A high FICO Credit Score can reduce the cost of borrowing money. Learn how to responsibly increase your credit score without taking on unnecessary debt.
Good Credit is Helpful
Having bad credit sucks.
A low credit score can make everyday things more expensive. Your car insurance can be higher, it can cost you more to rent an apartment, your car loan can cost you more, and your mortgage can be more expensive.
There are some real advantages to having a good credit score.
But, that does not mean you should give your credit score more attention than it deserves. And, you certainly shouldn’t harm yourself financially to boost your score.
So, what should you do?
This article will help you understand what a FICO Credit Score is, why it is important but not too important, the six factors that drive your score, and my best advice on how to responsibly manage your score.
The FICO Credit Score Defined
What even is a credit score?
There are lots of different types of credit scores. The most common one you hear about is the FICO. Here’s how it works.
If you borrow money from a bank or have a credit card, then the data about your debt is sent to three credit reporting agencies: Equifax, Experian, and TransUnion. Their job is to store that data and then, if you apply for a new loan, your new bank will ask one of those agencies to share that data, so they can decide if lending to you is worth the risk.
But, the data by itself is hard to wrangle. There is a lot of information in your credit file. And, there are a ton of regulations about how that information can be used. So, instead of every bank creating their own algorithm for how to rank that data, the three bureaus send it to a third party: the Fair Isaac Corporation (FICO).
The folks at Fair Isaac calculate the probability that each person will pay back debt. To do that, they created a score that ranges from 300 to 850, with 300 being the worst and 850 being the most likely to pay back debts. This is your FICO Credit Score.
The way that FICO is calculated is a carefully guarded trade secret. But, there is enough information out there that we have a pretty good idea about what can make big changes to your score.
Don’t Worship the FICO Credit Score
Before we go into how to boost your FICO Credit Score, I need to clarify a few things.
First, it is true that having a high FICO can help you financially.
But, you should never harm yourself financially to improve your credit score. That means you should absolutely never take on a debt simply to boost your score. You should not open accounts just to boost your score. Do not pay interest on a loan just to boost your score.
Second, stop obsessing over small changes in your score! There is absolutely no difference between a 795 and an 800 credit score. There is also no difference between a 545 and a 550!
I cannot tell you how many times people have said “my score just went up 4 points, yay!” or “I’m so mad, my FICO just dropped 2 points.”
Stop it. Get a life.
Instead, focus on the big picture. Make sure that you are using debt responsibly, and your FICO will rise all by itself.
The Simplest Way to Boost your FICO Credit Score
Okay, now that we have the FICO in it’s proper place. Let’s talk about how I got mine over 830, and what you can do to boost yours.
Your credit score is simply a prediction of how likely you are to pay your debts. The best way to improve that prediction is to provide evidence that you pay your debts. And, if there is any evidence that you don’t pay your debts, you need to address that too.
Find out Where You Stand
I use both Mint.com and CreditKarma.com to monitor my credit. They are both free, and using them does not create a “hard inquiry” which could have a small negative impact on your score. I am not an affiliate of either of those sites, so I will not get paid if you sign up. But, I think they’re pretty great, and you should use them anyway.
Here is a screen shot from my Mint.com. It shows my FICO is estimated to be 834.
There are six factors in your credit history that impact your score. Three of them have a high impact, one has a medium impact, and two have a low impact on your score. Let’s go through them one at a time.
High Impact: Payment history
The first of three high-impact factors on your credit file is your payment history. You need to make 100% of your payments on time. No excuses.
High Impact: Low Credit Card Use
This one surprises most people. The second of three high-impact factors is your Credit Card Use, and lower is better.
Take a look at my screenshot. My FICO is over 830 and my Credit Card Use is 0%. Yes, I have credit cards, but I do not use them. Carrying a balance on your credit card actually harms your FICO.
So, if anyone tells you to carry a small credit card balance to “boost your score”, they’re wrong. Pay off your credit cards as soon as possible, there is no downside.
High Impact: Derogatory Remarks
The third high-impact factor is Derogatory Remarks.
If you have been irresponsible with your debt, then the banks that issued the debt can add a note on your file. Derogatory remarks can be things like delinquencies, collections, charge-offs, foreclosures, repossessions, short-sales, and bankruptcies.
If you have any of these items on your credit report, you will have a hard time getting a high FICO. So, determine why you have derogatory remarks and address every single one.
Dispute any errors. Become current on your delinquencies. Pay off your collections. Settle your charge-offs. Avoid foreclosure, repossession, short-sale, and bankruptcy if at all possible.
Over time, all derogatory remarks will fall off your credit report automatically. So, if you cannot remove one by dealing with it, at least work to not add any new ones.
Medium Impact: Credit Age
The one (and only) factor with a medium impact on your FICO is your Credit Age.
Your Credit Age is the average amount of time your open accounts have existed. So, to manage your credit age, don’t close old accounts that don’t have an annual fee, even if you are not using them anymore. And, don’t open a bunch of new accounts.
Low Impact: Total Accounts
Remember that the FICO is just a calculation of how likely you are to pay back debt. So, the more evidence you provide that you pay people back, the higher your score.
