As someone who is wary of debt, I don’t advocate obsessing over your credit score. However, I also don’t advocate not paying attention to it. A good credit score is essential to functioning in today’s modern society and therefore should be indicator to keep an eye on.
A good credit score enables you to…
Access to key life stage loans such as home and student loans
Qualify for the best interest rates so you aren’t paying more on interest rates than you have to
Get approved for high benefit credit cards such as cash back or travel rewards credit cards
A bad credit score can create unnecessary barriers in your life and also cost you thousands of dollars in your lifetime. Let’s not obsess over getting the perfect credit score, but also let’s not ignore it.
In this post, I want to share with you few quick and easy tips to getting an “A” in your credit score!
Named after the Fair Isaac Corporation, the FICO score is the type of credit score most commonly used by lenders. The score ranges from 300 to 850. If you can maintain a score of 700 or higher, you will be looked favorably with most lenders.
The FICO score is made up of five categories:
Payment History (35%) - This is the most important category you should pay attention to. Are you paying on time? Do you have any missing payments?
Debt (30%) - Credit Utilization. How much debt do you have? What percent of available credit are you using? High credit utilization could hurt you here so don’t max out your credit card every month.
Credit Age (15%) - How long have you had your accounts? Usually an average of your oldest and newest credit accounts.
New Credit (10%) - Did you open a lot of new credit accounts in a short period of time? Try not to open too many accounts too quickly.
Credit Mix (10%) - Do you have different types of credit accounts? e.g. home mortgage, credit card, student loan, etc. Good to have a mix, but don’t overthink it.
Now that you know what makes up a credit score, here are few simple tips:
1) Automate Your Payment
Pay your bills on time. Never be late with your payments because this will have the biggest impact on your credit score. The easiest way to do this automate all your payments through your credit card or checking account.
If you are struggling to pay your full bill every month, stop reading this post because you shouldn’t be spending your time thinking about your credit score at this life stage. I recommend you spending your energy on personal finance fundamentals such as cutting down your expenses and living below your means first.
2) Keep Credit Utilization Ratio Below 20%
Utilization ratio is the amount of credit you use compared to the amount you have access to. For example, if you have a credit card with a limit of $10,000 and you on average use $2,000 monthly, you have a utilization ratio of 20%; $2,000 / $10,000. Lower this ratio, more favorable your credit score. 20% is a good rule of thumb, but lower is even better. Don’t be the guy or gal that “maxes out” his or her credit card every month!
3) Don’t Open Too Many Accounts
Whenever you apply for a loan or a credit card, you get an inquiry against your credit report. There are two types of inquiry; a soft inquiry and hard inquiry. A soft inquiry is when someone looks at your credit report as part of a background check or when a mortgage lender pre-approves you for a loan. However, this doesn’t affect your credit score. You want to be mindful of hard inquiries which occurs when a lender checks your score in response to your application. It is a necessary part of getting a loan or a credit card approved, but having too many in a short period time will negatively affect your credit score. You want to avoid multiple hard inquiries.
4) But Once Open, Don’t Close Your Accounts
15% of your credit score if made up of length of credit history. As you are cleaning house, you may be tempted to close your old underutilized credit cards. If they have high annual fees and no longer adds value, go ahead and cancel them. However, if they can still provide some function, I recommend keeping them. Closing old accounts can reduce your overall credit age and lower your credit score.
When was the last time you checked your credit score? Is it a positive rating? What can you do today to improve your credit score?