To be honest, credit is kind of a game. If you know the rules, you can do well. If you don’t, you can end up in real trouble.
It would be tempting to just ignore it, but a low credit score means:
- Higher interest rates on mortgages, car loans, and personal loans, which could cost you thousands.
- Paying more for car insurance and other types of insurance.
- Losing out on a job if your potential employer checks credit scores.
- Losing out on an apartment since landlords often check credit scores.
Even if you don’t plan to change jobs, get a new car, or move in the near future, a negative item can stay on your credit report for SEVEN YEARS.
Do you really want to limit your choices for that long?
How Is Your Credit Score Calculated?
So, there are two main agencies that calculate credit scores: FICO and VantageScore. They both do things a little differently, but the basic idea is the same. (Note: I’ve renamed some categories to make them easier to compare.)
The main thing I want you to notice is that for both companies the two biggest factors by far are:
- payment history, which means on-time payments
- credit utilization, which is about what percent of your total available credit you are using.
What is a good credit score?
It breaks down like this:
- 300-600 is poor or “subprime.” You risk being denied loans and credit cards or getting bad rates or terms.
- 601-600 is fair or “near-prime.” You will get reasonable or good rates and terms.
- 661-780 is good or “prime.” You will get better rates and terms.
- 781-850 is excellent or “super prime.” You will get the best rates and terms with this score.
My Absolute TOP Two Tips for Great Credit
Since payment history and credit utilization make up most of your score, my absolute top two tips for having great credit are:
1. Set up automatic payments to pay at least the minimum every month on all credit cards and loans.
Don’t hem and haw and question—just do it. Because you absolutely DON’T want to take a chance of accidentally missing a payment.
In this case, just paying the minimum is fine. Yes, of course, ideally you are paying the full balance on every credit card every month, but when it comes to payment history, all they care about is that you pay at least the minimum every month on time.
2. Don’t use more than 30% of your available credit.
Example: if you have two credit cards that each have a $5,000 limit for a total available credit of $10,000, you should try not to have a combined balance of more than $3,000.
This means that if you have high balances on your credit cards, paying them down will give you a bump on your credit score.
Or, you can increase your available credit by either getting a new card, or by asking for a credit limit increase on an existing card. As long as you don’t use this as an opportunity to charge more, it will improve your credit utilization which will improve your score.
If you stop reading right now and just do these two things, you will be well on your way to great credit.
More Top Tips For Even Better Credit
3. Keep your oldest credit card open and active.
If you are thinking of getting rid of some of your credit cards, you might want to keep at least one that you have had for a long time. Put one small bill on it and set it to autopay every month. That will be enough to keep it active, and it will help maintain a good length of credit history.
A student loan or a mortgage payment can also give you a nice long credit history, but hopefully you will pay those off one day!
“Length of Credit History” also includes the age of your newest account, and an average age of all your accounts.
4. Even if you don’t want to use credit cards, have at least one.
Maybe you have had trouble with credit cards in the past, or you just don’t want to get involved with credit cards. If that is the case, try this simple strategy:
- Have just one credit card, put a small monthly bill on it, set it up for autopay, then put it in a drawer and forget about it.
You will have an on time payment every month, you will have low credit utilization, and over time you will develop a good length of credit history. Those three things alone (assuming you don’t have other negative factors) will be enough to give you a good credit score for when you want that new job, new apartment, or a mortgage for your new home.
If you DON’T have any credit activity for six months (“credit activity” means loan payments or credit card payments), the credit bureaus can just stop calculating your score. Having no score at all is the same as having the worst score possible.
FUN FACT: Bills like rent, cable, phone and utilities DON’T get reported to the credit bureaus. They only affect your score if you don’t pay at all and the account goes to collections. However, if you have limited credit history and a good record of on-time rent or bill payment, there are companies you can pay to have these things added to your credit history.
5. You don’t need to keep a balance on your cards.
There is a common misconception that you will have a higher credit score if you always keep a balance on your cards. You do want to have some activity on at least one card, but always having an unpaid balance just causes YOU to pay interest and fees to the credit card company!
I think this idea comes from a common complaint that has to do with paying off loans which I’ll address below.
