So, how do you crack the elusive 800+ credit score? Persistence. Practice good personal finance habits for a very long time. At least that’s how I did it.
It wasn’t until many years later that I really learned about how credit scores are developed. The good news is that it’s never been easy to understand and for you to achieve a similar goal. In this post, I’ll sum up the fundamentals of how your score is developed and what I did specifically to get past 800.
Remember that part of being financially alert is learning the basics and practicing them. Some of you know this already, but are you really practicing what you know? Managing your credit score is an important aspect of your personal finance because it can mean the difference of saving tens of thousands of dollars when you go to borrow money, or it could determine if you can even get funding at all.
Credit scores are calculated by three main bureaus – Experian, Transunion, and Equifax. They use scoring models to calculate your credit score based on reported data available to them. Once you have a reportable credit line, it will be tracked regardless if you want it or not. Thankfully these days you can use free tools like Credit Karma to get free copies of your credit score at any time which is fantastic.
Here’s the breakdown.
1. Pay Your Bills On Time
Yeah, you’ve heard it a million times, but it can’t be stressed enough. One late payment can quickly cost you 3 digits off you score. Financial institutions want to have a certain degree of certainty that you’ll pay them back on time. So, they track your percentage of on-time payments.
Remember it’s always easier to maintain your score than to build one back. For this reason, I don’t rely on myself to pay bills. I’ve setup a system of automatic payments that deducts from my checking account regularly (use a credit card with reward points if you’re able to). This ensures I’m never late and it’s just down right easier. No more stamps, or clicking a bunch of links to submit bill payments manually.
Note, the one down side to automating is that bills can quickly get lost in the noise. Make a schedule to still review your bills… even if it’s after a payment has been auto deducted. I just checked my Verizon Wireless bill because the amount seemed a bit higher than it should. It turns out they snuck in an extra data plan on my wife’s phone that we never ordered! Thankfully, a quick call resolved the issue and we were credited back the 3 months we overpaid.
2. Use Your Credit Sparingly
I’m not the person to tell you to cut up your credit cards. Rather, I say have lots of credit cards, but DON’T carry any balances. If you follow this simple rule, you’ll be earning rewards via cash back, points, free travel, etc. If you do carry a balance, you’ll be paying for someone else’s rewards!
If you think about it, credit cards are surprisingly generous if used properly. They give you access to money that is not yours and do not charge you for it until your statement is due. That’s a pretty sweet deal in my mind. Don’t give into the temptation of financing something you haven’t got the money for.
How much of your credit creates a utilization rate that the credit bureaus track. This tells them how much credit you are using at a point in time, compared to your entire open credit (eg. you’re using $533 of your current credit against your total open credit of $9000, your utilization rate would be 5.9%). You do NOT have to carry a balance to show a healthy utilization rate, but you do need to use them.
3. Don’t Cancel Your Credit Cards
As you get older and become more credit worthy over time, you’ll get better offers for cards (rates, rewards, etc.) and your original credit card(s) may start to collect dust. You may be tempted to just cancel the old card and move onward, but don’t do it quite yet.
A portion of your credit score is calculated by the average age of your open credit lines. The longer the average age, the better! So, if you cancel an old card, you may be shooting yourself in the foot by unnecessarily reducing your average and accidentally lowering your credit score.
I will say the exception to this rule is when you’re not using a card and it continues to charge you an annual usage fee. As an example, I had an American Express Gold Card that I used for business purposes, but was tied to me personally. When I sold the business, I closed the account to cancel the expensive annual fees. Had it not had any fees associated with it, I would have just kept it open indefinitely.
4. Maintain a High Number of Accounts
This metric I find a bit silly, but I suppose it makes sense to some degree. Basically the bureaus want you to have a higher number of credit accounts. The reason being is if you have a lot of accounts, you’re more credit worthy based on other’s willingness to extend you credit. However, from what I can tell, this one isn’t weighted as high as some of the other measurements.
Be careful to not open too many accounts all at once, especially if you don’t have an established history, as this will generally suggest additional risk.
I have a total of 19 open credit lines which I’ve opened up over the past couple decades. That averages about 1 per year. I think 0-2 new lines of credit per year is a decent target, but probably not more than 3.
5. Manage Your Hard Credit Inquiries
On the flip side of having a lot of credit lines open, you’ll also be monitored on how many hard inquiries you have. A hard credit inquiry is simply when a company looking to extend you credit checks your score. This could occur any number of reasons including applying for a mortgage, auto loan, student loan, business loan, credit cards, etc.
Being a real estate investor, I have to watch my credit like a hawk. The terms of financing can mean the difference between an okay deal vs. a great deal! So, I’m always trying to preserve my credit score and minimizing the number of inquiries at all times.
When shopping for a mortgage, I will forward a lender my most recent credit report simply to show them which rate they should quote. Once I narrow it down to two competitors, I’ll select a lender based on their overall fee structure and terms. Only then do I allow them to run my credit, which should just be a formality at that point. They they send me their GFE (good faith estimate) and we’re off to a smooth closing.
6. Avoid Derogatory Marks!!
Last, but not least, you’ll want to avoid derogatory marks on your credit profile like the plague!! A derogatory mark on your credit report could include a foreclosure, lien, or collection against you for numerous reasons (such as extended non-payment). This can cause a serious adjustment to your credit score for the worse. It also takes several years (I think 7-10) to clear this from your record… ouch!
How do you avoid this? Do NOT spend more than you can afford. I know this sounds simple, but it’s absolutely critical in maintaining habits that rich people keep. Sadly our culture promotes just the opposite many times, so you’ll have to make a choice for yourself and your family.
I was lucky that my Dad and Mom were conservative with debt. So they would always pay credit cards in full each month which is what I do consistently until this day. If you were not so lucky to come to this realization on your own, you owe it to yourself to exit the debt race. With such high interest rates, it’s no wonder the banks are making a killing. Don’t let them make it off of you!
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