or bullet journal — to set up alerts and payments, and to sign up for free credit reports and scores that update regularly.
Perhaps you check and act on those alerts after Sunday brunch, pairing bill-paying with an activity you enjoy. Another tip is to use a tracker, like a journal or calendar, which can serve as a prompt and also gives you the joy of checking something off your list.