Building and Maintaining Good Credit
When it comes to our credit scores, Americans are doing better than ever before. Since hitting an average FICO Score low of 686 in October 2009—just one year after the 2008 stock market crash—scores have steadily risen. In 2024, the average FICO score in the U.S. reached 717, showing a positive trend in financial responsibility (Streaks, 2024).
Why Credit Planning is Essential
Building and maintaining good credit is crucial for creating a solid financial foundation. This foundation eventually becomes the cornerstone of your overall financial plan. Your credit score can impact your ability to buy a house, secure a loan, or even get a job.
Here are some critical steps you can take to build and maintain good credit:
Apply for a Credit Card, Not Ten Credit Cards
Opening too many credit cards at once can hurt your credit. Start small by applying for one card, and use it responsibly.
Make Small, Manageable Monthly Purchases
Use your credit card for a few monthly purchases, but avoid maxing out your credit limit. Lenders tend to see high usage as a financial risk.
Pay Bills On Time
Whether it’s a credit card, loan payments, or companies that report to collection agencies, paying on time is critical. Late payments can lower your score significantly.
Keep Your First Credit Card
The longer you maintain a credit card, the more positive credit history you build. Canceling your oldest card can reduce the average length of your credit history, which could negatively impact your score.
Good Debt vs. Bad Debt
Not all debt is bad. There’s a difference between good debt and bad debt.
Good Debt: This includes debts for items that increase in value or generate income over time, such as real estate, education, or starting a business. Most lenders don’t expect you to pay off good debt immediately. Instead, they want to see that you make regular, on-time payments.
Bad Debt: This is typically associated with carrying high-interest balances, like those on credit cards. High credit card debt can be damaging because of finance charges. Whenever possible, pay for smaller, everyday expenses like gas or meals with cash, or pay your credit card balance off in full each month.
Understanding the FICO Score
Most lenders rely on your FICO score when determining your creditworthiness. Your FICO score is based on five key factors:
Past Delinquencies (35%)
This reflects whether you’ve made payments on time. Late payments hurt your score, so always make at least the minimum payment on time.
Credit Utilization (30%)
This is the percentage of your total credit limit that you’re using. Keep your balance below 30% of your total limit to show responsible usage.
Credit History Length (15%)
The longer your credit history, the better. To build a solid credit history, keep older accounts open, even if you don’t use them as often.
New Credit (10%)
Applying for too much credit in a short period can lower your score. Be selective about when you apply for new loans or credit cards.
Types of Credit (10%)
A diverse mix of credit types—a credit card, a car, and a student loan—can help improve your score. This shows lenders that you can manage different types of credit responsibly (RSW Publishing, 2024).
Other Important Credit Tips:
Check Your Credit Report Annually: Make it a habit to review your credit report at least once a year.
Verify Information for Accuracy: Identity theft is common today. Ensure the accounts listed on your report are yours and confirm that balances and payment histories are accurate.
Ensure All Accounts Are Reported: Make sure your creditors report all of your accounts to the major credit bureaus to reflect your full credit activity.
Conclusion
Following these simple steps can help you build a solid credit profile and set yourself up for financial success. Whether you're just starting out or looking to improve your credit, being mindful of how your credit score is calculated and how to manage debt can go a long way toward a bright financial future.