Love your credit score with 3 simple steps.
A good credit score can make you a lot of loot by getting you get access to the best interest rates.
On a $300,000, 30-year fixed mortgage, getting a half a percent lower rate can save you $30,640 over the life of the loan. And that’s just one example; there are a bunch of ways to use credit to your advantage, but first you need the score. So let me tell you step by step how to get it.
First, to start qualify for the best rates you need a 740. Your credit score is always fluctuating, as it gets recalculated every 30 days. Therefore, I like to add a margin of safety and recommend you shoot for a 770 or better.
So, how do you get that sexy score? It’s actually quite simple. There are a plethora of misconceptions about credit, but if you follow these golden guidelines, and add nothing else, you will hit the best rate jackpot. To show you that I know what I’m talking about, here’s a screenshot of my current credit score on Mint.com. (They allow you to see your score for free! I highly recommend it.)
There are 5 factors that go into calculating your credit score, but there are three that are of primo importance. The first is: paying on time. To have amazing credit you have to pay on time. All the time. Even if you pay a couple of days late it can really ding your score. I highly recommend putting all your credit cards on autopay and creating a Google reminder a couple of days before the payment is do to ensure the payment gets made. You can not have excellent credit if you don’t follow this rule like gospel.
Now, it’s not important how much you charge. It’s only important that you generate a statement. Meaning you could charge one thing on your credit card each month, and that would be exactly the same as if you charge 100 things. The number of times you swipe does not affect your credit, but it does affect the probability of you creating debt. Generating a statement allows you to produce what the credit companies score: Your promise to pay.
I recommend adding a recurring bill, like your cell phone, to be paid automatically by your credit card. Then you wouldn’t have to think about it. You would be naturally building great credit. You don’t need to do this with lots of credit cards. Credit cards companies, and even the credit agencies, praise having lots of accounts. But two credit cards, a phone bill, and an electric bill in your name are sufficient. Having lots of different credit lines can add a few nominal points to your score, but the reality is you’re more likely to create debt or forget to pay a bill if you have lots of cards. I only have two credit cards and my credit rocks!
The second thing that is critically important in calculating your credit score is your debt to credit ratio. To calculate this you divide how much credit you are using, on all your credit cards, by how much you have available, on all your credit cards.
All balances on all credit cards / All limits on all credit cards = Debt to credit ratio
For example: Let’s say I have two credit cards. Credit card one has a credit limit of $10,000 and a balance of $4,000. Credit card two has a credit limit of $3,000 and has a balance of $2,400.
To figure out the debt to credit ratio all you have to do is add up what you owe on your credit cards. In this case it’s $6,400. Then add up all the credit you have available. In this case $13,000, and divide the two.
$6,400/ $13,000 = 49%
In this example the debt to credit ratio is 49%. This ratio would hurt your score. If the ratio is 30% or higher, your score starts to suffer. This is golden rule number two: you must keep your credit utilization under 30%. (If you want a 800+ credit score it has to be 20% or less.) Also, be aware that your scores are recalculated every month, with the hitch that you don’t know what day they are are recalculated. Therefore you want be conscious of your calculations at all times.
Lastly, you want to keep your two credit cards forever. You don’t want to open or close them. Why is this important? A good way to think about it is to imagine you had a credit card for ten years that you paid on time every single month. That would be 120 times, in a row, that you proved that you paid on time. Would you lend money to someone like this? What do you think the chances would be of getting your money back? Pretty darn high, right?
Now contrast it to a person who only kept their credit card for one year. They are always chasing the offers. Their credit report would show that they paid 12 times, in a row, on time. What person would you rather lend money to? Someone who has proven that they can pay 12 times in a row, or someone who has proven that they can pay 120 times? This is why the highest scores go to people who keep their cards.
To recap, here’s the “love your credit score” checklist:
- Open two credit cards that you want to keep forever.
- Pay one recurring bill with each card.
- Set the credit card to be paid automatically.
- Remind yourself that payment is coming out two days in advance with Google reminders.
- Keep an eye on your debt to credit card ratio. Make sure it stays below 30%.
If you do this, and nothing else, it will be just a matter of time before your credit soars!