In this episode, we discuss what makes up your (FICO) credit score and how you can maximize your score.
One of you had left me a message about how to tackle bad credit. So, what I want to do here is, I’m not just going to talk about repairing bad credit, I’m going to talk about how to maximize your credit score.
Some of the things in here, people that are trying to fix their credit can utilize for that credit repair process. But these are really things that everybody needs to know about maximizing your credit.
Oregon Cash Flow Pro offers free money management advice to help you take control of your finances! More wealth, less debt…fast! And now, here is your host, personal finance enthusiast and licensed insurance broker, James Barber.
So, let’s take a look here. There’s 5 things that make up your credit score.
-Balances on your accounts
-Length of your credit history
-Types of Accounts
We’re going to go over each of those and how you can make sure that you’re utilizing each one to maximize your credit score.
- Payment history: that accounts for the largest portion of your score, it’s 35%. Really what this means is always make your payments on time or a little bit early. If you do that, you’re going to have the payment history part of your credit score as good as you can get it.
You want to check your report for when each particular lender reports on their balances, so that when you make your payments you can do it prior to that reporting. The lower balance from the payment will actually help increase your score in any given month.
So, if you don’t know when they report, make the payment a week or two early, just to be safe. What I do is, I use Credit Karma. I can see exactly when the lender reports and I just make sure my payment goes in prior to that.
Pro tip here, make larger than minimum payments. The bureaus don’t release their criteria, but it’s widely believed that your score is negatively affected if you only make minimum payments. So, if the minimum payment is $20, make a $40 payment. If you have a large balance, make a larger payment. You always want to show them that you have the ability to responsibly handle your credit. Your finances don’t have to be dictated by whatever the minimum payment is that they’ll allow you to squeak by with.
- Balances on accounts. This accounts for 30% of your score. Now, we always recommend paying off credit cards every single month, in order to avoid interest charges. That said, keep your balances to limits below 35% for optimal credit scores. Ideally, each individual card would have a balance below 35%. That isn’t quite as important as your overall revolving debt usage remaining below 35% among all of your cards.
What that means is, if you have 3 cards, each with a $1000 limit. You can have a total of $1000 spread out across all three of those cards and it’s not going to impact your score a whole lot. It will a little bit, anytime you have a balance, but it doesn’t really ding you until you get over that 35%.
Pro tip on this one, regularly request a credit line increase. This will help you keep your balances below 35% easier and it’s always better to have credit available than not. Even if you’re not planning on using it. You just need to be sure that if you do, that you’re going to use it responsibly.
- Length of credit history. This one accounts for 15% of your score. How long have you been using your credit and how long each account has been opened affects your credit score. The longer, the better, with a good payment history. This shows that you are a responsible borrower, that lenders can rely on.
Now, you can credit hack the length of your credit history, by becoming an additional signer for a family member’s credit card that has a long history of good payments. This can be a big boost for teens or people trying to repair their credit. If you are that family member with good credit history, you don’t have to actually give them the card in order for them to take advantage of this. And it doesn’t have to be a permanent situation either. Once they qualify for a couple of cards on their own or a car loan or whatever they’re trying to buy, you can remove them as additional signers. So they can get that boost as it’s needed, and then you can take them off as additional signers.
One of the tricks that I learned about here is, if you add them as additional signers, you just make sure that the address that’s listed with that is your address. So any cards that get sent to them get sent to you, you don’t pass those along to them.
Pro tip for length of credit history: keep all of your credit cards active. I suggest having a main rewards card for everyday use, that you pay off each month. That way you can get the bonus from each of those uses and as long as you pay it off each month, you’re not going to have any interest charges. For all of your other cards, assign a small auto-payment to each bill for each of the cards. So, Netflix might be $10 per month, you might charge that to one card. You can have Amazon Prime charge to another card and Hulu charged to another card. Something that’s very small, but enough to keep it active. I think it has to be over a couple of dollars in order for it to register and they’ll keep reporting it to the credit bureaus month after month. Then, once you do that, you can set up an auto-payment so that it pays that off each month, so you don’t have to think about and get lost in how you’re balancing the use of these cards. We want to make it really easy and we want to make it so that you continue with this good credit history without having to work too hard at it.
- Hard inquiries. These account for 10% of your score. These are the results from a request for credit. Whether it’s a new credit card, mortgage, auto loan, or any other type of credit.
There are hard inquiries and there are soft inquiries. A soft inquiry does’t affect your credit score at all. These are typically inquiries that either you didn’t initiate or they originate from a credit monitoring service like Credit Karma.
Hard inquiries will remain on your account and they drag on your score for 2 years. So, we want to try and limit those to 2 or 3 over the course of a couple years. You can always see how many you have on their account. If you use a credit monitoring service like Credit Karma, they’ll actually show you how those credit inquiries are affecting your score as well. It’s good to use those services and stay on top of that.
Pro tip for hard inquiries: multiple hard inquiries from similar lenders within a short time frame, like 10 to 14 days, like if you’re shopping for an auto or home loan, they’re generally counted as a single inquiry. So, don’t be afraid to shop around for the best deal.
- Types of Accounts. This counts for 10% also. Basically, what that means is, they monitor the variety of the credit accounts that you utilize. The more variety you have, the better your score and you are showing them that you have the responsibility to handle multiple different types of credit. Obviously the more different types of credit you have, the better your score is going to be, because people look at that to determine whether they want to loan you money and at what rate they want to loan.
Those are your five types of accounts, just a last tip to finish this off. Monitor your credit report regularly for errors. You can dispute hard inquiries, derogatory items, and personal information that’s just wrong, anything that shows up that’s not correct, you can dispute it, and you should. You want to make sure your credit report is accurate. It’s also good to make sure that there is no accounts being opened that you are not aware of.
Hopefully you can take this information, go out there, start to maximize your credit score. If you have bad credit, I would highly recommend you sign onto a monitoring service like Credit Karma. It’s totally free and will give you specific tips on how to raise your score. They’ll also let you know what cards you may qualify for.
Thanks for watching! If you’d like to have a quick conversation with me, you can sign up for a 20 minute phone consultation, totally free. In fact, everything I do on here is totally free, but I just spell it out so that everybody knows that there is no obligation. But if you want to have a quick chat with me, 20 minute phone conversation, you can sign up. The link is in the show notes and you can sign up directly onto my calendar using my Calendly link.
I look forward to talking with you. If you have any other questions or concerns, leave them in the comment section below and let’s talk!
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