In the dozen or so years of being a financial adult, I’ve never spent much time “working” on my credit score. Neither has my wife. I’ve opened up a few more credit cards than I probably should have in my younger years chasing promotions (and I subsequently closed them, to the chagrin of credit experts!), I have missed payments (before discovering the wonders of online bill pay and good reminders), and had, by chance, a good mix of accounts (student loans, mortgage). My credit score is 780 and my wife’s is 804 (maybe I shouldn’t have opened, or closed, those credit cards!).
How did I get that score? I’ll tell you.
First off, the purpose of a credit score is to help a financial institution assess your default risk. What’s the risk that someone they lend money to will fail to repay that loan? Someone with a lower score is a higher risk than someone with a higher score. The problem with asking “what is a good credit score? ” is that it is, at best, an imperfect science. Take someone who has a great history, a perfect credit score, and give him a serious medical condition, one that cannot be predicted, and you’ll see that he will more readily pay medical bills than credit card bills. There is no score where you are 100% sure that someone will not default. But after a certain number, which is a reflection of good credit habits, and you have a pretty high percentage.
Second, what is that “good” number? If you were to ask Fair Isaac Corporation, originator of the FICO score, they would probably say a FICO credit score of 760. When you look at their sample tables, the lowest rates are available to people with FICO scores above 760. If your score is above 760, or even 700 (the next tier), just keep doing what you’re doing because your score is great.
Fix Errors, Catch Fraud
The single most important thing you can do to protect your score is to look for errors or signs of fraud. You can do this very easily since you can get a copy of yoru credit report every single year. I stagger my reports, requesting one from Experian, Equifax, and TransUnion every four months. If I find an error on one, I report that error to the others just in case it propagated to the other two. Errors on a credit report are extremely common and errors you think they would catch, they don’t. For example, Equifax had two social security numbers on my report – I didn’t think you could have two social security numbers! Their job isn’t to catch errors, it’s my job (and your job). They just report what’s reported to them.
While you’re at it, be proactive and try to reduce your mail offers by using OptOutPrescreen.com. It’s the official site to opt out of credit and insurance offers. This will reduce the amount of mail offers you get and reduces the probability someone steals your mail and opens accounts in your name. It has no effect on your credit score.
Your score is a reflection of your risk and someone who misses payments is risky. Would you lend money to a friend if they had a history of paying you back late? It’s the same idea. Here’s the crazy part, you can pay a little late and it won’t hurt your score that much. I’ve missed a couple before and I kicked myself because missing payments is expensive. When I called up the credit card company, in this case it was Citi, they reversed the fees and thanked me for my business. I asked them if they would report it to the
bureaus and they told me only payments 30+ days late are reported as late! That was several years ago so I don’t know about policy now, but they told me it just wasn’t worth it for them to report a payment that’s a day or two late. That said, it’s easier to pay on time in the first place.
Keep Inquiries Low
Don’t open a credit card unless it satisfies a specific purpose. The last card I opened was a Capital One card because we were going on a trip to Europe and Capital One cards do not charge a foreign transaction fee. Before that, I opened an American Express Costco TrueEarnings card because it was the only card accepted at Costco, where we do a lot of our shopping. In seven years, I’ve opened two credit cards. The irony of credit is that banks will gladly give it to someone who doesn’t need it, making few inquiries is a sign of someone who doesn’t need it!
In the end, remember that you are “paying” for each application with a few points on your credit score. Credit cards aren’t free. Those points will cost you something down the road when it comes time to apply for a loan, so treat those applications with great care.
Pay Little to No Interest
There’s a misconception that carrying a balance can help your credit score, it doesn’t. Most of my dealings with credit and debt follow one principle – don’t pay interest. I don’t carry a balance because it doesn’t make sense to pay double digit interest rates, especially when banks get away with paying extremely low interest rates. There is also no incentive to carry a balance because it doesn’t matter to your credit score. Your report records your balance as of the close of statement. You can pay off your credit card bill immediately and the report won’t be the wiser. Paying interest has no bearing on your score but it has an impact on your bank account, so avoid interest whenever possible.
Use a Sensible Amount of Credit
I’ve always been a relatively conservative person financially and I’ve never carried a balance, in part because I don’t like paying interesting. What that also means is that I generally don’t run up a large statement balance either because I don’t want to be put in a situation where I’m deciding whether I should pay one bill or another. I never had a large balance on any card such that it exceeded my monthly salary and, in the event I lost my job, put me in an uncomfortable decision of picking electricity bill or credit card bill. This is, in part, reflected in the credit score equation under credit utilization. While there isn’t a hard and fast rule of how much credit to use, I happen to stick around 10%. Credit utilization is credit used divided by credit available, but for my purposes I don’t care about that percentage. I care about credit used divided by monthly income and keeping to a reasonable range there puts me at 10%. In the end, you’ll want to use some of it but not too much.
Most of the tips I’ve shared are obvious but the point I don’t want to lose sight of is that we didn’t focus on improving our credit score. We simply used sensible credit behavior, were lucky in that we didn’t suffer any significant financial setbacks, and our credit score improved as a result of good behavior. People who advise that you do little tweaks and tricks to improve your score remind me of all those fad diets. They may work in the short run but it’s sensible behavior that works in the long run.