The internet is full of tips and tricks to increase your credit score. It seems like a new site is popping up every day with new credit “hacks”.
Honestly, I’m tired of all these hacks. Can’t we just spend a bit of time and effort to learn a few of the rules of the system, play by those rules, and be rewarded?
Your credit score is a number between 300 and 850. It is calculated based on an algorithm created by a company called the Fair Isaac Corporation (FICO). They are a publicly traded company with over 3,000 employees that are constantly working to improve their scoring models and make the number more accurate.
You think you can find some hack to quickly and easily outsmart these 3,000 mathematicians and computer programmers? Good luck.
My Credit Score
I have an 830 FICO. I track it on mint.com and on CreditKarma.com (I’m not affiliated with either site and won’t get any commissions from them if you sign up… I just really like them). Plus a few of my credit cards put it on my statements. It varies a bit between the different sources, but they all agree: it is over 800.
How did I get that score? How do I keep that score?
My Credit Score Rule of Thumb
I maintain my great credit score by really understanding one thing:
The more evidence I provide that I pay my debts, the higher my score goes.
That’s it. There’s no secret hand shake, no hidden menu, no hacks.
When you apply for credit, you are going into business with a complete stranger. They are giving you money in exchange for nothing more than your promise to pay them back (plus interest).
If a random stranger walked up to you on the street and asked to borrow money, would you give it to them?
What if you knew that they had borrowed hundreds of times before and paid every single debt without ever missing a payment?
That’s your credit score.
Sometimes this can result in scores that are counter intuitive. For example, you would expect someone with a perfect history of on-time payments to have a really high score right? Not always.
If the person has 30 accounts with decades of history and a perfect record of on-time payments, then their score will likely be super high.
But, if that person has only one account that has been open for one month and it has one on-time payment, then I would not be surprised if their score is super low. They just have not provided enough evidence that they are consistently good at paying their debts.
So, if you want a high credit score, your goal is to consistently provide evidence that you are responsible with debt.
The biggest issue I have with generic credit score advice is that it is not based on your personal situation. Without knowing what is already in your credit report, it is impossible to really know what specific actions you should take to improve your score.
CreditKarma.com is my favorite site for tracking my score. It is free and they track two of the three credit bureaus. They also show you where you stand on six credit factors with an easy-to-understand Red, Yellow, Green system. They track inquiries, total accounts, average age of accounts, derogatory marks, credit card utilization, and payment history.
With CreditKarma you can quickly see where you stand and you can focus in on the red items first, then the yellow, and finally get the whole board green.
If you are just starting out and either have no credit file or an empty credit file, then you will need to do different things to boost your score than someone who has been using credit for 20 years.
That’s why generic credit hacks aren’t my favorite. That’s why understanding what drives a score is more important.
Now that you know that your credit score is just a representation of the evidence that you are a good borrower that you have provided, you can decide how to manage it.
Whenever I am trying to decide what I should do: open a new card, pay down a debt, close an account, open an account… I make sure that whatever I do, it will provide more evidence that I am a responsible user of debt and that I will definitely pay back what I owe.
- Do: Pay every bill on time, every time;
- Do: Keep accounts open and in good standing for a long time;
- Don’t: Apply for a ton of loans all at once;
- Don’t: Open a bunch of accounts all at once;
- Don’t: Borrow more than you can pay back;
- Don’t: Max-out your credit cards.
I hope this has been helpful! Comment below with your thoughts and questions.