*(BPT) – Some rules are meant to be broken – like the one about not wearing white after Labor Day. Others should remain sacrosanct, such as the rules of good credit. Those are the kind of rules that can make life easier and happier when you follow them – and help ensure your finances stay in good order, too.
Unlike fashion rules, the rules of good credit are really not subject to interpretation or personal opinion. They derive from the formulae that credit bureaus and lenders use to calculate your credit score.
So what are the 10 unbreakable rules of good credit? Here they are in descending order, a la David Letterman:
10. Create a budget and stick to it. Your budget should cover everyday expenses and allow for the smart use of credit.
9. Use credit cards wisely. Smart use of revolving credit – not carrying a balance, paying the full balance immediately – is an important component of a healthy credit score. Unwise use, such as running up debt, can lower your score. And in that vein …
8. Always pay more than the minimum balance on your credit cards. Ideally, you would pay off the entire balance right away, but if that’s not possible, pay more than the minimum – as much as you can afford. Paying only the minimum balance means it will take years – and thousands in interest charges – to pay off your debt.
7. When applying for a loan – which includes applying for new credit cards – do so wisely. Comparison shop and make your applications (if you’ll be making more than one) in a short amount of time, so that those credit inquiries will only count against your credit score once. Stretching applications over time, or making too many in a short amount of time, can negatively impact your credit score.
6. Your credit utilization ratio – the amount you owe compared to the amount of credit you have available – is a key factor in determining your credit score. Avoid maxing out your credit – including credit cards or home equity lines of credit. At any given time, try to keep three quarters to two thirds of your total available credit free for use.
5. Don’t immediately close a credit card account just because it’s paid off. Doing so can skew your credit utilization ratio. Before you close an account, be sure you understand what impact – if any – the action will have on your credit score.
4. Practice identity theft protection measures. From shredding sensitive paper documents before trashing them, to keeping your PC’s virus protection software up to date, it’s important to take steps to protect your credit from identity theft and fraud.
3. If you’re in financial trouble, don’t practice avoidance. If you can’t pay your bills, contact your creditors to work out a payment plan, but know that not making minimum payments may negatively impact your credit score. Being proactive may not solve your financial woes but it can help minimize the negative impact on your credit.
2. Keep an eye on your credit score. Maybe you’re in the habit of reviewing your credit report once a year, or only check it when you’re planning to apply for a loan, but it’s important to stay on top of your credit score all the time. Fortunately, the Internet has made it easy to monitor your credit report and score. Enrolling in membership of a product like freecreditscore.com can help you understand your credit. With enrollment, you get credit score alerts, identity protection alerts and fraud resolution support if you find an error on your credit report.
And, the No. 1 rule of good credit:
1. Pay your bills on time. A consistent, long-term history of timely bill paying goes a long way toward a healthy credit score. In fact, a solid payment history can pull up your score even if there are other negatives on your credit report, such as a high ratio of credit used to credit available. Not paying your bills on time – or at all – is a surefire recipe for bad credit.