by The Ascent Staff | April 1, 2019
Americans would probably be lost without their credit cards. According to a study on average credit card debt from The Ascent, the average American consumer was carrying over $5,700 in credit card debt at the end of 2018 with total outstanding credit card debt hitting $870 billion. Considering that roughly 70% of U.S. GDP is consumption-driven, lending plays a big role in growing the U.S. economy.
However, borrowing can also play a big role for consumers, too. Consumers' ability to repay their debt obligations in a timely manner and manage their credit wisely is reflected by their personalized credit score (sometimes known as FICO® Score), which is derived from the three credit reporting agencies. Your credit score, as you can imagine, is critical in helping to determine whether or not you can receive a mortgage or loan from a bank or credit union.
But your credit score can affect much more than just your ability to get a mortgage. Landlords can request access to your credit report before renting to you, and employers can ask for access to your credit report before hiring you. Even auto and home insurance providers may request a credit profile, since studies have shown that persons with lower credit scores cost insurers more. Having a high credit score can not only set you up to receive an attractive loan rate, but it can be pivotal to helping you secure the apartment or job you're seeking.
The FICO score scale runs from 300 on the low end to 850 on the high end. How rare is a perfect credit score of 850? According to Fair Isaac Co., the developer of the highly secretive FICO score, just one in nine Americans has a FICO score of 800 or higher, and only 1% have a perfect credit score of 850. One out of 100 doesn't exactly sound like great odds if you're seeking perfection.
But a perfect credit score is actually a lot easier to achieve than you probably realize. Earlier this month I looked at my FICO credit score and was amazed to see it sitting at 849, one point shy of perceived perfection. I sat there and thought about what I'd done that was so incredible to push my credit score up to some very lofty levels and came to a striking realization: I'd done nothing special at all. Instead, I'd followed five relatively simple strategies and remained disciplined, which has paid off in a close-to-perfect credit score.
Without a shred of doubt, the biggest component to achieving a perfect credit score is to pay your bills on time. Paying your bills on time demonstrates to lenders that you can be trusted with future loans, and it may qualify you for a lower lending rate in the future. In theory, the higher your credit score, the more lenders will fight for your business, and the more leverage you may have in negotiating a lower interest rate.
Consumers should also understand that if a late payment is more of an exception than a rule, your lender may be willing to forgive it. Late-payment forgiveness is all dependent on the lender in question, but most companies will allow a late payment once every 12 to 24 months without any negative repercussions as long as you explain why you were late to the lender in question and make good on your payment.
It's also a common myth that you'll need to carry a balance on your credit cards to achieve a higher credit score, which isn't true. Though your lenders would love to collect interest on a carried balance from month-to-month, all the credit bureaus care about is whether or not you're meeting your obligations in a timely manner. If you pay your credit accounts off in full at the end of each month, you're going to achieve the same positive benefit as if you carried a small balance.
Another really important aspect of a perfect credit score is being mindful of your credit utilization rates. In other words, add up your aggregate available credit versus the amount of credit you currently have used. If this figure is below 20% or 30%, you're doing a pretty good job in the eyes of the three reporting credit agencies.
Credit bureaus are usually wary of seeing utilization rates that tip the scales above 30% as it implies that you either don't have good money management skills, or that you may have difficulty repaying your debts.
One of the interesting aspects of wisely managing your credit utilization rates is that credit line increases are often great news. Unless you have a spending compulsion, increased credit lines wind up boosting your aggregate credit available and can lower your credit utilization rate. Likewise, reducing your credit line could backfire by increasing your utilization rate to levels that the three reporting credit bureaus find worrisome.
A third strategy is to keep a good mix of credit accounts open at all times. Just as creditors want to see that you can make on-time payments, and that you can keep from utilizing too much of your available credit, they also want to observe your ability to handle different types of credit accounts.
For example, credit agencies are looking for consumers who have a good mix of installment loans, such as a mortgage or car loan, and revolving credit, like a department store credit card or bank credit card. If you can handle a good mix of debt obligations, creditors are more likely to lend to you, and your FICO score is liable to benefit.
Your credit score should also receive a big boost by keeping your good-standing accounts open for long periods of time.
Both your lenders and credit reporting agencies examine your account history as a roadmap to your credit worthiness. If you have a perfect payment history, but just six months' worth of credit history, lenders may still have reservations about your ability to meet your debt obligations. However, if your average good-standing credit account has been open for 10 years, you've demonstrated to creditors and the credit agencies that you're quite trustworthy.
A word to the wise here is not to close long-standing credit accounts, even if you don't use them often. Long-tenured accounts can provide a big boost to your average length of credit history, which is one of the factors that affects your credit score. Make an effort to use all of your credit lines a couple of times a year in order to keep them active and in good standing.
Lastly, while credit bureaus want to observe your ability to manage multiple types of credit accounts, you'll also want to be careful not to open too many accounts.
The easiest thing to do is ask yourself if a credit account is necessary based on your purchase. If you're buying a home, a car, getting a college education, or even buying a new washer and dryer for your home, opening a line of credit probably makes sense as these are large-money events. However, if you're buying a new shirt for $19.95 at your local department store, then opening a new account to save 10% probably isn't a prudent move. It can be especially prudent to open new accounts with discretion as you get older since a new account can adversely impact your average length of credit history, as well as knock a few points off your FICO score in the near-term due to a hard credit inquiry.
If you follow these simple strategies, remain disciplined, and give it some time, a perfect credit score of 850 is actually quite achievable.
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