How to Achieve a Sky High Credit Score (and Why It’s Important)
A credit score is a number that indicates how likely you are to pay off debt. This score can range from 0 to 850, and it’s calculated by analyzing 6 different factors over time. Over time? Yep - sorry. Rome wasn’t built in a day, and your credit score won’t be either.
Here’s a breakdown of the different score ranges:
850 - 800: Excellent
799 - 740: Very Good
739 - 670: Good
669 - 580: Fair
579 - 0: Poor
Why do I need one?
If you ever want to make a really large purchase that costs more than the cash you have on hand at any given time, you need a [good or higher] credit score.
When you a buy a house, you’ll likely need a loan, right? Banks determine whether or not to give you that loan by looking at your credit score. They ask themselves, “Is this buyer one that I can trust to pay me back over time?” If your score is on the high end, they’ll assume the answer is YES. If your score is on the low end, your track record shows it’s probably risky for them to lend you money and the answer may be NO.
Okay, got it. How do I maximize mine?
Good question! You need to keep the following 6 factors in check to maximize your score at any given time. Yep, you heard that right. Your score can fluctuate daily, so knowing what affects it is going to set you up for long-term, high scoring potential. Also, take note of the types of impact these factors have on your score, and prioritize the high impact factors.
Payment History (High Impact)
Your credit card company expects you to pay at least the minimum amount due on your total balance every month. If you fail to make at least the minimum payment, it will count as a missed payment, and this high impact factor is going to go down. No bueno.
The best financial advice I can bestow upon you is to use your credit card exactly like your debit card. Assume that every cent you spend is being siphoned form your bank account the moment you swipe your card. This mentality deters you from overspending and maximizes the likelihood that you’ll be able to pay at least your minimum balance monthly.
Tips for the overachiever: I suggest paying off your full balance each month if you are able. Set up auto-payments and select the “statement balance” option. You can set it and forget it, and you’ll never miss a payment. If you’re afraid your bank account balance won’t be able to cover the total amount in any given month, set up the “minimum balance” on auto-pay to ensure you pay on time and avoid overdraft fees.
Credit Usage (High Impact)
Let’s say you have 1 credit card. The credit limit (aka, the maximum amount the institution you’re borrowing from will allow you to spend) is $1,000. You get bored at work and spend $200 online at Anthropologie. You’ve now used 20% of your credit limit, and you still have utilities and groceries to pay for this month. YIKES!
Why yikes? I still have $800 left. It’s recommended that you utilize 30% or less of your TOTAL credit limit to keep this factor scoring high. In this example, you would want your credit card spending to be $300 or less each month with a $1,000 credit limit. If the cost of your monthly essentials meets or exceeds your monthly credit limit, call the bank and ask them to raise it. If you have a good payment track record or recently received an increase in income, usually this isn’t hard to do! (You can even log income increases within your account without ever having to pick up the phone.)
I have 5 credit cards, so the sum of the credit limits on those cards is what I use to calculate my credit usage percentage. If you’re in my boat with multiple cards and want to calculate your credit usage percentage, you do it like this:
(Sum of the $ spent on each card) / (Sum of the credit limits of each card) = Credit Usage %
The best way to keep your utilization percentage low is to (a) have a really high credit limit or (b) have really low spending.
Tips for the overachiever: You’re going to want to keep this really, really low - like below 10% to keep this factor as healthy as possible. If your spending stays constant and your credit limit increases, your utilization percentage will decrease and you’ll earn more points in this category! Math!
Derogatory Marks (High Impact)
The name of this factor sounds really bad…because it is. Typically you’ll find derogatory marks on someone’s credit report if they got into a sticky situation like failing to repay a loan or filing for bankruptcy.
Think of your credit report as a report card, and the derogatory marks are the bold red marks you unsuccessfully attempt to hide from your parents. They’re hard to come back from, because these marks can stay on your record for a up to a decade in some cases. Needless to say - do what you can to steer clear of these.
