An ultimate guide for how to get a perfect credit score. Read all about credit scores, how to check your score, and how to build your credit.
These days, your credit score is used for just about everything — from securing home & auto loans, to registering for a new cell phone plan, to signing up for a new credit card, and in some cases, they’ll even play a factor in you potentially landing that dream job of yours.
As an adult, it’ll become one of the most important numbers in your life.
My experience with credit started when I opened my first student credit card, back in college. That was over 21 years ago and since then, I’ve had a lot of experience in just about every single type of credit out there — from my student loans to car purchases and even the homes I’ve mortgaged over the years.
I’ve learned a lot about how credit works and what goes into your credit analysis — and I’m happy to say that as I’ve gotten older, I’ve become proficient enough, to where for the past several years, I’ve been able to maintain an 829 credit score.
Here, let me show you.
Now, this isn’t some kind of weird flex or brag or anything — but what I wanted to do, was share a little bit about my credit journey, and what I’ve learned in my path to get here — so that for those of you who are new to this or are working on improving your credit score, you guys can gain some insights and knowledge from someone who has started from scratch, but has worked his way up to what some might consider a near perfect credit score.
So in this article, I’m not only gonna provide you guys an overview of how your credit score is built and some best practices on how to establish a solid score — but I’m also going to share some key insights from my personal experience that have helped me get my score up to be where it is today.
What is a credit score?
A credit score is a calculated number that evaluates a consumer’s creditworthiness and is based on a person’s credit history.
Basically, in simple terms, it’s just a report card that tells other people and companies how well you manage your debt — all types of debt, from your credit cards to your car loans, home mortgage, etc. — it’s a comprehensive view of your entire credit track record.
And the primary use of this score is really just to give future lenders of credit, a good idea of whether or not you would be trustworthy enough to for them to loan you their money.
The higher your credit score, the more likely it’ll seem to them, that you would pay them back, on time — which means the more likely that they’ll approve your application.
Credit Score Range
Now, as you can see from this visual, the credit score range goes from 300 to 850 — and, of course, the higher, the better.
But to be very honest, any score above 780 is considered to be at the top — and at that point, you’re already qualifying for the best credit offers out there anyway — so you don’t necessarily need to get all the way up to 850. Anything above 780 is treated just about the same.
What’s really interesting, though, is that FICO recently published an article on the average US credit score, as of early 2020 — and guess what? The average score, here in the US, is 706, which is actually pretty good.
So if you guys are above that number, congratulations — you are ahead of the curve and well on your way to excellent credit. However, if you are not quite there yet, then don’t worry, that’s the purpose of this article. My hope is that after you’ve read this, you will have picked up some knowledge & key insights that’ll help you get to a higher score.
Where to Check Your Credit Score
There are 3 main credit reporting companies in the US, and they’re called credit bureaus. I’m sure you’ve already heard of them by now — but they are Equifax, Experian, and Transunion.
Their jobs are to collect all of the information they feel is important to consider in your creditworthiness. Things like credit card payment history, residential information (like where you’ve lived and how long you’ve been there), and even your job history (who you’ve worked for and are currently working for) and what your avg salary might be if that info is available.
Then, they apply all of that data into the FICO credit scoring system to produce their version of your FICO credit score. But since the 3 bureaus differ slightly on what type of information they collect and the weighting that they give each of those different components in your credit analysis — your score across those 3 bureaus will vary slightly, but they should generally be about the same, within the same range of about 15–20 points. But to be safe, when most lenders evaluate you for credit, they’ll pull your score from at least 2 or maybe even all 3 of the bureaus so that they can get a fair sense of where your average credit score lies.
Now how they use this score is that that they first decide whether or not they want to approve you at all — for the loan or credit card or whatever you maybe applying for. Most lenders have a minimum qualifying score you need to meet, in order for them to move forward with your application.
But assuming you meet that minimum to get approved — they then decide what interest rate and other terms they want to offer you based on how high your credit score is. Generally speaking, the higher the score, the lower the interest rate, the more favorable terms you get in the credit agreement.
For example, a really high score means:
1) You can get seamlessly approved for all of those fancy, high reward points, credit cards
2) You can register for an apartment or utilities without having to put down a down payment or deposit
3) Getting the lowest interest rate for your home mortgage or car loan
Ok — so now that we’ve defined what a credit score is, you might be wondering what are the main factors are that go into the calculation of your score?
