Some people don’t really think much about their credit scores until they’re gearing up to apply for a large loan, like a mortgage. But your credit score is a good number to keep tabs on. It tells different lenders how risky a borrower you are (or not). And the higher your credit score, the more likely you are to not only get approved for a loan or credit card, but snag a more competitive interest rate on the sum you’re borrowing.
When we talk about credit scores, we’re usually referring to the FICO® Score, which is the most commonly used scoring model in the U.S. A FICO® Score ranges from 300 to 850, and if you have a 300, you can pretty much assume that no one’s going to loan you money. If you have an 850, or perfect credit, you can pretty much bank on getting approved for a loan as long as there’s not another restricting factor, like an income that’s not high enough to qualify for the mortgage you want.
An estimated 1.7% of the scorable U.S. population has perfect credit, reports FICO. So if you have an 850, you’re in the minority.
But there was a point in time when I had a perfect 850 credit score. Here’s how I pulled it off.
When I went off to college, I got a credit card of my own. And I made sure to pay off that card in full on time every month. I also owed money in the form of educational debt, and I paid that debt on time, too.
Your payment history carries more weight than any other factor when calculating your credit score. So it’s important to be timely with bills. If you can’t pay off your credit card in full, for example, but you make your minimum payment by its due date, you’ll be considered timely with your payment.
Once I started working, I was able to get my credit limit increased on the one card I had. I also tended to charge expenses judiciously, and when I did have a balance at the end of the month, I paid it off in full.
Your credit utilization, or the amount of available revolving credit you’re using at once, also plays a big role in calculating your credit score. Keeping your utilization to 30% or less can help your score, while going above 30% can be damaging. This means that if you have a $10,000 credit limit, you’d ideally never want to owe more than $3,000 at once.
I don’t remember exactly what my credit limit was at the time I had perfect credit. But I doubt my utilization ever got close to 30%, even temporarily. And because I paid my balance in full every month, any slight rise in my utilization was immediately negated.
My parents added me as an authorized user to one of their credit cards when I went to college. That card was only to be used in a real pinch, and I made a point to not abuse that privilege. Instead, I charged my essential bills and unplanned ones on my own card, and I made sure to have cash in my savings account to pay off my balance even during those times when it was unexpectedly higher than usual.
But because I’d gotten added to that account and it was one that had been open for many years, it boosted the length of my credit history. That, too, is another big factor in calculating your credit score.
In fact, it’s a good idea to keep long-standing credit card accounts open even if you’ve since qualified for better rewards credit cards. As long as those older cards aren’t charging you an annual fee, keeping them around could work wonders for your score.
At this point, my credit score is no longer perfect. But because it’s still above 800, that’s not a problem. The reality is that it’s really difficult to get and maintain perfect credit, and it’s something that’s almost not worth pushing for.
Something as innocent as applying for a new loan or credit card will automatically ding your score by a few points. But it doesn’t make sense to not take advantage of a great offer that could help you snag loads of credit card rewards.
You don’t have to stress out about not having perfect credit. But it’s always a good idea to work on boosting your credit, or maintaining a score that’s already strong. And a big part of that is knowing what goes into a credit score.
So to that end, the three main factors you want to focus on are:
Your payment historyYour credit utilizationThe length of your credit history
But there’s one more consideration on top of these factors, and it’s your credit report. Believe it or not, the credit bureaus that put these reports together make mistakes all the time. And you don’t want an error dragging your score down.
So make a point to check your credit report a few times a year — it’s free (as long as you do it through AnnualCreditReport.com). That way, if you spot an error, you can raise the issue with the reporting bureau in question and, ideally, get it erased so that your credit score doesn’t sustain needless damage.
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