It took 17 years, but I finally made it: a perfect FICO credit score of 850. According to estimates from the Fair Isaac Corporation back in 2010, only one in 200 people has a perfect credit score.
Yet, as I look back on the nearly two-decade journey that allowed me to achieve what few other cardholders in America have, I can't help but realize that I didn't do anything particularly special or out of the ordinary to reach a FICO score of 850. In general, I simply followed the guidelines laid out by FICO to reach an excellent credit score.
Sticking to the basics helped me achieve a perfect credit score
The FICO score formula is itself a proprietary secret. However, FICO did divulge to CreditCards.com a few years back the five factors that matter most when calculating your credit score. Those factors are (along with their respective weightings in parentheses):
- Your payment history (35%): Paying your bills on time is of the utmost importance to FICO and your lenders.
- Your credit utilization (30%): Lenders and credit reporting bureaus like to see consumers keep their overall credit usage to 30% or less of their aggregate credit. Any more could be construed as a sign of irresponsibility and hurt your credit score.
- Length of credit history (15%): Your credit report is a "road map" for lenders, and the more data points there are, the more confident those lenders can be in the trends they're seeing. The longer you keep your credit accounts open (especially those in good standing), the more this road map is filled out for lenders.
- New credit accounts (10%): The number of new credit accounts you apply for can impact your credit score. Hard inquiries, such as opening a new account, can temporarily lower your score. Thus, it's wise to only open new accounts when it makes financial sense to do so.
- Credit mix (10%): Lenders like to see that you can handle the two types of loan accounts, installment and revolving. Installment accounts have fixed payments, such as a mortgage or car loan, whereas revolving account payments are based on your balance owed, such as a department store credit card.
Sticking to these basics, which anyone can do, is what allowed me to achieve the highest credit score possible.
Even someone with a perfect credit score makes mistakes
But it wasn't perfect along the way. Even though my FICO score is 850, I've made a few mistakes. Here are three of them.
1. I was late on a payment (once)
Even though paying your bills on time is the most critical component to an excellent credit score, even I was late with a payment once before. I had a penchant for waiting until the due date of my bills before making my payment, but I failed to factor in the processing cutoff for companies on the East Coast. Long story short, my payment wound up posting a day late, landing me a late fee and a ding on my credit report.
Now here's the interesting thing some of you may not realize: You can ask your lender to forgive a late payment from time to time. It doesn't mean they're obliged to cave into your request, but if you have a long history of making your payments on time, they probably will more times than not. Lenders value high-quality customers, and it's usually in their best financial interests to remove a late-fee and an adverse credit mark if you make a request than to spend a lot of money to replace you as a customer.
This late payment was also a wake-up call to pay my bills sooner. I've had a number of my regular bills and a handful of my credit accounts automatically debited from my checking account, or charged to a credit card that's paid off monthly, ever since. Having these automatic payments in place significantly lowers my chances of forgetting to make a payment on time.
2. I carried a balance on my credit cards to improve my credit score
In my late teens and early 20s, I was under the impression that the only way to properly build my credit history was to pay my bills on time and to carry a small balance on my credit card each and every month. I believed this would show responsibility to my lenders, which would translate into a positive move higher in my credit score.
Though I did wind up pushing my credit score successively higher more years than not, this approach above was inherently flawed. The belief that you need to carry a balance on your credit cards to improve your credit score is one of the most pervasive myths in the industry. In reality, you don't need to carry a single red cent from one month to the next. If you pay your credit cards off in full from one month to the next, you'll receive the same benefits on your credit report as if you carried a nominal balance. Best of all, you won't owe any interest if you pay off your credit cards in full each month.
3. I've let my reward points build without cashing them in
This last one I'm throwing in because I'm still guilty of it to this very day.
For years, I've favored using one credit card more than any other because it has cashback rewards attached to the purchases I make. If this sounds familiar, it's because reward cards, be it for cash, airline miles, or other goods and services, are becoming increasingly popular with cardholders. Over the years, I've built up quite a mountain of rewards points that I've yet to cash in.
But here's the problem with my philosophy. Even though I've got a growing number of rewards points waiting for me that can be turned into "cash" at a moment's notice, the dollars I've earned throughout the years have been devalued by inflation. Rewards points can't be invested and don't accrue interest. Therefore, if they aren't used right away, they begin to lose their value, which defeats the purpose of receiving the reward in the first place.
Since we're entering the vacation season, this Fool needs to rectify this error by putting his credit card points to work sooner rather than later.