5 Key Components that Build Your Credit Score
1. Payment History
Your payment history accounts for 35% of your score. This is by far the single most important factor that contributes to your score and it’s basically a track record of whether or not you’ve made all of your regular credit payments, on time. So if you’ve ever missed a credit card payment or auto loan payment or had a late payment of any kind — that would be one key aspect that would drive your credit score down.
Luckily, this one is generally easy to manage. You see, payment history really just looks at whether or not you are making the minimum required payments each month — so if that’s a credit card, then you usually have a low $25 or $50 minimum requirement to pay each billing period, regardless of how much debt you’ve used. Now I wouldn’t recommend only paying the minimum each time because then a lot of interest gets added to your balance over time, but given that the monthly minimum is a low payment amount, hopefully, this one should be fairly simple for anyone to do. In fact, the easiest way that I’ve found to avoid late or missed payments is to always set up auto-pay as soon as your line of credit is established. Nowadays, I don’t know any lender that doesn’t have an auto-pay feature that you could use, which would automatically pay your monthly required bill, on time.
2. Credit Utilization
Credit utilization which accounts for 30% of your score. The second most important factor in your credit score, your credit utilization is effectively how much of your available credit you are using at any given point in time. The easiest way to calculate this is to take all of your current revolving credit that you’ve used and divided that by your total revolving credit limits. What is revolving credit, you ask? Revolving credit are things like credit cards or personal lines of credit or home equity loans — basically, any line of credit where you are given a total limit to borrow against and once you borrow and then pay that back, you have that same amount which you can borrow and pay back over and over again, basically in a revolving fashion.
The reason this is a such a big consideration in your credit score is that if you have a high credit utilization (like you’re using more than 30%–40% of your available credit limit), this means you are constantly in a state where you are borrowing a large amount of money. This makes you seem a bit riskier to the lenders because it gives off the impression that in order for you to maintain your current lifestyle, you need to constantly carry that level of debt.
But on the other hand, if you only have a 5%-10% utilization each month, you’re seen as someone that doesn’t need to take on as much debt, and are therefore seen as more financially independent or responsible — at least that’s what the FICO algorithm thinks.
3. Credit History Age — this makes up 15% of your score. In this one, there are two main things that contribute to this category: the age of your oldest account — so basically how long you’ve had credit overall, and secondly the average age of all of the credit accounts that you have.
Now, the longer your credit history age, the more it shows consistency and tenure in credit borrowing and management, which reflects favorably on your score. And that’s actually one of the main reasons why people always say “don’t cancel your old credit cards” — it’s because these old accounts will contribute to your credit history age.
4. Mix of Credit Types
This one is only 10% of your score.
Now there are 2 types of credit: Revolving credit, which we talked about earlier — which are things like credit cards, personal loans, HELOC, where you can borrow, payback, and borrow again. And Installment Credit — these are things like home mortgages, car loans, student loans — any type of debt where you borrow a specific amount upfront and you pay that back in installments until the loan principal and the interest are all paid off.
The credit bureaus would love to see a good mix of both revolving and installment credits on your account because having that diversity indicates to them that you’re more likely to be at a certain life stage or maturity level where you are able to responsibly handle a wide variety of credit types — for things like buying a home or a car or other larger purchases.
5. Number of Credit Inquiries
This one is also 10% of your score. An inquiry is where a lender or creditor requests a credit report on you, from one of the 3 credit bureaus. Depending on the nature of that request, they can either be classified as Hard Inquiries or Soft Inquiries.
Hard Inquiries are full credit checks that lenders request that are usually tied to a direct intent to lend you more credit. Some examples of hard inquires include:
- Home Mortgage applications
- Auto loan applications
- Credit card applications
- Student loan applications
- Apartment rental applications
Having too many of these hard inquiries, within a short span of time (like 2 or more in the duration of a couple of months) will start to affect your credit history negatively because they give off an impression to the bureaus that you are getting ready to take on a large amount of debt or that you are suddenly in need of a lot of credit — which might indicate to them that maybe you’re running low on cash, or maybe you suddenly lost your income or something along those lines.
