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Some habits are born in tiny steps, and others happen as a result of big, sweeping changes.
When circumstances shift suddenly, as they have for millions of Americans during the coronavirus pandemic, it can be an opportunity to reset your routines, says Dan Ariely, chief behavioral economist at Qapital.
Whether you are learning a new skill or working toward a big goal like becoming debt-free, changing your financial situation requires you to look closely at your behavior. And if you want to build a better credit score, you can make the biggest difference when you take simple, meaningful actions.
CNBC Select spoke with Ariely about how your everyday habits can play a role in your financial wellness, plus how this period of great change might actually offer the opportunity to improve your credit score.
Using the right habits to your advantage
The good thing about being a creature of habit, says Ariely, is that you can use good habits to your advantage. The trick is to focus just as much on building helpful habits into your routine as you do on breaking the old ones you don't want anymore, he says.
"Good habits are a form of protection," he tells CNBC Select, and they can help you work toward a higher credit score.
When your goal is to improve your credit score, you should know the behaviors that are most critical to achieving a high score, according to the two most popular scoring models, VantageScore and FICO.
These two factors when combined make up about 65% of your credit score are:
- On-time payments: Whether you've paid past credit accounts on time
- Credit utilization ratio (CUR): How big your balance is, compared to your total credit limit across all of your credit cards
FICO and VantageScore also look at the type of credit products you have (loans, mortgages, credit cards, etc.), how many recent inquiries you've had, how often you open new accounts and the average length of time your accounts have been open. You can get a free credit report at least once a year to monitor all of your credit activities.
Getting into the habits of paying your bills on time and spending only what you can afford to pay off on your card each month are both essential habits to build good credit.
You can make it easier to do these things regularly with these nine easy changes:
1. Erase your saved credit card numbers from your internet browser
Everywhere we go, the world is trying to make consumerism more seamless, Ariely admits. But you can interrupt this by giving yourself intentional opportunities to pause before you buy. Clear your internet browser's autofill settings, and then you'll have to get up from your seat, grab your wallet, return to your computer and plug in your credit card number before you buy. This can help you be more mindful of how you spend money while you browse the internet. It can also help lower your overall spending and make a positive impact on your credit utilization ratio.
2. Put impulse purchases in your shopping cart but wait to buy
It is "very tough" to replace the feeling of euphoria that comes when we buy nice things because we are wired for pleasure, says Ariely. But have you ever bought something, only to lose interest in it a few days later? Sometimes the act of acquiring an item is what we're looking for in the moment, whether to ease stress, to daydream or try on a new look. We can replicate this feeling without spending a penny by putting things in the online shopping cart but not buying it right away, Ariely says. "This way we still get some of the excitement of shopping but hopefully by the time we get to the 72 hour mark, some of our interest in purchasing the item will subside."
3. Pay off your balance more than once a month
Your CUR is reported to the credit bureaus a few times every month. When you pay off your balance at least twice per billing cycle, it's more likely that a smaller CUR will be reported, which can help raise your score.
4. Set your credit card autopay for $5 higher if you can't pay your full bill
Maybe you don't have enough to pay your balance in full, but it's not a bad idea to try to pay at least $5 more above your minimum. You may not immediately notice a difference in just $5 dollars more every month, but according to Bankrate's debt payoff calculator, you could pay off a $2,500 credit card balance with a 18.00% APR a whopping 17 months faster and save $425 on interest when you pay $55 a month rather than $50. Paying debt down faster lowers your CUR, and setting up autopay reduces the risk of missing a payment.
5. Have a mini party when you pay your credit card bill
"I have this dream that mortgage companies would send people a 'mortgage party kit' every time they've paid off a quarter of the mortgage," says Ariely. That's because rewarding milestones is an "incredibly important" habit to have when you want to manage your finances. So every time you pay your credit card bill, whether its the full payment or the minimum, find a happy ritual to reward yourself for keeping your financial health top of mind. (Though this shouldn't be an expensive ritual.)
6. Pick a 'spending day' — and stick to it
Pick one day per month, that is your day to spend a budgeted amount on things that make you happy. This will help you avoid spending money on things you don't really care about and give you something to look forward to each month.
7. Charge $1 onto your oldest card
Many financial experts warn that closing your oldest credit card could have a negative impact on your score. While there are scenarios where it makes sense (a high annual fee, for example), another option, if you want to keep it open, is to charge a small monthly subscription, such as your $1 iCloud storage, and set up autopay so you don't need to worry about paying it off every month. This will stop issuers from closing your card because of inactivity.
8. Save where it counts (on interest)
If you can afford to make more than your minimum payments but can't necessarily knock out your credit card debt all at once, you could use a balance transfer credit card to save on interest. Using a card like the U.S. Bank Visa® Platinum Card can help you save a lot of money because your whole payment will be applied directly to your balance, and you won't be wasting money on interest charges. This helps you get out of debt faster and lowers your CUR — with very little change to your routine.
New coronavirus protections can help your score during the national emergency
During a crisis, your credit score very well may be the last thing on your mind. And that's OK, some experts say — especially if you have more pressing concerns like finding a way to pay your rent or mortgage.
However, most major credit card issuers are waiving late fees and lowering interest rates for cardholders who are suddenly struggling to make ends meet due to the coronavirus pandemic. This could give you an opportunity to protect, or even improve your credit score, by enrolling in a qualifying assistance program like forbearance or deferment.
Section 4021 of Congress's coronavirus relief bill states that you cannot be penalized if you are enrolled in an assistance plan while the nation is in its current declared state of emergency. Your credit lenders will not be able to report negative hits on your credit while you're in a forbearance or deferment plan, and if your accounts were previously considered delinquent, enrolling in a qualified financial assistance plan could result in them being updated as "current" in the eyes of the credit bureaus.
To protect your credit score, call your card issuer and ask about financial hardship assistance if you think you will have trouble making your minimum payments.
Here are some instructions for contacting your specific card issuer:
Bottom line
We're more motivated to make a change when things aren't normal, Ariely says. And maybe you've already seen your priorities shift already due to the drastic changes the world has been forced to make during the pandemic.
This could be a good time to establish some new routines with your money. It might be worth spending a few hours each week to reviewing your credit card statement to take stock of exactly where your dollars were going in "pre-coronavirus" times, then ask if you want to continue spending money that way moving forward.
"Money is kind of like the oxygen for our life," says Ariely. "And the question is, how do we distribute it?"
Before you start thinking about changing your money habits, first spend some time asking yourself what you want and how you'd like things to be different in the future.
