When it comes to building wealth, credit is an underplayed hand that even the savviest investors don’t give enough weight. Healthy credit habits and healthy financial habits are not mutually exclusive by any stretch of the imagination. If you’re strategic about monitoring your credit score, improving your score over time, and making wise decisions about using credit cards, life will get a lot easier when it comes to big ticket purchases and growing your net worth.
Read about the credit habits of the most affluent Americans to learn how to make your credit score work for you.
Habit 1: They Track Their Finances
Wealth-minded people keep tabs on every aspect of their finances, including how their credit score improves or declines. When you know where you stand, you can use financial strengths like a great credit score to your advantage and make moves to improve your financial weaknesses. It’s wise to get in the habit of reviewing your credit report on a regular basis. You can do this for free online. This will also help you detect any fraudulent credit card activity happening under your name.
An even easier way to keep track of fluctuations to your credit score is through apps like Credit Karma, Credit Sesame or Experian. They’ll also show you how your score improves or decreases based on credit card utilization, payment history, age of credit history, total accounts you have open or hard credit inquiries. Many credit card companies offer similar services.
Keeping tabs on your score is important:
- You can spot mistakes recorded in your credit history or fraudulent activity, which can damage your credit
- You know what to expect if you ever need to use your credit for big ticket purchases, like a home or car
- It can serve as a gauge for your financial habits
Another simple way to track activity on your credit cards is with Personal Capital’s free app and online dashboard. Link all of your accounts, and you can quickly review purchase activity in one location.
Habit 2: They Know How Credit Scores Work
If you want to build your credit, and make it work for you, you have to know how credit scores work in the first place. Your credit score is calculated based on amounts you owe, new credit, the length of your credit history, your payment history and your credit mix, according to FICO:
- Payment history: Your payment history makes up 35% of your overall score, which means it’s critical to make sure you pay credit cards and loan payments on time.
- Amounts owed: 30% of your score is based on credit utilization, which is how much money you owe compared to how much credit you have available. You want to have a low credit card utilization. Wealth-minded people optimize their credit utilization by establishing high credit limits on multiple cards but not using the entire limit. A good way to increase your credit limit is to call your credit card company on a quarterly or annual basis and request a higher limit.
- Length of credit history: This makes up 15% of your score. Many experts advise you keep your oldest credit cards open even if you don’t use them – the longer your credit history is the better your score.
- New credit: Opening too many accounts around the same time can have a negative impact on your score, according to FICO. This factor makes up 1% of your score.
- Types of credit used: FICO considers the mix of credit you use – private loans, mortgages, credit cards, etc – when calculating your score. This accounts for 10% of your score.
Habit 3: They Use Credit Card Rewards Responsibly
Credit card rewards are another way to use good credit to your advantage. When you’ve got an attractive score, you’re eligible for cards that come with great perks.
If you have good credit, you can use credit card rewards to earn hundreds of dollars of cash back throughout the year or deals on hotel stays and vacation travel. Whatever the reward, the idea is the same: you get freebies for charging the things you would be buying anyway on a credit card. and you build credit.. Of course, pay your balance in full each month, don’t spend more just to get those rewards, avoid opening too many credit card accounts and be aware of fees associated with credit card points programs.
Building wealth requires long-term thinking. It’s about having full control of your finances. Sure, developing good credit habits might not seem like the most exciting jolt to your short-term financial picture. But establishing good credit ensures you have control over your finances and goes hand-in-hand with building wealth.
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