My name is Brandon. I’m twenty-one years old and I have a better credit score than you.
Ok. Fine. For those of you reading with a perfect 850 credit score, you win. I admit I do not have a credit score better than yours. What I do have though, is a pretty darn good credit score that’s not just higher than most of my peers around my age, but also much higher than the average American’s credit score(which happens to be 703 based off the FICO model).
You want to know my secret? Sure, the secret to building up to that perfect credit score is easy. Just have your parents open up a trust fund and throw a couple million in there.
In reality, having millions of dollars or having no money at all literally has no effect on your credit score. There are actually only five factors that are used by credit scoring companies which are: Payment History, Credit Utilization, Age of Credit History, Credit Mix, & New Credit.
Payment History, which is the largest factor affecting your credit is the most important and arguably the easiest to score well on. As the name states, it shows a record of all your previous credit card payments and whether or not they were on time. In order to maximize your credit score, having zero or as close to zero late payments will be essential. If you already have a few late payments on your history, the best thing to do is just to simply keep making on time payments. With time, the ratio of on time to late payments in your payment history will improve alongside your credit score and you’ll avoid many of those pesky late payment fees that creditors often time sneak in.
Secondly, your Credit Utilization will also be a large contributor to your overall credit score. So what even is your Credit Utilization? It is the percentage of your overall credit line that you are utilizing or your total statement balance divided by your total credit limit. Most experts will tell you to keep this under 30% but ideally you would want to keep your utilization below 5% if possible. Sometimes keeping your utilization this low is impossible. Whether you are a student with a total credit limit of $1000 or using your cards to pay off multiple bills, there are a few quick and easy ways to lower your Credit Utilization. The most straightforward strategy is buy less things with your credit card. This way you can keep your total statement balance lower while your total credit limit stays the same and your utilization decreases.
The other way to approach this is to increase your total credit limit. A little known fact is that, in some cases, all you have to do is ask. Call up your creditor(your bank or whoever issued your credit card to you) and when you talk to an agent or representative, ask them to see if you are eligible to get a CLI or credit limit increase. A lot of the time this is all you need to do for them to substantially increase the credit limit on your cards. One thing to keep in mind while asking this is to make sure they will not need to create a hard inquiry on your credit in order to increase your credit limit as this will affect your credit score negatively. Lastly, if you are unable to get a CLI or if they would be required to create a hard pull on your credit information, you can always apply for another credit card. This is always an option for people seeking more credit and can come with many benefits such as different credit card rewards or sign up bonuses. As you open up new lines of credit you will have the option to spread out your purchases between different cards thus creating a loophole in lowering your overall Credit Utilization. Interestingly, you will score a higher credit score if you spread out your purchases across several cards keeping your utilization lower across those cards instead of putting all your purchases on one card keeping that utilization higher even if all your other cards have zero utilization.
The amount of time you have had any sort of credit or Credit History also helps decide your final credit score. This is probably the portion of your credit score you will have the least control over as there is no way to improve this other than simply waiting. The age of your Credit History is essentially the average length of time you have held each open line of credit ever granted to you. This is the reason why many people may tell you to never close your first credit card as it will negatively affect your credit history by lowering the average age of each of your lines of credit. In order to improve this component of your credit score you simply have to keep your credit cards or other lines of credit open. Another helpful strategy is to open a few accounts early on in your credit journey. In the case you end up needing to close one of those accounts, you will have other accounts open that will help keep your Credit History healthy.
The most often overlooked portion of credit scores is derived from Credit Mix. Your Credit Mix is the number of lines of credit you currently have whether that be credit cards, auto/personal loans, or even a mortgage. Although this component of your credit score only affects roughly 10% of your credit score it can still make a big difference. In order to improve your Credit Mix, you’ll need to continue to open up a variety of different lines of credit. One easy way of achieving a stronger Credit Mix is to apply for various different no annual fee credit cards in order to increase the amount of credit lines available to you. Since these cards will have no annual fee they will cost nothing to keep open and will help boost this category in your overall credit score calculation.
The last category that affects your credit score will be New Credit. This is another way of saying, the number of hard inquiries you have in your history. A hard inquiry will appear whenever you apply for a new source of credit whether that be another credit card, mortgage, or other loan. This may seem to be a little unfair to consider when calculating credit scores as many of the other factors that are considered can be improved by having a large number of credit lines. The silver lining here is that these hard inquiries only stay on your credit reports for two years at most. Also, for example, if you are applying for a mortgage and end up shopping around from a few different creditors, there will most likely only be one hard inquiry shown in your credit report. The New Credit component of your credit score will also only affect about ~5% of the overall credit score so don’t stress too much when opening new lines of credit.
Once you learn what the factors are that go into calculating your credit score and understand how they work, it is pretty easy to improve your credit score. The most important part is staying consistent and diligent with improving each of the above elements. Credit scores are like the report cards of the adult world. With a good credit score, you will have the opportunity to take advantage of lower APR or interest rates on credit cards, mortgages, and all other types of loans. By following these tips and improving your credit score will not only give you more access to credit but will actually end up making you money.