Consider these top 7 ways to boost your credit score based on the FICO score algorithm so you can get almost any kind of credit card or loan with the best and lowest interest rates.
The almighty FICO score is super important when lenders are considering how good of a borrower you’ll be. I’ll break down the most important components of what goes into this credit score number. I’ve been able to achieve and stay in the 800+ credit score range for many years. By following these no frills tips, you can get a bodacious credit score too, dude.
Often it’s not good enough to just be “good,” you either gotta be very good (740+) to excellent or exceptional (800+) to qualify for the most competitive interest rates.
One: Payment History (35%)
Always pay your credit card and other loan balances on time, every month, and better yet pay in full! Because this makes up the #1 component of your credit score of 35%! This is one third of the score that shows how reliable you are with paying your debt. If you struggle with time management, you can automate credit card, utility bill, and other payments but just make sure your checking account always has enough to cover your payments. If you miss only one payment in one year across 3 credit cards, that means your on time payment rate is 35/36 because you had 3 monthly opportunities across 3 accounts, and already puts you in the 97% rate which is not good.
Two: Amount of Debt (30%)
The amount of debt you have makes up 30% of your score and has the two main components of the amount of credit used and out of how much available credit you have. This is ultimately judged in the form of a credit utilization rate. So if you have an outstanding balance of $1,000 out of an available credit of $100K, the rate of 1% used is really excellent! I’ve done everything in my power to keep low balances and pay off any loans or credit card balances I had right away, so being effectively debt free by paying credit card balances in full within the 28 days in a statement period is the best way to go. You want to have 9% or less of a rate per credit karma.
Three: Length of History (15%)
Since 15% of your score comes from the length of credit history, the longer you’ve had a credit card open, the better. I say credit cards because you end up closing other kinds of loans when you pay them down, and most of us don’t get a mortgage when we’re 18. The only thing with this is that it takes at least 25 years to reach excellent (open card at age 18 -> 43!). And the credit karma range is at least 7 years of the average age of open accounts.
However, if you can be added as an authorized user on your parent’s credit card and you and they are responsible about using the card, this can be reported to the credit reporting agencies and you can build credit even sooner as a teenager.
The ideal thing to do is not close your credit cards if you can help it, unless the annual fee of the card makes it not worth it, and then either just close it or call your credit card company up to switch you to a no fee card. Whatever you do, make sure you transfer as much of the available credit limit over as you can! It might be a ding in the short term but I’ve managed to stay in the 800 score range despite this.
Four: New Credit (10%)
New forms of credit you open is 10% of your score. You can open a few new credit cards every now and then, but try to avoid opening too many within a similar timeframe or you start getting rejected. Try to use your cards every now and then because if you neglect them as I’ve done in the past, you get a letter saying it’ll be closed unless you make a purchase. Sometimes I’ve let this happen because I really stopped caring about the card and my money is better focused in earning rewards that I can more easily redeem.
Five: Credit Mix (10%)
Another 10% of the score is the credit mix which is a combination of the types of credit you have. Generally the score rewards you for having diverse kinds of credit accounts other than credit cards like student loans, car loans, mortgages, and others. Though watch out for getting too many hard inquiries when you get different accounts. And these usually fall off after 2 years. Be careful about personal loans because I heard from the latest 2020 changes in score algorithm, you may be penalized for having a personal loan.
Six: Increase Your Credit Limit
If you’ve been developing a good track record of managing your debt, and you find yourself in need of more credit like you’re making a big purchase soon, go ahead and call the credit card company to increase your credit limit so that you maintain a good utilization rate. Sometimes, when you don’t use enough credit, they gradually start taking it away so this is a fine balance to maintain.
Seven: Monitor Your Credit Score & Report
Monitor your credit report and credit score regularly for any significant changes so you can course correct. Make sure you dispute any errors you see on your credit report because anything that’s wrong can seriously handicap you when you’re applying for loans and credit cards. Go to this official US government Consumer Financial Protection Bureau (CFPB) article to learn how to do this with each credit reporting company.
All of us are on the journey toward financial freedom, and I look forward to making more investor friends. Add me on Instagram: michellemarki. 🙂