How to Build a Great Credit Score in 2022?
***Disclaimer – I’m not a financial advisor, just a normal guy with financial success. The information shared here is purely for educational purposes only***
Do you know what your credit score is? If you don’t, you’ll want to find out either through one of the banks that you have accounts with or you can get a free annual report through one of the big credit score companies like Transunion.
Why does your credit score matter?
Glad you asked. Your credit score will influence countless areas of your life. It could determine whether you can buy a car, get a job, rent an apartment, buy a house, and apply for credits like credit cards or even debit cards.
Lenders will use your credit score to determine your creditworthiness, or in another word, if they’ll want to let you borrow their money and how risky it is for then to lend to you. Your credit score will not only determine whether they are willing to lend to you, but how much and at what interest rate.
If you are somebody with low score, lender could ask for collateral and / or give you a very high interest rate because they deem you a high risk borrower. So in essence, to save yourself money in the long run and be able to afford things that you want, you’ll want to have a good to great credit score. What are some things that determine your credit score?
What is a good credit score?
Credit score generally ranges from 300-850 points, with 300 being poor and 850 being exceptional. Here is the rest of the breakdown:
300-579 – POOR
580-669 – FAIR
670-739 – GOOD
740-799 – VERY GOOD / EXCELLENT
800-850 – EXCEPTIONAL
Keep in mind that many lenders basically make no distinction between a score of 740+ or 760+ to 850. Meaning if your score is above that threshold, you are getting the same rate whether your score is 740 or 790, or if their threshold is 760, then it makes no difference to them if your score is 761 or 841.
Payment History – 35%
This is by far the most important factor and then one you have to pay close attention to. Making your payment on time on your credit card balances, mortgage payments, and other loan obligation is the first step in building great credit score.
If you continue to make on time payments on your debt obligations over time, you will score high on this part because lenders will consider you a trustworthy borrower who pays on time. On the flip side, if you don’t pay on time or have filed for bankruptcy because you could not repay your debt obligations, lenders will consider you high risk and not a lendable borrower.
How many and how long you miss your payment obligations are also a factor. If you miss one payment, it will certainly hurt your credit score noticeably. But if you let it linger for 60, 90, or even 180 days, it will hurt your score significantly.
Amount You Owe / Credit Utilization – 30%
Lenders also look carefully at how much credit you typically use and draw reasonable conclusion as to whether you are a responsible borrower, so your credit utilization makes up about 30% of your credit score.
How is this calculated? Let’s say you have three credit cards, one has $10,000 limit, one has $5,000 limit, and another has $4,000 limit. Your total credit limit is $10,000 + $5,000 + $4,000 = $19,000. You will want to stay under the 30% utilization ratio as a whole and on each individual card.
So in this example, to keep your credit score high, 30% of $19,000 is $5,700, meaning you don’t want to use more than $5,700 of your total credit, and you should try to stay under 30% for each card, so that’s $3,000 / $10,000, $1,500 / $5,000, and $1,200 / $4,000. If you are able to stay under 10% overall, your credit score will work the best.
Length of Your Credit History – 15%
Lenders like most people want to see some history of how you utilize your credit. If you haven’t had a credit, mortgage, or any type of loan for long, your credit score probably won’t be very high. The longer your credit history is, the more information the lender has to look to see if you have acted responsibly with your credit.
This is also why it’s not a good idea to close old credit cards even if you no longer use it very much because it adds value to your credit report by its history. The length of your credit history is typically averaged out.
So let’s say you have one card that has 6 years of history, one card with 4 years of history, and one with just 1 year of history, that’s 6 + 4 + 1 = 11 years / 3 = 3 years and 8 months of average history. The longer your average history is, the better this factor contributes to your credit score. If you can average above 9 years across all your cards, this would yield the highest score for you.
New Credit You Applied for / Inquiry – 10%
When you apply for new credit such as mortgage, a loan, or any type of credit card, the lender will want to pull your credit and that will add an inquiry to your credit report. The inquiry is typically a temporary ding to your score; it usually fades after three months and comes off the report after two years. To get the best score, you would want to have 0 inquiry in the last two years and fewer than 2 is still considered good.
Types of Credit You Use / Total Accounts – 10%
Lenders like to see that you have multiple accounts and ideally different mix type of accounts such as mortgage and credit cards. If you have history of 20 + accounts, this could help show the lender that you can use much credit responsibly.
Conclusion
I typically have a score of 780-820 (depends on which credit score services) because I am very careful to keep all the factors talked about above in mind. The only two categories that I occasionally struggled with are Inquiry and length of credit. The reason being, every time you apply for new credits, you get dinged on these two together, and sometimes there are just great credit cards that are too hard to pass up. But other than that, I make sure to never miss payment and not overextend myself on spending. If you have to struggle on two of the categories, those are the two I would recommend.
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***Disclaimer – I’m not a…