Build Good Credit Habits In 5 Steps

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Note: This article was included in The Carnival of Personal Finance at Squawkfox. Thanks!

As you build good credit, you’ll find that your bad habits are impossible to break. Yep, impossible. They always come back to haunt you. You can’t just break them and move on. You can’t truly “break” any habit…unless…you replace that habit with another. And it might as well be a good habit, right?

When you build good credit, it helps to think in terms of building a house: you start on the foundation and build it one brick at a time, one room at a time. But bad credit habits are like using paper mache instead of bricks. They appear to be okay, they look good, they’re easy and cheaper for now, but when the storms move in, they crumble.

You cannot build good credit with bad credit habits.

If you’ve relied on credit for your daily needs, and now it’s coming back to bite you through late payments, high interest charges, and that “downward spiral” feeling, you have a bad habit that needs replacing. Build good credit by replacing that habit with these five things:

1. Rely only on cash for your daily plans. Leave the credit cards at home (or cut them up) and carry only enough cash to do what you’ve planned for your day.
2. Design a new perception of yourself as someone who always pays bills on time and doesn’t need credit cards. That’s just “who you are” now. This is the most important of the five steps.
3. Plan for known upcoming expenditures (think: Christmas Club, quarterly insurance payments, personal property taxes, etc), by making regular deposits into an account for these items.
4. Build an emergency fund for unforseen events. Murphy will sneak up on you!
5. Always, always pay your bills on time.

Making your payments on time is THE best way to build good credit. As a result, you need to take notice if a bill doesn’t arrive in the mail. You cannot forget a single one! Even if you don’t receive a statement, you’re still responsible to make that payment on time.

Try using one (or more) of these methods to avoid any late or missed payments:

• Keep a “bill calendar.” List all your accounts, including billing cycles, due dates, balances, and interest rates. List any quarterly, annual, or irregular payments as well as monthly ones. Then, take time to enter all your due dates into a paper or electronic calendar (like Google Calendar) checking it at least once a week to keep track. Allow plenty of time for mail delivery if you still send checks in the mail.
• Use electronic reminders. Program your PDA, cell phone, email system, or financial software to remind you automatically when various bills are due. Google Calendar lets you schedule email reminders to yourself. Many creditors offer email reminders too, but don’t count on these! Sometimes a creditor’s biggest profit producer is late payments, so they have a vested interest in you being a few days late.
• Enroll in automatic payment programs. Automatic payments, electronic funds transfers (EFT’s), or direct payments, authorize creditors to withdraw monthly payments directly from an authorized checking account. Auto payments are often used for utility bills and loan payments but are becoming popular with other creditors AND debtors.
• As a final catch all to build good credit, you might consider credit monitoring. This is a service that I personally use as the final catch all for negative changes to my credit report (including identity theft).

When you build good credit, the key factor is YOU.

Your perceptions, your plans, and your actions are what builds it. You ARE in control, so seize the wheel and steer your financial vehicle to the land of wise choices.

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