Now on the flip side though, Soft inquiries are usually requested that are made as part of a background or verification check. Things like:
- Checking your credit scores through services like Credit Karma
- Getting “pre-qualified” for credit card offers
- Getting “pre-qualified” for insurance quotes
- Conducting employment verification & background checks
These inquires are usually most common when you start a new job or shop around for new credit card offers or things like that. Since these generally aren’t directly related to getting new lines of credit, having soft credit checks against your profile doesn’t affect your credit score. So quick tip — whenever you are in a situation where a lender or creditor says they need to check your credit — you should always ask them if it’s a soft or a hard credit inquiry.
Now those are the 5 major factors — that make up your score, but there is one additional thing that is really important to be aware of.
If you have any negative flags on your credit profile, like collections notices, or bankruptcies or foreclosures or civil judgment from losing a civil lawsuit and you have to pay to a certain party a certain amount of money — these are all major factors that would noticeably affect your credit score, regardless of how when you perform in those top 5 categories I mentioned previously. Negative Flags are a big deal and they tend to stay on your credit report for an average of 7 years so you’ll want to try to avoid them as much as possible.
So now that you guys have the basics down on what credit is and how to build up a solid credit score — let me share with you 3 key insights from my personal credit journey, that I feel contributed the most to my 829 credit score.
Tips and insights
1) First, if you’re just now embarking on your credit journey — I’d recommend starting out with a Student Credit Card. As I mentioned earlier, I opened my first credit card when I got to college. Honestly, I barely knew what credit was at the time, and to be even more honest, I really just wanted the free t-shirt and water bottle that they were giving out at the card sign up booth. But, looking back in hindsight, I’m actually glad I did this because this was a student credit card and I feel like starting out with this one — really helped to begin my education into credit management.
You see, Student Credit cards are great entry-level options for credit because they offer certain features that are designed to help new users acclimate to the way credit works.
First, they usually offer a very low credit limit, so that it doesn’t tempt new users to overextend themselves. I believe my credit limit for that first card was a very conservative $700. And I’m actually thankful for that — knowing how dumb I was back in college, I’m sure I would have spent a lot more than that per month if I could.
Secondly, most student credit cards come with an introductory period of 0% interest — this benefit is usually given between the first 4–6 months of when you get the card. What this means, is for the first 6 months, even if you don’t fully pay off what you’ve borrowed, there is no interest that gets added to your balance during this time. So if it takes a little while longer for you to get the money to pay off your debt, you still have a little bit of a grace period, that you can lean on.
Lastly — most student credit cards still give you some cashback or other reward benefits, even if it’s not as high as some of the other more qualified cards. Having a student credit card with these features made it easier for me to ease into learning about and managing my credit — and I think it really set me off on the right track.
2) Secondly, in my lifetime of credit ownership and management, I’ve carried two different mortgages, three different auto loans, and two student loans — in addition to my five credit cards. But I’m happy to say that through a rigorous savings discipline and careful planning of my future purchases and 21+ years of time, I’ve been able to pay off every single one of the loans. And the point in which I saw the biggest jump in my credit score was always shortly after I completed one of these major loans.
The fact that you are completing and closing out a loan statement provides a huge boost to your credit score because it proves that not only can you take on and manage a strong credit debt, but you are also responsible enough to see it through and pay it off in full. So my advice, is that, if you choose to take on some of those large installment loans — work diligently, and hyper-save to pay them off as soon as possible because payoffs are one of the most impactful ways for you can increase your credit score.
3) Lastly — make sure you review your credit report, at least once a year. Given how important this is — you’ll want to make sure there aren’t any errors in your credit report. Luckily, there is a federal law in the US that allows you to pull your credit report, from each of the 3 bureaus, once a year for free.
That’s right — for free! Just navigate to AnnualCreditReport.com and follow the instructions to download your free report. (If you’d like to visually walk through this process — just click here.)
Having a mistake or not knowing what’s on your credit report can be immensely costly — that’s why I always check my report once a year.
So, that’s it for this topic — I hope you found this information valuable.
With credit, it’s important to know that it’s a marathon, not a sprint — even if you do all the right things, it may just take some time before your credit score gets to as high as you’d like it. Be patient, diligent and consistent and you’ll see an 800+ credit score in no time!
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**** Disclaimer *****
The content here is strictly the opinion of Daniel’s Brew and is for entertainment purposes only. It should not be considered professional financial investment or career advice. Investing and career decisions are personal choices that each individual must make for themselves in accordance with their situation and long term plans. Daniel’s Brew will not be held liable for any outcome as a result of anyone following the opinions provided in this content.