Tips for the overachiever: If you’re following so far, you’ve probably noticed these factors are all tied together. Odds are, if you’re performing well in categories 1 and 2, then you likely won’t have to worry about category 3, ya know?
Average Credit Age (Medium Impact)
If a credit score is used as proof that someone can pay off a loan, banks are probably more willing to lend to someone with a longer track record, right? Their credit history is much more extensive, so it provides banks with additional assurance that they’re making a good decision to let someone borrow from them.
This factor is also one of many reasons why I think you should start building credit from a young age, if possible. It’s all connected! If you teach high schoolers and college students to be responsible with money, then they’ll be much more knowledgable and prepared to handle money when they get out on their own. It would also increase the likelihood that they start building credit responsibly from an earlier age, which is so much more valuable than one might think. (Unless you’re a multimillionaire who can pay for everything outright in straight cash.)
I’ve seen my own friends struggle after college when they had to unexpectedly buy a new car, attempt to buy a washer and dryer, set up a cell phone plan, buy a home, etc. because they had no credit history. Student cards with low credit limits are a great place to start and require little to no credit history to be approved. If you’re a parent with a decent credit history and are willing to co-sign on a card with your child, it’ll also increase the likelihood they get approved.
I’ve been building credit since I was 18 and I’m now 30, so you’d think that my credit age would be 12 years old, right? Wrong. It’s your AVERAGE credit age, so while one card has been open for 12 years, others have only been open for 4-5. You have to average the age of your accounts to arrive at your true credit age.
Tips for the overachiever: Open new cards strategically to keep this factor scoring high.
Total Accounts (Low Impact)
Your credit score needs to be just as well rounded as you are! In order to max out this area of your credit score you need multiple healthy lines of credit in varying combinations - I.e., mortgage + credit cards vs. just credit cards.
For those of you with student loans and credit cards - I have some good news for you! (That’s rare in relation to this topic, I know). Let’s compare these 2 students:
Student 1 has student loans and 2 credit cards.
Student 2 has no student loans and 1 credit card.
Student 1 is going to score higher in this category because she has a higher number of accounts and a more varied portfolio than Student 2. In order to max out this area of your score, it’s recommended you have 5 or more accounts in your portfolio. Those with fewer than 5 accounts that are also homogenous have what is known as a “lean” file - aka, less evidence to prove that they’re trustworthy. Those with 5+ accounts have more data for bureaus to analyze and are said to have a “fat” file.
You know the phrase “not all debt is bad debt”…? This is a good example of that. In this situation, having debt (in high quantities and in varied forms) actually earns you points; however, you need to be able to pay off said debt. Period. Having multiple delinquent accounts is only going to drive your score further into the ground. (Remember factors 1-3?)
Tips for the overachiever: If you have a credit card that is never used and doesn’t carry an annual fee - don’t close your account. That card adds to the total number of open accounts, helps increase your overall line of credit to keep your usage percentage low, and keeps your payment history spotless because you’re not missing payments. Win, win, win, win!
Hard Inquiries (Low Impact)
Hard inquiries is another name for “a real banking institution has received your permission to take a good, hard look at your credit report.” Hard inquiries occur when you apply for a new credit card, a home loan, a car loan, etc. A “soft inquiry” happens when you use free sites like Credit Karma to see what your credit score is at any given time. Those healthy check ups aren’t recorded anywhere unlike the hard inquiries that are added to your file.
Having 1 to 2 hard inquiries on your record within a short time frame isn’t a big deal. It will lower your score a few points in the short term, but your score will rebound quickly. If you have too many hard inquiries within a short time frame, creditors are going to get curious as to why you need so many different loan types, and it may scream “risky” to them.
It’s best not to open 5 credit cards at once for many reasons, this is just one really great example.
Let’s wrap things up
WHEW! That was a lot. Fortunately this article isn’t going anywhere, and you can reference it at any time. I highly recommend signing up for a free Credit Karma account to keep tabs on your credit score - especially if you’re planning to apply for a loan in the near future.
Spend wisely, pay your bills timely, and take on debt strategically. Go forth and conquer!