How to Prevent Bad Credit

Recovering from a bad credit score is tough. It can take several years of hard work to bring your credit score out of the pits and back to a place that makes you an attractive borrower. While your credit score is still in pristine condition, you can take steps to make sure it stays that way. Here’s what you can do to prevent bad credit from happening to you.

Pay all your bills on time. The most important thing you can do to maintain a good credit score – and build a better one – is to pay all your bills on time. Your payment history is 35% of your credit score and serious delinquencies like charge-offs and collections will demolish your credit.
It’s even important to pay the bills that aren’t included on your credit score because if those bills become debt collections, they too, will be added to your credit score. Plus, you never know when the major credit bureaus will find a way to include things like rent and electricity payments on your credit report.

Keep your credit card balances at a minimum. Another huge factor influencing your credit score is the amount of debt you have. Carrying large credit card balances, especially relative to your credit score, is bad for your credit score. You can recover points you lose here by reducing your credit card balances. You can ensure you don’t lose points at all by keeping your balances below 30%, below 10% is even better.

Have an emergency fund. While an emergency doesn’t directly influence your credit score, it does keep you from taking an action that will impact your score. For example, if you have an unexpected car repair, an emergency fund would give you the cash to pay for the repair. Without an emergency savings, you might have to run up a credit card balance which could, in turn, cause your credit score to drop. The ideal emergency fund is six to twelve months of living expenses, but you can work toward that goal over a period of time. First, save up $1,000, then one month of living expenses, two months, and so on.

Spend only as much money as you make. Even better, spend less. Keeping your spending in check lets you also keep your debt in check. It’s when your spending gets out of control that you run up balances you can’t afford to repay and enter the downward spiral of missed payments that lead to bad credit. Check up on your spending periodically to be sure that you’re not supplementing your income with withdrawals from savings or retirement or using your credit card to make ends meet.

Keep your credit card applications to a minimum. Since inquiries made by credit card issuers are 10% of your credit score, making new applications can hurt your credit score. However, applications may not necessarily ruin your score. But, opening too many credit cards creates the opportunity to run up more debt than you can afford to pay back. Always assess your current credit card holdings and balances before applying new accounts.

Don’t file bankruptcy, let your home get foreclosed, or allow your card to be repossessed. These are three of the worst things for your credit score. Unfortunately, if you’re contemplating bankruptcy or on the brink of foreclosure or vehicle repossession, there’s a good chance your credit is already damaged. Bankruptcy, foreclosure, and repossession are hard to come back from, so do what you can to avoid these actions. The good news is you can eventually bounce back from even these significant blunders.

Having a strong financial foundation and good spending habits is one the best ways to maintain a good credit score. Take extra care to protect your credit when you experience a significant life-changing event like major medical illness, job loss, or divorce

Source: myFICO.com