6. “I paid off my car loan/student loan/mortgage and my score went down!“
We’ve probably all heard this story–or had it happen to us. Someone finally pays off a loan and their credit score goes down. They might think it’s because the credit agencies WANT them to owe money, but it is actually because of something called “Credit Mix.”
“Credit Mix” accounts for about 10% of your score and it just means that you have shown you can handle different types of credit including:
- Revolving accounts, like credit cards, store accounts and HELOCs
- Installment accounts, like mortgages, student loans and car loans.
So if your car loan is your only installment account and you pay it off, you will lose a few points on Credit Mix. This does not mean you should rush out and get another loan! Focus on the two main things, on time payments and credit utilization, you can still have a great score.
7. Don’t open too many new accounts at once.
Opening new accounts is one of the smallest factors in your credit score, but it does affect it. So minimizing or at least spreading out the number of new cards you apply for helps.
Think of it this way … when you apply for a lot of new cards at once, the banks start to wonder if you are having a financial crisis. Do you suddenly need to borrow a lot of money that you won’t be able to pay back? This will make them lower your score or even deny you that new card.
8. Get a copy of your credit histories and dispute any errors
There are lots of companies that will give you a summary or an overview of your credit history, but only three companies, Equifax, Experian and TransUnion, can give you your ACTUAL credit histories—the ones that FICO and VantageScore use to calculate your score. You can go to their individual websites, or you can request all three of them from:
Once you have them, take a good look at any negative information. If the information is false, you should dispute it. There will be instructions in the report about how to do that, and often you can do it right from their websites just by filling out an online form.
9. What if the negative thing on my credit report is correct?
This always makes me think of an old TV show theme song that goes, “Don’t do the crime if you can’t do the time.”
If you actually did the negative thing, you probably have to just wait it out. Most things will go off of your credit report after 7 years, but some, like bankruptcies, will be there for 10 years.
If the negative item is just one or two late payments from a company you have a long history with, you can try calling them and asking them to remove it from your report. If you are a good customer they might be willing to do that. Or if it is an account that has gone to collections, one thing you can ask for as part of the settlement is that they remove it from your report. They may not do it, but you can ask.
- If you have accounts that have gone to collections read my article, “What To Do When Debt Collectors Are Calling.”
You can also focus on adding new, positive things to your credit report. Your most recent activity will weigh more than older activity even though the older things are still there.
10. Be your own credit repair company.
A common scam is when a credit repair company claims they can remove negative information from your credit report, but all they do is flood the credit bureaus with disputes. The credit bureaus will temporarily remove the item while they try to figure out what is going on. Then the credit repair company will show you that the item is gone and collect their fee. A few months later that item is back on your report and you have wasted your money.
Most people can “repair” their own credit just by following the rules in this article. It might take time, and it’s not sexy, but it works.
Even More Ways To Have Great Credit
These might sound out of the box, but they really do contribute to having a good credit score.
1. Have an emergency fund.
Stuff happens! Having an emergency fund means you aren’t relying on credit cards when, inevitably, the unexpected happens. That means you are not lowering your credit score by racking up big balances (credit utilization). Or even worse, you are not getting into a situation where you can’t make the minimum payments (payment history).
2. Have health insurance, dental insurance, etc.
Insurance isn’t perfect, but it can help keep an unexpected event from becoming a big financial setback. Health insurance, dental insurance, short term disability insurance, pet insurance, and renters insurance are all good things to look into. If someone in your life relies on your income, some inexpensive term life insurance can protect their finances in case of your death.
3. Get financial coaching from me.
Breaking out of a cycle of credit card debt is not easy, but help helps! I walk people step-by-step through not only improving their credit, but improving their whole approach to their daily finances. That is how you make real, lasting change to your credit score, and your life.
I work with couples and singles at all income levels. With my one-on-one coaching sessions I help them pay down debt, improve their credit, save for the future, deal with their money emotions, prepare for retirement, and just in general get on top of their personal finances so they can live richer, more stress-free lives.
I offer a free 30-minute intro session, affordable rates and up-front pricing. Coaching is over video calls so you can do it from the privacy of your own home, and I do not sell any kind of financial products.
- Learn more and schedule your free intro call.
- See my coaching packages with prices.
- Read my reviews and testimonials.
