Are you ready to make a big purchase and thinking about using financing?
Fair Isaac, the creator of the FICO score used to determine a person’s credit worthiness, has provided a peak into the common traits of consumers who have achieved the superstar tier of a credit score of 785 or higher (scale of 300-850). These folks get the best rates on mortgages, credit cards and other loans, which can save you tons of money over a lifetime.
Here is a brief summary of what you need to know and do to optimize your score:
- Don’t be Late. Paying your bills on time is the biggest factor in determining your credit worthiness. Being a few days late will not negatively impact your score, but if you are 30+ days late on making a payment a red flag goes up! To make sure this does not happen, update your contact information for student loans and automate payments for the minimum due on all credit card accounts.
- Have Debt. On average, a person with a credit score over 785 has four loans or credit cards that are regularly used. A third of these consumers have average credit card balances of $8,500, which are likely paid off (on time!) each month. Roughly 13% of high credit score consumers have no balances on their credit cards. Managing debt shows lenders that you are a good credit customer.
- Keep Credit Usage Low. Unused credit available helps explain 30% of your credit score calculation. You want to keep credit usage below 30%, so if you have $30,000 in credit on your various credit cards, you want to keep the balance below $10,000. Most consumers with credit scores in the top tier maintain credit usage under 7%.
- The Older the Better. Accounts that have been open longer have a bigger impact on your credit score. The average age of an account for a high credit score consumer is 11 years! So, keep that card you had in college open and active with small purchases that you pay off on-time. Focus the majority of your credit card spending on better credit cards that offer cash rewards. FICO does not care how much you charge, just that you keep accounts active and pay your bills on time.
Having a high credit score has its perks, but more important than any one number, is that you not use credit to overspend. Credit is a way to manage your spending and potentially get some type of bonus, like cash back. If you have credit card balances that creep up during the year or never seem to get paid off, take a step back and analyze whether these balances represent the amount by which you are living beyond your means. Living within or below your means will have much larger and long-lasting financial implications than your credit score.