That’s why having more open accounts provides upward pressure on your score. Having lots of open accounts of varying types that are all current or zero-balance, shows the algorithm that you can handle the responsibility of managing your credit.
Low Impact: Hard Inquiries
When you apply for credit, the bank will ask one of the Bureaus for access to your records, to see if you’re responsible with debt.
Well, if you have a ton of banks pull your credit in a short period of time, you can see how that might look problematic. It could be evidence that even though you’ve been responsible with debt in the past, something has changed and there may be stormy seas ahead.
To manage this, limit how often you apply for credit.
The Best Advice: Four Pillars of Personal Finance
The best way to have a high credit score is to live responsibly and pay off all of your debts. And, the best way I know to do that is to live the Four Pillars of Personal Finance.
- Spend less than you make
- Have emergency savings
- Have diverse investments
If you spend less than you make then you can reduce and eliminate your debt, which will help you with all three of the high-impact Credit Factors. Plus, if you have emergency savings, then you won’t have to carry a balance on your credit cards any time something unexpected comes up.
By living within your means, you can constantly and repeatedly show the credit bureaus evidence that you are the kind of person who pays their bills. And that is exactly what will boost your FICO Credit Score.
Only Use Credit for Housing, Cars, and Education
Another way to get and keep a high FICO Credit Score is to limit what you use debt for. That way you will be less likely to get into financial hot water.
As I have written about before, I only recommend using debt for housing, transportation, and education. And, then only in very specific circumstances.
You need to decide how much you can afford before you apply for a loan. That is because the amount you can afford is often significantly less than you can qualify for.
Housing: 20 / 3 / 15
When you borrow to buy a house, make sure you put 20% down, keep the purchase price less than 3x your annual gross income, and keep the payment less than 15% of your gross monthly pay.
Transportation: 20 / 4 / 10
If you cannot pay cash for your next car, make sure to put 20% down, keep the loan duration less than 4 years, and keep the payment less than 10% of your monthly gross pay.
Education: 2 years max
Do everything you can to keep your education expenses in check if you are not paying cash. Stay in state, start at a community college, live with your parents. And, if you must borrow, do not take out more than 2-years worth of the net increase in pay you expect to receive as a result of your degree. Then, pay it off as soon as possible.
90 Day Debit Card Challenge
One of the most common traps people fall into with credit is irresponsible use of credit cards. I cannot tell you how many times I have heard people say they use credit cards for everyday purchases, pay the bill in full every month, and receive points or cashback. They’re beating the system!
Sorry, that’s just not true.
I used to work at a credit card company with some of the most brilliant financial and mathematical people I’ve ever met. Do you really think you are going to win? Okay, fine. Prove it.
I actually used to do this. But, then in January, 2020 I decided to prove it myself. I switched to using my debit card 100% of the time and stopped using my rewards card. You know that I am a huge money nerd, so I knew that there was no way I was spending more just because I was using credit.
But, I was 100% wrong. It turns out I was spending nearly $1,000 more per year, just so I could get a couple bucks in cash back.
If you really think you can do better, great! Put your reward cards in a drawer for 90 days. If your spending doesn’t decrease, you can always go back to your old ways!
Bonus: Freeze Your Credit Files
In early 2020 I froze my credit files at all three bureaus. It is a very easy process, it only takes a few minutes, and it has a bunch of benefits.
The most obvious benefit is that if someone tries to open a new credit account in your name, they will have trouble. But, a nice side benefit is that it puts one more layer between you and irresponsible financial behavior.
Generally, it is incredibly easy to apply for credit online as you are checking out on Amazon, or to get pre-approved for a car loan before you even hit the lot. But, by freezing your credit files, you have to step out of the checkout process, go unfreeze your files, and then come back and finish your transaction. Who knows, maybe it will make you think twice before buying something you can’t afford right now.
There are real, significant, financial benefits to having a high FICO Credit Score.
Insurance is cheaper, mortgage interest is less, and if you get into a bind and need to borrow money unexpectedly, it is an inconvenience instead of a disaster.
However, too many of us are obsessed with our credit scores. We are willing to do financial harm to ourselves to try and bring our score up. And, that is a bad plan.
Give the FICO the attention it deserves: very little.
All you have to do is realize that the FICO is the aggregation of all of the evidence you have provided that you pay your bills. So, to boost your credit score, pay your bills on time, all the time. And your score will take care of itself.
More important than managing your FICO Credit Score is managing your credit itself. Live within your means, spend less than you make, and don’t go running for a payment every time you want to buy something that you don’t have the cash for.
Only use credit for housing, education, and cars. Nothing else.
Learn what you can afford before you apply, because it is likely less than you will qualify for.
What to Read Next
For more information, check out these articles that offer more detail about these topics. Enjoy!
- The Four Pillars of Personal Finance
- Only Use Debt For Real Estate, School, and Cars. Nothing Else
- How Reward Credit Cards Lead to Accidental Overspending
- How (and why) to Freeze Your Credit Bureau Records
I hope this has been helpful! Join the conversation by adding a comment below.
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