It only takes one instance of being refused a loan, a mortgage or a credit card for most of us to resolve that we are going to take actions to build our credit rating. Our credit provider may even give us advice on ways to do this, and there are numerous resources available to help us identify the actions which will have a positive impact on our credit scores.
However despite the best intentions, it can be easier said than done to create credit building habits. Perhaps this is because our credit scores are fairly abstract to most of us – algorithm-created numbers that exist somewhere in a company file. There’s little immediate gratification in paying back a credit card debt.
Credit Building Habits
In his excellent book ‘The Power of Habit’ the psychologist Charles Duhigg argues that our habits dictate the majority of our daily behaviour. Very often we are operating on a kind of ‘autopilot’, going about tasks in a way that takes as little mental effort as possible. This makes sense; if we had to think hard about how to brush our teeth in the morning, commute to work or make our morning coffee then we’d be exhausted by brunch.
Very often we’ll try to change bad habits by using our willpower, but this is difficult. It’s believed that we each have limited daily reserves of willpower, which might explain why it’s so much easier to succumb to naughty treats in the afternoon.
So how can we go about effectively changing our habits and creating behaviours that serve us? In our case, how can we make credit building habits a regular enough occurrence that it will have a positive effect on our credit scores?
The answer is to recognise what creates and sustains our habits, and to replace old habits with new ones. Duhigg identifies three stages of habits:
Cue: the action that triggers the habit (for example the smell of ground coffee wafting out of a coffee shop window)
Routine: your physical or mental behaviour that follows the cue (walking into the coffee shop and ordering your brew of choice)
Reward: the pleasant sensation you get once you complete the action (the taste of the coffee; the buzz of the caffeine)
Once we can recognise these three stages in our daily habits, we can begin to take steps to change them. Of course, this can be applied to several areas of our lives, but in the case of credit building, here are some ideas that may help make it easier to improve your credit score.
Credit Card Spending
As far as habit building goes, the less you have to think about an action the better. So the first action to take is to obtain a credit card that is automatically paid off every month. Even if you don’t need one and are entirely capable of living within your means, this is important as the regular repayment of borrowed credit will quickly help your credit score to improve.
Now to create a new habit with the credit card. For optimum ‘credit utilisation’ you should aim to spend between 10% and 20% of your available credit each month. For argument’s sake let’s say that your new credit card has a limit of £1000; your aim will be to spend between £100 and £200 per month. Therefore our ‘cue’ will be something that we spend roughly this amount on per month. For many people this is fuel for their car, so we’ll use that as an example.
Every time you go to the petrol station, remind yourself that you need to pay for the fuel on your credit card. Once you’ve done this a few times you’ll have established the routine. This will be easier of course if there’s a tangible reward. The nice feeling of having a full tank of fuel? The satisfaction of having improved a credit score? If these two don’t quite cut it then perhaps you could add the cost of a favourite snack from the counter to the cost of the fuel.
If this example won’t work for you, can you think of others that might? Consider items you regularly spend small amounts of money on each month and the cue, routine and reward associated with them. In no time the credit building behaviour will be a habit and the effect will be reflected on your credit score.
Monthly Bills
On time payment of monthly bills such as your phone and utilities contracts contribute towards a positive credit score. As stated in the previous example, the best habits are the ones you don’t have to think about at all, so making as many of these monthly payments as possible direct debit will give you the benefit of building credit with no work at all.
However, sometimes it’s not possible or practical to pay bills in this way and we need to build the action into our monthly routine. Duhigg offers suggestions for this too. He tells the story of the song ‘Hey Ya’ by OutKast, which was met with resistance by radio audiences when it was first released. The song only became popular when radio producers began to play it between two well-known numbers. ‘Sandwiching’ in this way – placing a new behaviour between existing familiar routines can make the habit more likely to stick.
In the case of keeping up with our payments (rarely a rewarding task in itself) it can be useful to tag this on to other monthly tasks. An hour sat at a computer making payments might become easier if it’s tagged on to a monthly social occasion, class or business call. As with all habits, once the behaviour has been repeated a few times it will start to become automatic, making credit building easier.
Check Your Credit Score Regularly
Positive Feedback is a huge motivator, and it therefore makes sense that we will feel more inclined to carry on our credit building behaviours if we see the difference that it is making. Contrary to popular belief, checking your credit score yourself won’t harm your rating. Free credit checking services such as Experian’s allow you to see your score and how it is changing. Seeing the positive effect that the new habits you have created will act as a reward and encourage you to maintain the behaviour.
You can also check your credit score within your Credit Builder application.
Rental Payments
With Credit Builder you can now turn another of your habits into a credit building opportunity. Simply by making regular rental payments you can build your credit rating in the same way that you would if you were paying a mortgage. It’s simple, free, and like all the best habits, happens automatically without you having to do a thing.