Building Amazing Credit

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1) On-Time Payment History, 35%

Basically, this means that you never miss a payment. The easiest way to do this is to simply never use your credit card. But if you do because you want to take advantage of a cash-back or points program, just be sure to pay it off (preferably IN FULL) every month. It’s okay if you get in a pinch and can’t pay it off in its entirety, it just matters that you are making at least the minimum required payments ON TIME.

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2) Credit Utilization, 30%

This is the percentage of your available credit you’re actually using. The smaller the percentage, the better. A score in the green uses less than 30% of the credit available to them. 31–49% is in the yellow. Ideally, you’ll use less than 10%.

So if you have $1000 of credit available to you, you should keep your actual usage under $300, and I’d recommend even keeping it less than $100 if you want to really be in the clear.

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3) How Many Lines of Credit, 10%

This is where some scores start to come together to allow you to really boost your overall score. You would think that not having a bunch of lines of credit open would be a good thing, but since your utilization score is based on a percent of your available credit, having multiple lines open will reduce your utilization. So you can double dip on your utilization score by having more lines open, which will boost your total lines of credit score as well.

Now, if I tell you that a green score requires at least ELEVEN lines of credit, you might want to panic a little. Don’t. It doesn’t mean you need 11 credit cards. Lines of credit include things like loans, so taking a loan for your car counts. Things like having a home mortgage count. All these things just show that you know how to handle debt.

Plus, this number will also reflect CLOSED accounts. So when you finally pay off that auto loan, it will still count and continue to help you in the future!

This score is something you will build over time as you take care of life needs. You shouldn’t be in a rush to try to open credit services at 11 different banks since this is only 10% of your score.

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4) Length of Credit History, 15%

However, that said, one of the best things parents could do for their kids is take them to a couple banks to get credit cards when they turn 18. Since 15% of your credit score is how long your credit history is, you want to start that history as soon as possible.

The key thing to understand here is that this is an average of your credit history, not a total. If you have a credit card for 2 years, then you go get a second card, you’re now splitting that two years between two sources, so your credit history will drop from an average of 2 years to an average of 1 year.

So if you’re just starting out with no credit history at all, it’s best to open a few lines simultaneously so the average never takes a hit.

Otherwise, you probably want to try to time opening new credit lines between major life events. For example, if you know you’re going to go for a home loan next year, you might want to wait until after you secure a lower interest rate on your current credit history score before you open a new account and take that hit to your score.

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5) Total number of Hard Inquiries, 10%

This is measuring how often you go to companies asking to use their money, and it should be obvious that doing this frequently is bad. So taking out a new credit card not only reduces the total length of your history, but it counts against your hard inquiry score as well and hits you twice.

The good news is that this is less permanent. While opening a new line of credit can cut your credit’s average lifespan in half, a hard inquiry will only be on your record for 2 years, and will only affect your credit for 1 year before falling off.

Hard inquiries also show when dealers run your credit as you shop around for mortgage rates, auto loans, and things like that. But don’t worry, if you go to 10 different car dealers, that’s not going to count as 10 different inquiries. Credit inquiries of the same type are all lumped as a single inquiry as long as they fall within a few weeks of each other. So you can shop around for the best deal on a loan without being overly penalized because, after all, the credit company WANTS you to get the best deal so you actually pay them back!

A green score for this is 1–2 inquiries in a year, with 0 being perfect — which is pretty ridiculous because you’ll just have life needs sometimes. Most people average around 3–4. You can’t really help it too much sometimes. If you secured a good mortgage, then opened a new line of credit and now suddenly your car dies, that’s a bit out of your control. But, fortunately, this is only 10% of your score, and by the time you need to do another hard inquiry, hopefully any unexpected dings will have fallen off since they have a pretty short timer for how long they stay on your history.

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Final Advice:

There you have it: those are the 5 things that affect your credit score. If you want to check your credit score in a free, safe way, I’d suggest using a reputable site like Credit Sesame or Credit Karma. Certain banks also offer free credit services, for example Chase Bank has something called Credit Journey that will tell you your credit score for free every single week. If you’re looking to maximize your savings and get the lowest interest possible on any loans you might have to take, you ideally want to keep your score above 750, with 800+ being “perfect.”




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12 cats in a man suit. Finance and Japan. May your bags be full and your candles green.