An excellent credit score opens the door to the best financing offers on the market. Who wouldn’t want to take advantage of them? Lowering the cost of a mortgage by a single percentage point, for instance, can easily lead to tens of thousands of dollars in interest savings. So how does an average consumer achieve a credit score in the top tier to unlock the best offers? The steps are quite simple. And they are achievable by anyone across all income levels.
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What’s in a Credit Score?
The two most widely used credit score models used by lenders are the FICO score and the VantageScore. FICO scores range from 300 to 850. The latest version of VantageScore uses the same scale (earlier editions used a 501-990 scale). The higher the score, the better. The minimum requirements to generate a credit score vary between the two models. For the FICO model, a consumer must have at least one account that has been open for six months or more, and has been updated in the last six months. The VantageScore model requires one month of credit history and one account that’s been reported within the last two years.
Lenders and creditors set their own cutoff points for determining which scores qualify as poor, fair, good or excellent. There is no regimented standard, but the range generally looks something like:
– Bad – Under 500
– Poor – 501-600
– Fair – 601-670
– Good – 671-760
– Excellent – 761 or higher
The credit scores themselves are made up of multiple factors, mainly:
– Payment History – 35%
– Debt/Credit Utilization – 30%
– Account Age – 15%
– Credit Mix – 10%
– New Credit/Inquiries – 10%
Each category is more than it appears. For example, the utilization category (the amount you owe in relation to the amount of credit available, specific to your credit card accounts) also considers the number of accounts with balances, the amounts owed on each account, and the percentage owed on installment loans. This is in addition to the percentages of credit used on each account and the overall, comprehensive figure. Exact algorithms are complex and proprietary.
Essential Habits for a High Credit Score
When it comes to reaching an elusive 800+ score, no single strategy works for everyone. But people with excellent credit scores obviously get high marks across the credit scorecard. Here’s how they do it:
1. Pay all bills on time.
The largest portion of a credit score is based on the consumer’s payment history. Paying all bills on time is the single best thing a person can do to maintain a great credit score. Very late payments hurt more than slightly late payments (30 days late can ding you, but 90+ days late is a huge red flag to creditors). Recent late payments hurt more than old ones. A person with a history of late payments does more damage to their credit scores than someone who pays late just once. Late payments remain on the credit report for seven years but the effect on the consumer’s score tends to diminish over time. The exact hit depends on many other factors.
2. Have credit but avoid using it much.
The second biggest credit score factor is utilization, or the amount of credit you use in relation to the amount of credit available to you — specifically we’re talking about revolving credit card utilization. Consumers and experts have different opinions about what the “best” utilization ratio is, mostly ranging from 7 to 30 percent. This percentage also varies depending on which scoring model is being used. In any case, the lower the better.
Don’t swear off credit. The only way credit scoring models can assign a score is when they see the consumer has a history of using credit. And to achieve excellent scores, these consumers have a history of using credit responsibly. A person who avoids using credit can’t possibly achieve a high score. In fact, they may not be able to achieve a score at all if they don’t meet the minimum requirements to generate a score.
3. Avoid new credit.
Once the right credit accounts are in place, don’t add to the mix unnecessarily. Applying for new credit can bring the score down in two ways. One, the hard inquiry results in a temporary small ding to the score and each new account brings down the overall average account age.
On the flip side, adding a new revolving credit card account can help to bring the overall utilization ratio down by adding to the amount of available credit. For people who carry little or no balance, the effect is minimal.
4. Maintain accounts for a long time.
Some of the credit score is based on the average age of all of the accounts reported in your credit report summary. Closed accounts are factored in alongside open accounts but eventually they will age off the report. Open accounts remain indefinitely. When it comes to average account seniority, the biggest benefit comes from very old accounts that are still open.
Avoid involuntary closure of dormant credit card accounts by using them to make a purchase at least once a year.
5. Use a diverse mix of credit.
Responsible use of a variety of types of credit accounts is scored favorably in credit scoring models. People can achieve a good mix with a mortgage, auto loan and credit card(s). Other credit accounts that add spice to the pot are student loans, personal loans and home equity loans. Many peer-to-peer lenders report to the credit bureaus, too.
What’s your secret?
If you’ve got a score over 800, we want to know your credit strategy! What’s your secret?
