Despite what you may have heard, there’s no big secret to getting a higher credit score. The categories of information that make up your FICO credit score are well-known, and while the exact scoring formula is a secret, the general path to good credit isn’t.
With that in mind, here are the top three ways to take your credit score from good to great.
1. Pay your bills on time
This one may sound quite obvious (and it is), but it’s by far the most effective way to boost your credit score, especially if your score isn’t great right now due to a history of missed payments or even collection accounts and charge-offs.
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Your payment history is the most important category of information that makes up your FICO score, contributing 35% of the total. This is why a simple action like a late payment can have such a dramatic impact on your score.
If you have a history of late payments, these will stay on your credit report, and will be a factor in your credit score for up to seven years. However, it’s important to mention that although we don’t know the precise FICO formula, we do know that more emphasis is placed on newer information.
In other words, a late payment will matter less as time goes on, especially if you establish a track record of on-time payments from here on out. Similarly, a collection account or charge off from, say, six years ago, should hurt your score less than a similar item from just a few months ago.
As a personal example, until recently, my credit report had one negative item on it — a late student loan payment from early 2010 that recently came off my credit report since it is now over seven years old. By the time it was removed, it was such a minor contributor to my credit that my score barely budged when it finally dropped off.
2. Keep your card balances low, and pay down your loans
The second most important category of information that makes up your FICO credit score is “amounts owed.” And this doesn’t necessarily mean the dollar amounts of your debt (although that is a factor).
Instead, the key factor is your debts relative to your credit lines and original loan balances.
Your credit utilization is the percentage of your available credit you use, and is considered on a per-account and overall basis. For example, if you have a credit card with a limit of $5,000 and balance of $2,000, your utilization for that particular card is 40%. If the total of all of your credit limits is $15,000 and your total balances add up to $3,000, your overall utilization is 20%.
Experts generally advise that consumers should aim to keep their credit utilization under 30%, and lower is better. For reference, the average consumer with a FICO score above 800 uses just 4% of their overall revolving credit limit, and no more than 10% of any single account.
In addition to simply paying your balances down, here are two less obvious ways to boost this part of your credit score:
- Ask for credit limit increases. A higher credit limit means that your balance will represent a lower percentage of your available credit. Most people who ask for credit limit increases are successful, and this could certainly boost your score.
- Keep old accounts open, even if you don’t use them. Unless your old account has a high annual or ongoing fee, it’s generally a good credit practice to not close your unused credit accounts. Doing so reduces your total available credit, and therefore can increase your overall credit utilization.
3. Wait a while
Here’s a secret: The FICO credit formula is somewhat biased toward older consumers. The reason that I say this is that the third-largest contributing category of data is the length of your credit history. This includes factors like the age of your oldest credit account, average age of all of your accounts, and the ages of your individual account.
In fact, the average member of the 800+ FICO score group opened their first account more than 25 years ago, and their average account was opened almost 12 years ago. Obviously, if you’re relatively young, this can be impossible.
To be clear, by simply paying your bills on time and keeping your credit utilization low, you can indeed achieve a great credit score. However, to truly maximize your credit score, you need to let your credit accounts age.
On this same point, it’s a good idea to only open new credit accounts if you really need them. New accounts not only drag down the average ages of your accounts, but there’s another category called “new credit” that contributes 10% of your score.
It’s not a magic formula
If you find someone who has an elite-level credit score and ask them how their score got so high, they’re likely to tell you that it happened through some variation of the three steps mentioned here.
For example, my colleague Sean Williams has a perfect 850 FICO score, and his credit tips involve things like paying bills on time and automatically, avoiding credit card debt, and only opening new accounts occasionally. These are indeed excellent pieces of advice, but nothing that should come as too much of a surprise.
The point is that the path to excellent credit consists of a combination of two simple things — good personal finance habits and time.
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