Credit is still one of the great enigmas of personal finance. It’s virtually a requirement in today’s society, yet millions of people fail to understand their credit scores. In short, credit scores are designed to predict the likelihood that you will meet your financial obligations. The FICO credit score, which ranges from 300 to 850, is the dominate score used in America. Only around 18% of consumers have a score over 800. I’m one of them with a score of 831.
My journey to a near-perfect credit score starts in my teenage years. Shortly after I began driving, my father told me I needed to build credit. “This world runs on credit,” he explains, in his infinite-wisdom voice. I wasn’t quite sure what that meant at the time, but since he also informed me that I would be an authorized user on a gas credit card, I didn’t really think twice. The deal was simple: I maintain excellent grades in high school and stay out of trouble, and he finances my modest driving habits. We both keep our ends of the deal.
College offers lessons outside of the classroom if you pay close enough attention. While I still had access to the gas credit card, I desired a card of my own. Lucky for me, credit card companies just happen to visit campus more frequently than students. One day, when I was returning from class, I encountered a booth offering free pizza in exchange for simply filling out a credit card application — approval not necessary. I knew enough at that point in my financial life to make sure there was no annual fee and proceeded. I’m approved within ten minutes. I now understand how easy it is to obtain credit if you already have it.
I kept only those two credit cards throughout the rest of my college years, and never posted one late or missed payment. I obtained another card with better rewards about a year into my first “grown-up” job. Not once did I give much thought to interest rates when applying for cards because I never carried a balance — ever. I see credit cards as a plastic form of the cash sitting in my bank account. If the cash isn’t there, my cards are practically useless to me. This approach has yet to fail me.
Paying bills requires its own unique strategy. Instead of procrastinating until almost the due dates to make payments, I pay utility bills within a day or two of receiving them. I completely ignore credit card deadlines. Instead, I pay off every card in full about every two weeks. This ensures I’m never late on payments. Remember: payment history makes up 35% of your credit score — the largest component. Automatic bill payments or calendar reminders are also a great way to avoid late payments, but I have trust issues with that approach.
More than eight years after I received my first credit card, I’m offered cards in the mail like clockwork — oftentimes “pre-approved.” While some people take pride in avoiding plastic, I collect them like baseball cards. If Mr. JPMorgan wants to offer me a $100 sign-up bonus and cash back on purchases I’m going to make anyway, I gladly accept. I really only have a few simple rules on offers: no annual fees, no retailer credit cards, and wait at least three months between applying for cards. Applying for too much credit in a short amount of time can lower your credit score.
Opening more credit cards than I will ever need in a lifetime has its benefits, and limited risks as long as I use them responsibly. Aside from cash back programs, free car rental insurance, and extended warranties, more cards increase my total available credit. For example, it’s generally recommended that you not use more than 30% of your total available credit. The more credit you have, the easier it is to stay under the 30% threshold. How much you owe out of your total available credit is the second largest factor in your credit score. The less you owe, the better.
You can also make a phone call to an existing credit account and request a credit limit raise to boost your total available credit. I’ve done this a few times in my life. It’s painless and only takes a few minutes. Some companies may ask for a reason, so I usually request a raise around the time of a home improvement project or vacation. I never cancel any old cards I rarely use either — that reduces total available credit and could impact my credit score.
Plastic is hardly the only form of credit. I currently have a mortgage and co-signed on my wife’s auto loan last year. The types of credit you use account for 10% of your credit score. However, I wouldn’t use a mortgage or auto loan simply to boost my score. Instead, I mainly use installment debt to take advantage of historically low interest rates and other favorable market conditions, which is only possible because of my excellent credit score. Over the life of my mortgage, my high score will easily save me thousands of dollars.
Will these strategies work perfectly for everyone? Of course not. Everyone has their own financial struggles to overcome, and bad habits can take time to break. However, anyone who takes responsibility for their finances today can improve their score, regardless of age, income, race, sex, marital status, national origin, or religion. You may feel like you don’t need a high credit score if you plan on avoiding debt forever, but it can also save you money when shopping for insurance or even help you land a job since a growing number of employers are requesting to see your credit report in hopes of learning more about your character.
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