A quick guide to a stellar credit score

A credit score measures how trustworthy you are. Learn what most affects it, how to fix it, and why you want it

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Disclaimer: I am not a financial advisor. I am just someone who regularly opens and closes credit cards with the purpose of earning points for travel and has a credit score of 831 at the time of writing. This article talks about the credit score system in the US.

You can have a look at my miles and points earning strategy here Travel Hacking with US Credit Card Points and here Make an easy $1100 or How to get started with Credit Card Bonuses

What exactly is a good credit score and why do I need it?

A credit score measures how trustworthy you are and tells banks and lenders if it’s risky to lend you money or give you credit cards. The higher the score, the more they can rely on you to pay them back, and the better your chances of being approved for credit cards and loans. A good score also means lower fees, lower interest rates, and lower security deposits. You’re also more likely to get that apartment you want.

Credit scores range from 300 to 850. Here’s a breakdown of what Experian thinks of your score:

I don’t like debt. Why would I want credit cards?

I don’t like debt either. In fact, I have zero debt. I get several credit cards each year for the bonuses they offer, I meet the minimum spending and pay them off in full each month.

The bonuses come in the form of cash or points, which I use to book flights and hotels. I also take advantage of the different perks that some cards provide, like travel insurance, extended warranty, cash back on purchases, purchase protection, free checked-in luggage, and rental car insurance.

How do I check my credit score?

There are several ways to check your credit score. You can contact each of the credit reporting agencies (Equifax, TransUnion, and Experian) separately, you can get a free report at AnnualCreditReport.com, and your bank may also provide it. I check mine at Credit Karma. It’s free it shows my Equifax and TransUnion scores, it tells me exactly what impacts my numbers, suggests what to do about it, and is good-looking, perfect for visual thinkers.

From my own credit report

What affects my credit score?

Your credit score is based on your payment history (pay your bills on time), credit usage (don’t use more than 30% of your credit line), the age of credit (the average time you’ve had each account), derogatory marks (collections, bankruptcies), number of accounts (more than 3 is better), and hard inquiries (whenever a potential lender checks your credit score).

A higher credit score indicates lower risk and therefore a better chance of being approved for loans and other forms of credit.

From my credit report. Hard Inquiries are supposed to stay on your record for 2 years. For some (lucky) reason, mine disappear in a couple of months

Let’s look at the bits that affect your credit score one by one:

Payment History

A late payment can show on your credit report for up to 7 years and can lower your score by as much as 180 points. Make sure you pay all your bills on time. This is one of the most important ways to show the banks that you can be trusted.

Whenever I get a new credit card, I change the due date to the same date as my other accounts so I can pay all my bills at the same time. I either do this online or by calling the bank that issued the card. For my due date, I always choose the 7th. That way I know that if I pay before the end of the month, I still have a week in case something goes wrong with the payment.

I put all my card and payment info into a spreadsheet. I find them hugely useful and well worth the time it takes to master them. I learned from random youtube videos and use them almost daily for plotting, planning, and tracking.

Credit Utilization

If you add up the credit lines from all of your accounts, you get the total credit available to you. When you check your credit report, the math might be done for you.

Your credit score is highly affected by how much of this credit limit you use (how much you owe on your credit cards) and how quickly you pay it off. This is called “credit utilization”.

The best possible scenario would be to use less than 10% of your total available credit and pay it off in full every month. The second best option would be using less than 30%.

If I need my credit score to be in tip-top shape (like when I’m applying for a new card), I pay all my cards in full a few times a month, so that my credit utilization is close to zero. I also regularly call the banks and ask for credit line increases. The higher the credit line, the more I can spend before I reach 10%.

There’s no maximum number of cards you can have. All that matters is how responsibly you use them.

Derogatory Marks – the good news

Tax liens and debt to the IRS no longer affect your credit scores. The reporting agencies stopped taking them into account in 2017. They still appear in public records though, so if a lender goes to the trouble of checking, they’ll find it.

Medical debt rules changed in 2022. Paid medical debt is wiped out of your credit report immediately, even if it went through a collection agency. Unpaid medical debt no longer shows on your record either, unless the medical provider sends it to a collection agency and you don’t pay it within 12 months.

Derogatory Marks that do count

Derogatory marks are placed on a credit report for serious delinquencies, like unpaid bills going to collections, bills overdue by more than 30 days, repossessions, foreclosures, and bankruptcies.

The credit score hurt by these events is hard to recover from as the derogatory marks stay on your credit report for 7 – 10 years even if you remedy the situation.

