People are always contacting me about ways they can improve their credit score or asking about what things effect their FICO score. A lot of times this question can be specifically answered without reviewing their individual credit profile as it stands currently but there are some basic sound building blocks that are universal to having a good credit score. I have created a list of 5 important things to strive for with your credit report.
- A clean payment history– I know this sounds pretty basic but a lot of people still don’t understand that how important this is. Payment history makes up 35% of your FICO score so not only is it VERY important to achieving or maintaining a good credit score it also has the most long implications to your score. Missing a credit card payment is a mistake that can stay on your credit profile for 7 years! Without having a clean payment history you score will be limited on how high it can actually be. Make paying your bills a priority. Be careful when you move or when you go to the hospital, you need to be proactive to make sure you are getting these bills and getting them handled rather than just waiting for them to contact you. This is one of the most common ways that accounts show up as collections on people’s credit report.
- Understand the importance of credit card balances– Many people are surprised to learn that just paying your bills on time will not win yield you a great credit score. A very important factor your credit score is the balance on your revolving accounts compared to the limits on those accounts. A good rule of thumb is to try and keep your balance under 10% of the limit at all times. Not only will your credit score reward you with this approach you will save money by paying less interest. For more information on how to compute your debt ration click here
- Credit scores like old accounts– Remember that credit scores are about predictive information. Think of it this way, if someone made a bet with you and the bet was to guess what someone might have for lunch that day and they gave you a choice of trying to guess what a stranger might have for lunch or what someone that you have known for 20 years might have for lunch. Everybody would feel a lot better about their chances of winning that bet if they used the person they have known for 20 years as the subject rather than the person they have never met. Credit scores are the same way, the more they know about your spending habits and how you manage your credit the better they feel in trying to predict your future performance. Work on establishing and keeping well aged accounts.
- A good mix of credit is helpful– What I mean by a “mix” of credit is to have different types of accounts. Different types of accounts are valued differently. A good plan is a mortgage account, some other installment account (student loan, auto loan etc) and 3 to 5 credit cards. Be careful with this, don’t get too hung up and the exact numbers I gave you here. If you have more than 5 credit cards don’t run out and close a bunch of them. That could be detrimental to your score. This is just meant to be a range.
- Be responsible with credit inquiries– Easiest tip I can give you, don’t apply for anything unless :
1. NEED it
2. Are strategically trying to add accounts to your report to build your credit profile in areas that it may currently be lacking.
Applying for a credit card at your favorite department store at the checkout counter is NOT an action that would fall under either of these two options.