When people think about building wealth, they usually focus on saving, investing, or earning more. However, one tool that often gets overlooked is credit.
Credit isn’t just about getting a loan or a new credit card. It significantly affects how easily and quickly you can grow your financial future. Used wisely, credit can be a powerful ally. However, if managed poorly, it can quietly hold you back.
Why Credit Plays a Bigger Role Than You Think
Credit is more than just a score; it’s a financial reputation. Lenders, insurers, landlords, and even employers use your credit profile to assess how well you manage risk and financial obligations. Good credit can open doors to low-interest loans, better insurance rates, and strategic investment opportunities.
How Good Credit Helps You Build Wealth
- Lower borrowing costs: With a strong credit score, you can access loans with lower interest rates, saving you thousands over the life of a mortgage or auto loan.
- Greater leverage: Healthy credit gives you more options to borrow for strategic investments, such as buying rental properties or starting a business.
- More substantial financial flexibility: A robust credit profile allows you to weather unexpected financial challenges with better terms and access to capital.
Smart Habits: What You Should Do with Credit
1. Regularly Monitor Your Credit
Checking your credit report from all three major bureaus (Experian, Equifax, TransUnion) at least once a year will allow you to catch errors early and monitor your progress.
2. Pay Bills on Time, Every Time
Your credit score and payment history are the single most significant factors. Set up auto-payments or reminders to avoid late payments, which can have lasting adverse effects.
3. Keep Credit Utilization Low
Aim to use less than 30% of your available credit. Low utilization signals responsible usage and boosts your score.
4. Diversify Your Credit Types
A mix of revolving credit (i.e., credit cards) and installment loans (ie, auto or student loans) can positively impact your score, demonstrating your ability to manage different types of debt.
5. Build Credit Early
The length of your credit history matters. We encourage young adults to get started early with a secured credit card or become an authorized user on a trusted family member’s account. This allows them to begin building a positive credit history.
Common Credit Mistakes to Avoid
1. Don’t Max Out Credit Cards
Maxing out your cards (even if you pay on time) can damage your score due to high utilization. It also suggests financial strain, which is a red flag for lenders.
2. Avoid Frequent Credit Applications
Each application triggers a hard inquiry, which can temporarily lower your score. Multiple applications in a short period may appear as risky behavior.
3. Don’t Close Old Accounts Without Thought
Older accounts contribute to a more extended average credit history. Closing them can shorten your credit age and reduce your available credit, which may hurt your score.
4. Don’t Ignore Debt
Even if you’re not planning to borrow soon, neglecting debt can spiral into collections, lawsuits, and long-term credit damage—all significant roadblocks to wealth building.
5. Avoid Co-Signing Without Caution
When you co-sign a loan, you’re on the hook if the primary borrower defaults. This can lead to credit score damage and liability for payments you didn’t anticipate.
Final Thoughts
Credit isn’t just a number; it’s a tool. And like any tool, it can either build something valuable or do some damage. By staying mindful of how you use credit and avoiding the most common traps, you give yourself a better shot at building lasting wealth.
Whether you’re starting or trying to improve your financial standing, smart credit habits can make the journey smoother and faster.