Monday, January 9, 2012

Improving Your Credit Score

What's the point of having a good credit score? 

It will affect all of your big purchases in life.  Having a good credit score is what allowed me to finance my new car purchase for 1.9% APR 2 years ago (the lowest APR for this car possible).  Having a good credit score is what allowed me to get a mortgage at a rate of 4.375% last year, the lowest amount possible, and which has allowed me to refinance my mortgage at a rate of 3.75% this year.  It also made the dealer jealous when he announced that my credit score was "a very impressive 805."

You NEED a good FICO score.  One day you may want to buy a new home, or a car, or start a new business.  Your FICO score will be a major component in determining the interest rate you will end up paying.  The difference between the highest and lowest scores is about 3 points for a home loan and more than 8 points on a 3 year car loan.  

FICO scores range from 350-850.  
Imagine your score is a grade on a test.

780 above = A+
720 – 779 = A-
680 – 719 = B
620 – 679 = C
550 – 619 = D
549 below = F

How is this credit score calculated?

I took this image off which nicely represents what your credit score is made up of.

35%: Payment History (how timely and consistent your payments are)
30%: Credit Utilization (debt-to-credit ratio)
15%: Length of Credit History (when did you first sign up for a credit card?)
10%: Types of credit used (mix of credit and loans, revolving, consumer finance, mortgage)
10%: Recent searches for credit (Credit inquiries and new accounts)

The 3 easiest things to do to increase your credit score correlate with the 3 biggest pieces of the FICO pie:

1.  Payment history.  Pay your bills on time!  That's all you have to do.  If you can't handle your credit card spending and you leave a balance on your credit card (which you should NEVER do), you will still be fine if you pay just the minimum amount, as long as it's on time.  The most important thing you can do for your credit is simply pay your bills on time.

2.  Credit Utilization.  Ideally you want to have the highest amount of available credit, and the lowest amount of debt.  There are a few ways to get your credit utilization rate as low as possible:

     1.  Pay off your debt!  The lower your credit card debt, the higher your credit limit
     2.  Call and get your credit limit increased.  It only takes 30 seconds to get approved.
     3.  Apply for an extra credit card

For example, if you have a credit card with a credit limit of $1000, and you have a balance of $800, then your credit utilization rate would be 80%, a terribly high percentage.  If you increase your credit limit to $2000, then your utilization rate would be 40% ($800/$2000 = 0.40).  If you pay off half of your debt, your utilization rate would be 40% ($800/2 = $400; $400/$1000 = 0.40).  Now if you pay off half your debt AND increase your credit limit to $2000, then your utilization rate would only be 20% ($400/$2000).  

A credit utilization rate of less than 25-30% should be ideal.

This image capture was taken off my iphone credit sesame app recently.

I have a total credit limit of over $90,000, yet I pay off my entire statement balance every month.  This gives me a 1% to 6% credit usage rate.  My utilization ratio changes because I always pay off the entire statement balance, but the total balance may have some revolving credit balance that does not count towards interest rates.

3.  Length of Credit History.  Do NOT cancel your old accounts.  If you have an old credit card that is not earning you rewards, call your credit card company and have them convert your card to a newer rewards earning card.  Closing your old accounts also lowers your total available credit limit and will subsequently increase your credit utilization rate.  If you don't want to use it for regular purchases, set it to pay for a small amount like your netflix account, which can cost as little as $7.99 a month.  If you absolutely have to cancel your credit card for whatever reason, cancel the newest card first, and definitely keep the oldest card.  If you do not use your credit card for a long amount of time, 2-3 years or so of inactivity, your credit card company may automatically cancel this card for you.  

Your goal is to get your FICO score above 760.  

The good news is that if your score is 761, then you can get just as good an interest rate on an auto loan or mortgage as someone with a score of 849.  This is true within every score range. 

Here it is again so you don't need to scroll up:

780 above = A+
720 – 779 = A-
680 – 719 = B
620 – 679= C
550 – 619 = D
549 below = F

This was my last credit sesame credit score update.  

At my peak of credit, my FICO score was 805.  After purchasing a new car, a new home, and a new tempur pedic bed, all on credit, my score dropped down to 713 in October 2010.  A little more than a year later, my credit has been steadily increasing and I hope to push past the 800 barrier in the next few years.  You'll get another screen shot from me when this happens.

Remember, your goal is to have a score above 760.

Some interesting facts on credit scores and the average American.  As of January 2011:

- The average American had a mean credit score of 692
- Only 13% of the nation's population has scores above 800
- 15% have a score lower than 550
- 58% have credit scores above 700
- Most don't know what their credit score is until they go to buy a car, or a home, or get denied on a credit card application.


  1. Hello, you say that we need to look for 760 but the range show 780 or up. Can you please confirm if we need to be at 760 or is better to get to 780. Thank you.

    1. Realistically, a credit score over 740 should be fine. The grade scale I listed shows a credit score of over 780 like having A+ credit. An "A", or anything over 740 should be good enough. I personally do not apply for any credit unless my simulated scores are over 760.


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