5 Tips To Build a 700+ Credit Score
How are credit scores calculated?
There is a lot of confusion when it comes to building a good credit score.
To start, let’s talk a little more about the purpose of a credit score.
A credit score tells lenders how good you are at borrowing money and paying it back. That’s all a credit score is used for.
Your net worth is a better metric to follow closely when measuring your overall wealth because it will tell you how well you’re building wealth for yourself, whereas your credit score only tells you how well you are at paying back debt.
That being said, a good credit score will still help you get lower interest rates whenever you decide to take on some sort of debt to buy a home, finance a project, or even rent a home!
So having a good credit score is important to make your financial life easier.
Let’s dive into the 5 ways a credit score is calculated so that you can better understand how the financial actions you take might impact your overall credit score.
#1: Make all of your payments ON TIME
This is of course, the most important factor when it comes to your credit score.
Are you paying your bills on time? If not, this will ding your credit score the most.
A late payment cannot be reported to the credit reporting bureaus until it is at least 30 days past due.
But it’s best to get into the habit of paying your bills ON or BEFORE the due date.
Lenders don’t want to loan money to people who don’t make payments on time due to the higher risk of not paying them back.
#2: Keep Total Credit Usage BELOW 20%
Your credit usage is calculated by adding up ALL of the debt on your credit cards and dividing it by your total credit limit amongst all of your accounts.
A high credit usage tells lenders that you are at a higher risk of having too much debt, and will ding your credit.
Are you managing your credit usage correctly? Or are you maxing out every single credit card you get?
If you are maxing things out, you become a higher risk to lenders, which will also drop your credit score.
Your best bet is to keep your credit usage BELOW 20% each month. This will show lenders that you manage your credit responsibly and your credit score will reflect that.
#3 Length of Credit History (the longer, the better):
How long have you had the credit cards or loan accounts that you have open?
The more credit history you have, the more lenders will be able to see your “track record” of making previous payments, and the more your credit score will go up in this category.
The only way this category can be impacted is with time. So there is not much you can do in this category other than let time pass.
Lenders will see you as a higher risk if you don’t have a lot of credit history as there is more uncertainty when it comes to how you handle your finances.
#4 Credit Mix (credit cards, auto loans, etc):
Do you only have one type of credit card? Or do you have a mix of different types of credit?
Having just 1 credit card reported on your credit history doesn’t give lenders enough information on how you might handle larger loans like a mortgage or auto loan.
Your best bet is to open up a few different credit card accounts to show lenders you can handle multiple lines of credit.
Having a good credit mix will boost your credit score as lenders will have more confidence in your ability to handle different types of loans and your credit score will reflect that.
#5 Avoid having more than 6 Hard Inquiries at any given time:
A hard inquiry, or a "hard pull," occurs every time you apply for a new line of credit such as a credit card or loan.
Hard inquiries generally stay on your credit report for two years before falling off, although they typically only affect your credit scores for a year.
You want to avoid having too many inquiries on your account. As lenders view someone who is always applying for credit and loans in a short period of time as a higher risk.
Six or more inquiries are considered too many and can seriously impact your credit score.
Also, sign up for my email list to be the first to know when I publish a new blog post!
Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #013
