Whether you realize it or not, your credit score can have a sizable impact on your financial well-being.
Most Americans are fully aware of the importance of maintaining a good credit score when trying to obtain a home loan, or when attempting to open a new credit card. If you have a poor credit score, or even one that's below the national average of 695 (based on the FICO score scale of 300 to 850), it can be tough to obtain a mortgage or even a new credit card. If you do manage to get a line of credit with a low score, your loan choices could be limited and/or your interest rate significantly higher than those with excellent FICO scores.
But, your credit report can impact other aspects of your life. Landlords and prospective employers may request to see your report before renting to you or hiring you. If either sees a history of late payments, collections, or repossessions, it could cost you the home or job of your dreams. Utilities may also request a large depositand insurers could charge you a higher rate if you have a poor credit history.
A perfect credit score isn't out of reach
On the flipside, having an excellent credit score puts the ball in your court. Usually people with credit scores over 800 have the luxury of creditors fighting for their business, which can mean lower interest rates, bigger credit lines, and more choices. In April 2012, around 18% of all adults had a credit score of 800 or higher.
Yet, there's even an elite among this group: people with a perfect credit score. According to a somewhat dated statistic from FICO in 2010, just 1 in every 200 adults (0.5%) managed to achieve a perfect credit score of 850. Amazingly, yours truly finds himself (today) among this rarified class of perfect scores. But what strikes me the most isn't that I've managed to achieve what 99.5% of adults haven't. Instead, it's that I didn't do anything particularly special to reach a FICO score of 850. In other words, if I can do it, there's no reason any other person couldn't do it as well.
Here are the five steps I followed to achieving the Holy Grail of all credit scores.
1. Follow FICO's guidelines
Unquestionably, the smartest move to make is to heed FICO's every suggestion. As noted by CreditCards.com, FICO doesn't publish the exact formula for calculating its vaunted credit scores, but it does offer a general guideline that consumers should follow. Below is the breakdown of the key five points, along with a percentage in parenthesis that represents each points' relative importance.
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- New credit accounts (10%)
- Credit mix (10%)
As you can see from these guidelines, making your payments on time and keeping your aggregate credit usage below 30% of your combined available credit, accounts for nearly two-thirds of your credit score. Other important factors include keeping your accounts open for long periods of time, which allows creditors to get an accurate roadmap of your repayment habits, as well as being mindful of how many new accounts you've opened (or tried to open). Lastly, the type of credit accounts you have matters. Creditors like to see a nice mix of installment loans, such as a mortgage or auto loan, and revolving credit lines, such as a department store credit card.
It's pretty difficult to get a perfect credit score if you aren't aware of what counts. Of course, there's more to a FICO score of 850 than just following this script.
2. If you mess up, fess up
Most people aren't perfect when it comes to their credit history, and we mess up from time to time. My suggestion, should you ever be late on a payment: fess up.
About eight years ago I was late by a matter of hours in getting my often-used credit card bill paid, and I was hit with a late charge and a ding on my credit report. Most people would probably pay the late charge and chalk up the error as a lessoned learned. However, what you may not realize is that most creditors (at least of the revolving account kind) have some leniency if a mistake is more of the "once in a blue moon" variety. Previous to this late payment, I had never been late with a payment. When all was said and done, the creditor reversed the late charge and removed the black mark on my credit report.
The next time you run into a credit snafu, ask your lender if they'd be willing to remove the late fee and accompanying black mark against your credit score. If you've made your previous payments on time, you may be pleasantly surprised by their answer.
3. Give it time and think long-term
In order to get a perfect credit score, you need to give your credit history time to build. The longer of a roadmap you can provide creditors, the more accurate their assessment will be of your responsible or irresponsible spending and repayment habits.
My suggestion? Don't look at your credit score every month, even if your bank offers it to you, or you subscribe to a monthly credit report service. If you do, you'll be trying too hard to micromanage your actions, which won't help you see the bigger picture.
To be clear, that doesn't mean don't keep an eye on your credit report and your credit activity. Ensuring the accuracy of your credit report, as well as going to AnnualCreditReport.com and accessing your free report from the three reporting credit bureaus, is a great idea. Just do your best to avoid getting down on yourself if you don't see progress being made on a month-to-month basis with regard to your credit score.
4. Is this necessary?
Before opening any credit account, ask yourself, "Is this necessary?" I would ask myself this question before I considered opening a new credit line, and it's often kept me from making a bad decision.
As a general rule, avoid opening department store credit cards unless you're a regular shopper and there are enticing rewards attached. Often times, saving 10% on a $29 pair of jeans isn't worth the hassle of what a new account could do to your credit score because that brand new account decreases the average age of your credit accounts.
On the other hand, it may make sense to open an account to finance large purchases (e.g., a house, a car, a washing machine, a bedroom set). Just remember to consider your alternative credit options, such as using a revolving credit account, and consider whether you'll use the account at some point again in the future. In this instance, despite it being an expensive purchase, a credit card would probably be a smarter option.
Just remember these three key words: "Is this necessary?"
5. Never close accounts in good standing
Most credit reporting agencies and FICO prefer to see your average credit accounts open for a very long period of time. This means that each new credit line you open could weigh down the average length of time your total accounts have been open. Likewise, closing long-standing accounts can also reduce the average length of time your accounts have been open. Old accounts that are in good standing are particularly valuable to boosting your credit score by keeping the average age of your open accounts high.
With just a single exception, I've personally never closed a credit account. Since they're all in good standing and all being used at least on rare occasions to keep them active, they continue to have a positive effect on my credit score.
Long story short, you don't have to be perfect to get a perfect credit score. If I've done it, so can you!