Your credit score in some ways is meant to be a snapshot of your overall financial habits – especially your habits surrounding debts and other financial responsibilities.  Developing some good financial habits can help your credit score by putting you in a good financial position.

Good financial habits will ensure that you don’t get into too much debt and that you are able to meet your financial duties easily.  There are a few financial habits that are especially credit-friendly:

Learn to budget

One of the biggest reasons that people develop poor credit is overspending.  In many cases, this overspending is caused by a lack of budget.  A budget can tell you how much you should be spending on each item in your life.  This allows your financial life to stay nicely organized.

Contrary to popular belief, a budget does not have to be constricting or boring or complicated.  Simply note how much you earn each month, and on a piece of paper, write down how much you really need to spend on savings, rent, utilities, food, personal care, transportation, spending money, entertainment, hobbies, education, and other items.  Make sure that you account for every expense.

Then, simply commit yourself to spending that particular amount on each item on your list.  Of course, some expenses on your list will change each month – you may spend more on heating bills in the winter than in the summer, for example – but estimating can help ensure that you can meet all your financial responsibilities.

Live within your means

Many people believe that if they only had more money, they would not have to worry about credit.  In fact, this is not true.  Many people who have money – or at least have all the trappings of money, including cars and nice homes – in fact have terrible credit.

The secret of this is that it is not your income that decides whether you are a good credit risk or a bad one but rather how you handle money.  You could be earning $7 per hour and still paying your bills and meeting your financial responsibilities – in which case you will have terrific credit.

You could also be earning $300 000 a year and be in terrible debt and financial shape due to unpaid bills and excessive debt.  The best way to ensure that you have a good credit rating – no matter what your income – is to spend less than you earn.  That means living below your means.  If you have a very small income, you may need to live with roommates in order to keep costs down.  If you have a medium-sized income, that may mean saving more and entertaining less.

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Big, bad problems can happen to you – bankruptcies, divorces, law suits, non-payment of taxes.  These are big problems that can affect your credit score in as big way.  If you have faced a large problem that has ruined your credit, you need to take action fast and work consistently to boost your FICO score:

If you have bad credit, establish better credit by taking out credit and repaying it quickly

If you have terrible credit following a bankruptcy or other major financial upheaval, you may need to get back into a good credit rating by taking out a loan you can handle.  Make an appointment to see your bank or bad credit lender a few months or years after the problem in question and arrange for a small loan.

You should have enough savings to pay for the loan before you do this.  Pay back the loan quickly.  It will not hugely boost your credit score but it will show lenders that you are having an easier time paying your bills.  Taking out a small loan you can repay is part of the slow process of reestablishing good credit following a big financial problem.

Try secured credit if you cannot qualify for other types of credit

Secured credit is credit or a loan which uses something as collateral.  In some cases, this could be an asset like a house.  In some cases, this collateral could be money frozen in an account by the bank for just such a purchase.

If you need credit following a big problem with your credit score, secured credit may be something you can qualify for. You can use this secured credit to reestablish a good credit rating so that you will qualify for other loans in the future.  You may have to pay slightly higher interest if your credit score is quite low, but in the long term repaying this type of loan can improve your credit score.

Give it time

Many people believe that simply paying off debts will improve their credit score at once.  This is not true, unfortunately.  If you have experienced a bankruptcy, have been reported to a collection agency, or have had charge-offs, the record will remain on your credit report – even after you have repaid your debts and resolved the problem.

In fact, major problems such as a bankruptcy will remain on your credit report for seven or ten years, affecting your credit score.  Even if your credit problems stem from simply not paying bills on time, it will take some time for the mark to fade from your credit report and for your credit score to reflect your better repayment.

Paying off your debts and resolving problems will help your credit score (since overdue accounts will be marked as “paid” on your credit report), but only time will remove the mark of the problems from your record entirely.

This means that if you have faced a major setback such as a bankruptcy, you may have to wait in order to get the best interest rates on larger purchases.  The good news is that the further away you are from a major financial problem, the less dire it appears.

For example, if you have declared bankruptcy, you can expect it to have a huge impact on your credit score for the first two years, during which time you will have a hard time getting any credit at all.

However, after two or three years, if you have been paying your bills on time, then the bankruptcy from two years ago will matter less because you have been rebuilding your credit.  Your credit will still suffer – but you will slowly be starting to work your way out of the credit problem.  Persistence and good financial habits will get you there.

This means that if you plan on making a major purchase (such as a house of car) that may require a loan, you should start working on improving your credit well in advance – even years in advance – of your actual purchase.  This is because you simply will not have enough time to radically alter your credit score in time if you wait too long.

Even if your credit score is already fairly good, you may need to give yourself several months of time to boost your credit rating enough to get the best loan rates.

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