It’s a Catch-22. If you have bad credit, you pay more in interest on home loans, auto loans, credit cards and more, making it more challenging to make your payments, get out of debt and improve your credit score. On the other hand, if you have good credit, you pay less in interest, increasing the likelihood that you can manage your monthly payments, keeping your credit score high and intact.
The truth is, no matter what your credit score is now, you can achieve the “platinum standard” of credit – a score above 800 – and nab yourself the best deals on life’s largest purchases.
As your average 30-something, I’ve been in debt, struggled to pay bills and never had a substantial income to bail me out. But, the one thing I do have (now, anyway) is a credit score of 808. And I’m here to tell you my secrets:
Never miss a payment.
I’ve never had a payment reported as late on my credit report. This is crucial to your credit score. Payment history makes up about a third of your credit rating. If you have a good score and miss just one payment, your credit score can suffer upwards of 110 points. Besides debt settlement, foreclosure and bankruptcy, a late payment is about the worst thing you can do to your credit score.
Of course, I’m human. I’ve had flaky moments where I forgot about a bill’s due date and made my payment a few days late. While I was slapped with hefty late fees, I did not get the black mark on my credit report. But I may have been lucky.
Technically, a “30-day late” is any payment received one to 30 days after the due date, according to FICO. However, in many cases, your bank, creditor or lender will give you a grace period of a few days to up to the next due date before reporting your payment as late to the credit bureaus. Find out what your grace period is so you don’t find yourself in a credit crisis.
Keep your balances low and your limits high.
Another good chunk of your credit score is determined by your credit utilization, or how much credit you use (balances) compared to how much credit is available to you (limits) – the lower, the better. A good rule of thumb is to keep your balances well below 50 percent of your limits. As soon as you hit the 50 percent mark, your score will begin to take incremental hits. On the other hand, the lower you keep your balances below that 50 percent mark, the more your credit score will incrementally benefit.
As a point of reference, the average credit utilization of a person with an 800+ score is 7 percent, according to FICO. Mine averages out to 2 percent, depending on when I pull my credit, as I ordinarily pay off my balances in full each month.
If you’re doing all that you can to keep your balances low, try your hand at the other side of the equation – your credit limits. This can be tricky, as the recession prompted many creditors to not only deny credit limit increases more often, but actually lower your credit limit based on the credit review they do on you. My advice would be to only ask for a credit limit increase if your credit card is in good standing and you have the income to support the possibility of greater debt.
Mix it up.
Another ingredient to the 800+ credit score recipe is a good mix of credit – revolving credit (e.g. credit cards), installment credit (e.g. car loans, student loans) and mortgages. I’ve always had a good mix of the first two, but haven’t yet ventured into home loan territory. Now, I would never recommend that you apply for credit you don’t need, but be aware that the ability to manage different types of credit responsibly bodes well for your credit score.
If you only have credit cards and are eager to mix it up, consider talking to your bank about a savings- or CD-secured loan. This is a type of personal loan in which the money in your savings account or CD is used as collateral in case you default on the loan. This loan typically qualifies as an “installment loan,” like car loans and student loans, and may help you break out of the credit card-only slump. If you go this route, make sure your bank will report your payment activity to the credit bureaus, so your timely payments will help your credit score.
Don’t apply for credit you don’t need, but don’t close accounts either.
With the exception of my college years, I never applied for credit I didn’t need – and still don’t. I have three regular credit cards, two of which I use often. I also have two retail credit cards that I use on occasion (mostly for the perks). One of my credit cards I use only for gas. Not only does this help keep my budget simple, but the little amount I charge on it each month, then pay off in full, will be reported on my credit report as “OK,” thereby strengthening my credit history.
Each time you apply for a credit card or a loan, your credit score takes a small hit. While one or two won’t hurt you that badly, many inquiries – especially in a short period of time – can. That’s why it’s a good idea to only apply for credit you need and try not to succumb to the temptation of “10 percent off your purchase” every time you hit the register at your favorite stores.
If you have any credit card accounts you don’t use, don’t close them! When you close an account, you’re lowering the amount of credit that’s available to you and if you carry balances on any other cards, your credit utilization will go up and your credit score may go down. Instead, you may want to dust off that old card and use it for small purchases that you will pay off in full each month – like me with gasoline. Ultimately, a good credit score is about more than having credit. It’s about having credit and using it responsibly.
A good credit score is like having a coupon book for the biggest purchases you’ll make in your life. The lowest interest rates afforded to those with top credit scores translate to lower monthly payments – in the case of a mortgage, that could mean many hundreds of dollars in savings each month. Given all those hard-earned dollars at stake, why wouldn’t you manage your credit on a regular basis to make sure your score is where it needs to be?
Find out how to join the exclusive 800+ credit score club with tips and tools from Quizzle.com. At Quizzle, you’ll get a complete understanding of your credit, including a free credit report, free credit score and access to an affordable credit improvement program that will help you take your credit to the next level. See you at 800!
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