With so much to worry about in the present, it’s easy to put off planning for the future. This tendency is one of the reasons your credit score might be a bit of an after-thought, even though you know it’s important. You can always worry about it later.
Until the time comes to apply for a loan.
It’s possible to repair your credit score but it’s not easy and it’s certainly not quick. Waiting until you’ve been rejected for a loan — or stuck with a higher interest rate — due to a poor score is too late. Your best option is to develop the types of habits that lead to a good credit score today. But as you know, developing new habits isn’t easy either.
If you approach credit building as a game, it could provide a more lasting change in your behavior. So let the games begin…
What’s a winning credit score?
A credit score determines your eligibility for loans, along with the terms of the loan. The higher your credit score, the better loan you earn.
FICO is the most common model for credit scoring, but there are others like Vantagescore 3.0, which is generally used by those with shorter credit histories. Under FICO, the highest possible score is set at 850, an honor that fewer than 1% of Americans hold.
Generally, a score of 760 or higher will deliver the best deals, so don’t feel pressured to reach the holy grail of a perfect score. But if you want to go for it, more power to you.
Your FICO score is made up of five different factors, each weighted as follows:
• Payment History: 35%
• Amount Owed: 30%
• Credit History Length: 15%
• New Credit: 10%
• Types of Credit Used: 10%
To gain a winning score of 760, you’ll need to understand how your monthly financial decisions impact the calculations. Here are a few strategies to get you on the right path.
Playing offense: scoring more points
Pay your bills on time
Recall that your payment history makes up a whopping 35% of your credit score. Even one missed payment can impact your score, although you’ll have plenty of chances to make it up. To avoid missing a payment, set up autopay through your vendor or through your online banking portal.
Reduce the amount you owe
Many of us know the feeling of being buried in credit card debt. Fortunately, many of us also know the relief of paying off a mountain of credit card debt. But even if you eventually get the balance down to 0, your credit score still takes a hit when you run your debt levels too high.
FICO recommends staying below 30% of your available credit (not including mortgage debt). For example, if you have $20,000 in available credit, you would want to keep your total balance below $6,000.
Sometimes people avoid taking out loans or opening a credit card for fear of overspending—a reasonable concern. But waiting too long means it’ll take longer to build your credit score.
Perhaps the least known factor in a credit score calculation is the length of your credit history. According to the credit reporting agency SubscriberWise, members of the hallowed perfect credit score club had an average credit history of 30 years.
Once you’ve begun building your credit, be sure to stay consistent, both with your spending and the frequency in which you apply for credit. Large spending spikes can set off red flags for credit agencies as a sign that you might pose a higher risk.
Likewise, opening too many credit cards also signals a credit risk. Even opening two cards in one year can ding your credit score, so be sure to spread out your credit requests.
Playing defense: avoiding losses
Check your credit report regularly
In general, credit agencies do a decent job of tracking your credit history. But everyone makes mistakes. Unfortunately, you likely won’t find out about these mistakes unless you look for them.
Be sure to perform a credit check at least once a year. This gives you a chance to challenge any erroneous charges.
In the same vein, be vigilant about reading your loan and credit card statements each month. Credit fraud is rampant and it’s more important than ever to keep your digital information protected.
Don’t open too many accounts
We warned you about submitting too many credit card or loan applications in a year, but holding too many cards in total can also damage your credit score. There’s no magic number of how many cards you should hold, as it depends on a number of factors, but 2-3 is considered safe by conventional wisdom.
Don’t close old accounts
It might be tempting to cancel a credit card once you’ve paid it off since it reduces the urge to rack up more debt. But not so fast.
Remember that your credit history makes up 15% of your credit score. When you cancel old accounts, they eventually won’t be counted as part of your credit history and may lower your score. If you feel tempted to use the card, when you really shouldn’t put it in a drawer instead of carrying it in your wallet.
Keep track of your score
If you’re a Vantage West Member 1 , you automatically have access to Credit Central by SavvyMoney, a free tool inside online banking to track your credit score. Credit Central gives you access to check your credit score without impacting it. The tool provides reporting, a dashboard of all loan or credit card products you currently have or previously held with any financial institution, credit monitoring emails, blog articles to help you build your credit score, and more. If you haven’t signed up for this tool, you can do so now in online banking (Click “More” then “Credit Central” then “Launch Credit Central”).
Earning a winning score
Reaching that 760 goal relies on establishing good habits and being proactive about your financial decisions. With the right strategy, you’ll essentially be able to get better access to better loan rates , one of the most valuable financial tools available for growth and prosperity.
Best of luck on your path to 760.
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1 Available only to Primary Members. Not available on all accounts. Certain restrictions may apply.