Your credit score is like your GPA from school applied to your credit activities. While you grades in school were on a 4.0 scale, the credit scoring system has a scale too. The most commonly used scale is FICO, which scores between 300-850, 850 is the best.
Our quest is the 850 credit score. Last time we talked about how to get your free credit report. This post will cover improving your score. Next time we will pull our scores for free. Don’t pay anyone for this service, as you can do it for free.
My credit score today is 754. Generally, above 720 is considered excellent. 680-720 is considered good. If your score is below that, categories exist. But you are going to leave those on the quest to 850, so I am not going to outline them.
Those bad things we discussed last time (late payments, bankruptcy, collections) cause your score to go down. Another factor that will hold down your score is percentage of used revolving credit. If you add up your total credit card limits, divide that by two. You should never use more credit than that on your cards. For example, if you have two credit cards with a $1000 limit and a $4000 limit, your total limit is $5000. Never use more than 10%, or $500, of that at a time. Optimally use as little credit as possible to raise your score.
Closing revolving accounts can negatively impact your score because of the above logic. If you have $2500 in credit card balances and a $5000 limit you are using half of your available credit. If you close a card with a $1000 limit, you are now using 62.5% of your available credit (out of $4000). This hurts your score.
Another big factor in determining your FICO score is length of credit. Since your score is calculated from the last 7 years, having 7 years of good history will give you the best score. To have good history, you need open credit that is being handled well. Make those payments on time for 7 years and you will by default have perfect credit.
Yet another factor that can dent your score is the number of recent inquiries on your credit report. When you open a bank account, buy a car, or apply for a credit card (even a store card), your credit is pulled. A large number of these inquiries hints that you might be opening new lines of credit. This decreases your score. An inquiry once in a while is normal, and will not impact your score.
A great way to increase your score is with a fixed term loan. Don’t go get a loan to increase your score, but be aware of the impact. I have a car loan, for example. My car loan is a 5 year loan with a scheduled monthly payment. By making an on time payment every month, my score is going up, up, up.
Next time we will pull our scores for free!
