Financial Services
July 12, 2023

Boosting Credit Scores through Smart Credit Utilization

We will explore 5 psychological factors that influence positive credit behavior which lead to the successful building of credit

Credit in today’s financial systems enables individuals to access funds for life requirements. But building a solid credit history requires pointed ability and effort. One has to be mindful of the behavior patterns and psychological aspects that are behind building credit. We will explore 5 psychological factors that influence positive credit behavior which lead to the successful building of credit. 

Your credit score is a numerical representation of your creditworthiness. Banks, lenders and other financial institutions assess risk based on this score. It is a standard measure to indicate how likely you are as a borrower to fulfil your financial obligations to these institutions. Whether or not you can repay your debts on time makes you further eligible for credit.

Building Credit and the psychological impact it has on the individual

If you thought Credit is merely a financial tool, you thought wrong. Its psychological implications are actually profound. 

By really paying attention, you can see how one’s credit score can enhance or damage one’s sense of self-worth, security and how they aspire for the future. Successful credit management only comes by adopting behavior patterns that are healthy. This can begin with how we use credit cards, for starters. 

Credit cards affect the mind, studies show

Consumer overspending is often blamed on credit cards, because they have been one of the primary reasons behind household debt. Neuroscience has shown that credit cards are capable of facilitating purchase behavior. It leads people to spend in ways that are sometimes hard to justify. 

Studies have shown that credit cards are a pendulum, swinging back and forth from giving man an attitude of ‘releasing the brakes’ to reduce the burden of payment and at the same time, to also start ‘stepping on the gas’, motivating a person to spend.  

There is evidence of brain activation when someone shops online (‘retail therapy’), the instant gratification they get for just doing so. It goes even deeper. People’s brains behave differently when they spend using a credit card versus when they use cash. Using a credit card helps them dissociate between the expenditure they are making and the true price they are paying for it. A ‘reward network’ activation happens when this is done.  

With the world transitioning into a more cashless society, the way an individual can feel rewarded mentally while putting their actual finances at risk is fascinatingly scary. 

Boosting credit scores through smart credit utilization| Bright Money

So, what’s the solution? 

Financial literacy helps. It’s not a full-blown solution but it can keep you aware of important financial concepts and help you form goals for each of those in your own life. Financial literacy has a great impact in shaping one’s credit behavior. 

It helps to have a solid understanding of credit concepts such as credit scores, debt management, interest rates, etc because informed decisions can be made with this knowledge. This is true empowerment which can guide your credit habits. It’s a good starting point if you are looking to have a positive impact on your credit. 

What are credit habits, really?

Simple things passed down from generation to generation, or something you picked up from a mentor or friend along the way. Things like saving - some are natural savers, while others are impulsive spenders. Some can clearly assess what they need and stick to budget, while others might not see the point in operating on one. 

Understanding personal financial attitudes and habits help realize what supports or spoils your chances of building credit. Many applications are available today to help manage finances, budget for necessities and to save. Bright Money is one such App that does this based on individual needs, with highly personalized plans to get out of debt and start saving. 

Psychological behavior patterns worth your time. What to learn, what to unlearn:

  1. Emotional triggers: We talked about impulse buying before. It’s a big problem and it impacts credit greatly. When we are stressed, or want instant gratification or are merely bored (in some cases), we might end up spending money on something we don’t need and often, don’t have money for. By being aware of these triggers, excessive credit card debt can be avoided, which in turn, helps maintain a good credit score.

    The solution
    Understand your triggers, give it a name:
    If your fingers are itching to hit on that ‘go to cart’ button, try to recognize the feeling behind it. Are you sad? Anxious? Label that feeling. It will help your rational mind to see if this is the right way to deal with the emotion.

  2. Delayed gratification: In Psychology, this is a concept wherein one resists immediate rewards or ‘feel good’ gains in order to patiently wait for long-term gains and gratification. Credit patience and self-control are key. By doing so, one displays responsible credit behavior. Work on securing the needs of your future instead of falling prey to the wants of today.

    The solution
    Get a distraction:
    Get up for a walk or call up a friend and meet for coffee or finally try and fix that leaky tap in the kitchen. Give your brain literally anything else to focus on (mindless scrolling doesn’t count because ads pop up there as well).

  3. Cognitive biases: Our internal biases formed over a lifetime affect our credit decision-making capabilities. Some biases such as:

    Availability bias - This cognitive bias occurs when we rely on readily available information in our memory to make judgment or decisions. This happens because it is the easiest accessible information to us. When we do this, we fail to consider more accurate or comprehensive details which might not be readily available in our minds but might have led to better informed decisions.

    Confirmation bias - We all have strong pre-existing beliefs or opinions and sometimes, these beliefs tend to seep into how we see the world. When we look for information, interpret and remember it in a way in which it confirms our pre-existing beliefs without regarding or downplaying the facts which contradict them, this is called the confirmation bias. This bias validates our worldview, it reinforces our thoughts and hence, feels like a safe bet. But many times, it could lead us the wrong way, turning a blind eye to the facts.

    Anchoring bias -  In this cognitive bias, one heavily relies on the first piece of information they get, this information acts like the anchor based on which they pass a judgment or take action. This is not good for credit-decision making because an offer might seem too good to be true at first glance and you might dive right in, but later find out that there were many scary terms and conditions attached to it. Sometimes, this bias can even make irrelevant or arbitrary information seem imperative to base your judgment on, which needless to say, can be highly problematic to your financial future. One must question and actively challenge these initial anchors to overcome them.

    Many such biases exist. These biases could lead us into making credit choices that just don’t make sense. Recognizing them helps us become more objective in our credit decision-making.

    The solution
    Mindfulness practice:
    Take 10 minutes to simply close your eyes and focus on your breathing. When you feel like you’ve got some clarity, try to think back into the past to see if there are any contradictory memories or details you are missing about a situation. Something that didn’t come to you instantly. Put all the information together and only then, come to a conclusion.

  1. Socio-cultural influences: We’ve all grown up with different lessons imparted to us on debt, society norms, savings, etc. The locality, who you’ve grown up with, cultural practices all shape a person’s credit habits.

    The solution
    Make more ‘grown-up’ friends:
    Sometimes, doing things differently might not be such a bad thing. If you find yourself admiring someone outside of your immediate circle having sound financial habits and credit discipline, feel free to learn from them. If you surround yourself with financially irresponsible people all the time, somewhere in your mind, you too will start to think it is alright to be frivolous with money. This can land you in deep debt and with bad credit, potentially affecting your future.

  2. Stress: Yes, stress! It can affect your credit behavior. Impulsive spending, poorly managed funds, missing payments and more could happen as a result of stress. Effective stress management techniques, relaxation techniques such as deep breathing exercises,  seeking professional support, journaling, and so on can help create a financial plan that is realistic.

    The solution
    Meditate, Do Yoga & ‘Me time’:
    Mindfulness is a great way to alleviate stress. Therapists to shamans will tell you that. If coupled with Yoga, your mind and body both benefit from the happy juices your brain will produce as a result of the exercise. If you’re unable to do either of these, try taking some time off to do something you love. 

In conclusion

Building good credit has its own psychological rewards, you might not be able to see them but you will certainly feel a shift in your mood and attitude towards finances. 

You will get a chance to feel a sense of accomplishment, your self-confidence will see a boost and your overall financial wellbeing will improve. Tap into the best of your abilities to be consistent in making timely payments, keeping credit utilization low and maintaining a credit portfolio that is diverse. All of these behaviors will contribute to building a positive credit history. 

Related Reads:

  1. 8 reasons why your credit score is important
  2. What's a good credit score?
Vaishnavi A B
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