If you find yourself in dire straights due to your finances or physical and mental health, contact 211. org. They will put you in contact with an appropriate agency to help you.

The Age of Credit

As much as you might dislike aging, it’s good for your credit score.

There are a few factors affecting the length of your credit history but it’s the approximate average of years you’ve had credit cards and loans. You can check your credit report, where the math is usually done for you. The impact the credit history has on your credit score is about 15% so it’s not huge, but not negligible either.

The bigger this number the better. Banks, lenders, and landlords don’t only want to see that you’re responsible (paying on time, not using much of your credit) but also how long you have been responsible (the age of your credit).

Find out which of your credit card accounts you’ve had the longest. Use them at least once a year so the bank doesn’t cancel them for inactivity, pay them off in full and never, ever close them. Keep your oldest accounts alive.

A trick to “aging” your credit history

Ask someone older, with impeccable credit history and excellent credit score, to add you to their oldest account as an authorized user. This is a delicate situation because you need to be able to trust each other. If one of you makes a mistake, it affects you both.

If you trust them but they don’t quite trust you, they don’t need to give you the card or tell you the account number. As long as you’re listed as an authorized user, the age of the account will be added to your overall age of credit. Again, use this advice with caution, as it can affect not only your financial life but also your relationship.

Hard inquiry

Whenever you apply for a personal credit card, loan, lease, or mortgage, the lender pulls your credit report to check, with your permission, your credit score. These inquiries result in a “hard pull”, or “hard inquiry” and a possible small drop in your credit score.

My score goes down by 3 – 5 points each time I apply for a card and gets back up within a couple of months. In contrast, missed bill payments and collections can cost you well over 100 points and stay on your report for up to 10 years even if you have paid them off.

Can getting too many cards hurt my credit score?

It’s not the number of cards that has the power to hurt your score, it’s what you do with those cards.

I currently have 25 different accounts on my credit report (8 active and 17 closed) and my score is excellent (or “exceptional” if we go by the pie chart at the top of this article đŸ™‚ )

If you use only a small portion of your credit line (less than 30% is good, and less than 10% is ideal) and pay your balances off in full each month, your credit won’t get affected by the number of cards you hold.

There is such a thing as too few accounts though. If you have less than 3, there’s not much information to calculate your credit score from, so keep this in mind.

Quick tips on improving your credit score

  • Change the due dates of all your credit cards to the same day every month. It will help you stay organized and not miss payments.
  • I know you know, but still: Pay your bills on time. Late payments can have a huge, negative impact on your credit score and stay on your credit report for years.
  • Length of credit history accounts for about 15% of your credit score. If you’re lacking in this area, try to get someone with a long and impeccable credit history to add you as an authorized user to their oldest account. They don’t even need to give you the card or access to the account. Pic someone you trust. If either of you screws up, it will affect both of your credit scores.
  • If you’re juggling multiple accounts, use spreadsheets to keep track of payments, rewards, expiration dates, spending, and bonuses.
  • Keep your credit card balances low. Use less than 30% of your available credit line or, ideally, less than 10%. If you make big purchases, pay off the credit card immediately, and then again before the regular due date.
  • Having many credit cards won’t hurt your score if you use them responsibly. Use less than 10 – 30% of your credit lines, and pay them off on time and in full.
  • Closing newer accounts can increase your average length of credit history (which is good), but decrease your total available credit line (which is bad). To avoid the possible (small) drop in your credit score, try to raise the available credit lines on the rest of the credit cards you own by calling the banks that own them.
  • Don’t close unused credit accounts if you’ve had them for a long time. They add to the age of your credit history. Use them at least once a year, otherwise, the bank may cancel them due to inactivity.
  • Check your credit report regularly to spot any errors or fraudulent activity, which can damage your credit score. If you find a discrepancy, dispute it.
  • Pay off collections and past-due accounts as soon as possible. They have a huge negative impact on your score and stay on your credit report for years.
  • Tax liens won’t hurt your credit score.
  • Medical debt no longer hurts your credit score until 12 months after it is sent to collections. The law changed in July 2022.
  • If you can’t pay your credit card bills, call the bank to see what they can do for you. Neither you nor the bank wants to deal with late or missed payments.
  • If you’re paying high interest rates on your credit card debt, see if you can transfer it to a new, 0% card. Read the fine print, most transfers come with a transfer fee, usually about 3% of the whole transferred amount.

So there you have it. Improving your credit score takes some discipline but it can be done. If you have any questions, leave them in the comments below.

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