Your credit or FICO score is basically a number assigned to your financial profile letting lenders know your financial standing in the economy. The range is 300-850 and while it can take a lot of time building your score, it takes only one error or negative mark to pull it down and recover from.
So who is this article for?
Anyone and everyone really. People with low (<700) FICO scores will see scores rise relatively faster if they fix things I’m going to cover vs people with high 700 or 800+ scores.
Breaking down the FICO score
This covers your statements and whether or not they were paid back in full over time. Missing even a single payment on a credit card, charge card, loan or mortgage can result in serious consequences and negatively affect your score.
Always pay off your cards/payments on time to keep a positive record which builds over time.
Missing payments will raise flags on your credit report and pull down your score. This negative record will continue to hurt it upto 7 years by staying on your account. If you’ve been a long time member of a bank and say in 36 months, you had your first missed payment, you may have it removed by calling up the bank.
If your score is currently below 700, you might have a missed payment on file. If you’ve been paying off all your bills on time over time, you may try calling the bank and requesting them to remove the missed payment record.
I recommend people set-up auto pay with your bank account to avoid any lapses incase you forgot or were busy. I personally pay off my card (and have auto-pay set-up incase) every week because I use my credit cards as if they were debit cards (they’re not, but it’s better to feel the money leave your account now than later).
This Includes all your loan(s) and credit card charges. Loans show up as open accounts until paid off. Once paid in full, they are closed with a remark (paid in full). This is good for you as it shows to future lenders you are a reliable borrower. If you missed a payment and didn’t pay it off, eventually it goes to collection. The last thing you want is a collection on your credit report as that can stay on your record for upto 10 years.
If you catch a collection as it is reported, your best bet is to contact the debt/collections agency and negotiate a deal to pay off your debt and remove the mark or contest.
Note: Once a collection is placed on your account, the Bank that you originally owed money to may not necessarily be the one responsible to get it off. Debt gets bought/sold by agencies so that the bank can recoup most of the lost money.
Credit cards are a different story. It is the final amount that posts to your statement that matters here. If you spent $500 out of $1000 and let it post in your month-end statement, your utilization is 50% which is VERY HIGH.
If you however pay off $450 before the month-end statement posts, you only see $50 on a $1000 limit which is 5% utilization. Your goal should be to keep your utilization between 1-8% from now on.
This is determined by the average age of your accounts. If you only have one credit card for a year, the age/credit history is 12 months. If you have two credit cards both opened at the same time – kept for one year, the average age is also 12 months. But if you apply for a second card after the first one ages to 12 months, your average age now is 6 months.
The lower the age, the worse it is for your score. But over time, as the numbers increase, your score also starts to increase. Hence, space out ANY credit related applications so that it gives time for your average age of accounts to grow (hence absorbing additions) score to bounce back up.
New Credit (10% share)
Each new account opened adds a new data point to your credit report but also may involve an inquiry. You will not receive an inquiry (hard pull) if you applied for a credit card you were pre-approved for (also called soft-pull). Do not apply for too many cards in a short period of time as it will damage your score. It is recommended NOT to apply for more than two cards every 12 months but if you have a very good (750+) score, you can play the credit card game and apply for multiple cards.
If you applied for a card and were rejected, you may read this to get approved.
Do not keep applying multiple times to the same card as it may seriously hurt your score. I cover why that happens here.
Credit Mix (10% share)
Contrary to popular belief, having more credit cards actually helps you (as long as you pay them all off on time). It creates a portfolio of various loans and multiple data-points for lenders to see your diversification. The more cards you have the more information you provide every month which includes utilization (which will start to drop each time you open a card as new credit limits are being added) and on-time payments.
How to target factors to favor your situation?
If you feel your utilization is high there’s two options to choose from: increase credit limit or apply for new credit. I cover the former in a previous article.
Build a credit card roster that fits your needs. Start early so that when you are ready to make a big purchase that will put you in debt, you have built a strong profile to get the lowest interest rates.
Apply for credit cards when you think you need them and they will give you positive expected value. The stupidest thing to do would be going out and getting a bunch of credit cards, not paying them back in full and getting into debt.
Monitor your score
I recommend CreditKarma’s website/mobile app to track your credit score on a weekly basis. By bringing your utilization down from 30% to 2% can raise your credit score from say a 650 to 720 in a matter of 2-3 months. But, a collection on your report can drag your score down from a 800 to a 710.
Monitoring your credit profile and setting up alerts is a great way to start not only boosting your score, but being financially responsible with debt. When you take those steps, you will automatically start seeing a positive change in your profile as well as spending habits.
This is by no means a comprehensive guide, but merely a basics guide on what really matters when building/rebuilding one’s credit profile.