Banking

How to Achieve a Perfect Credit Score

While some people may be familiar with the basics of a credit score, here’s a brief explanation for those who aren’t. A credit score is a three-digit number that is associated with each person.

This number can fluctuate up and down, depending on the way you act where sources of credit are concerned. This includes loans, mortgages, credit cards, etc.

The number is based on the number of credit types that you make use of, your credit utilization percentage, your payment history, etc.

Since it’s based on your behavior, lending institutions tend to use it to determine your creditworthiness when you apply for any kind of credit. The idea behind this is to ensure that they eliminate as much risk as possible.

Therefore, people who have very bad credit tend to get turned down when they make such applications. Even when they don’t, the terms that they get offered are not the best, as lenders see them as a risk. Therefore, things like high interest rates are used to recover the value of the loan as quickly as possible.

People with good credit, on the other hand, get to enjoy much better terms, and they typically find that longer loans are much cheaper than they could be to repay.

Your credit score can fall anywhere between 300 to 850. Generally, once your credit score is above 700, it falls in the bracket of being a good one. If you manage to get over 760, then your score is seen as excellent.

People with excellent scores below 800 tend to have the desire to get their scores up to 800 and beyond. While there’s nothing wrong with this, you should know that, once you get above your score 760, the terms that you can get when you approach lenders are rarely any different regardless of how close to 850 you are.

The average national credit score in the USA is 706, according to FICO. This means that most Americans have at least good credit. Though you don’t need a score of 850, you may want to achieve it for your own reasons. Therefore, here’s a look at things that you can do to earn yourself a perfect credit score.

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Credit Report Checking

This is something that is severely undervalued. Many people have lower credit scores than they should because of incorrect information. Though the current system is built to accurately monitor and reflect your credit status, you need to always be in the frame of mind that things can go wrong. There’s nothing wrong with being a little paranoid about your score. This is the kind of paranoia that can save you from huge headaches in the future.

Check your credit score often with tools such as Credit Karma. These are all soft inquiries, which means that they have no effect on your score. It’s even advisable to take it a step further and get yourself signed up for credit monitoring so that you can use the well-designed alert system to keep tabs on everything that’s going on.

There have been data breaches, such as the one that Experian suffered in 2017, and with the advancements of technology, cybersecurity is a bigger concern now than it has ever been in the past.

There’s nothing you can do to stop a breach, but you can keep yourself on the safe side to prevent things such as identity theft and fraud. You’d be surprised what you can ascertain from just reviewing your credit score.

Address Inconsistencies

Checking for errors and having alerts about credit changes is one thing, but it doesn’t stop there if you do find any errors. There is a reporting process that allows you to have these errors corrected, and it’s in your best interest to take advantage of the system if the need should ever arise for you to get things corrected.

You don’t want to find out about these errors at the point when you’re applying for credit. During your application, there is a hard inquiry done, which has a negative effect on your score, so you don’t want to stack anything else on top of that.

As stated before, while the credit bureaus are supposed to have an error-free system going, there are many erroneous entries that affect people. There are thousands of reports annually from people who have discovered errors, so that should give you an idea of the kind of system that you’re dealing with.

There are many areas of life in which you can simply trust the process and let nature take its course. This is not one of those areas, so don’t get complacent and take that kind of approach.

Pay Bills on Time

This is one of the biggest determinants of what kind of credit score you have. This metric is linked to your behavior with credit, after all. How many things are more significant than your repayment habits in that regard?

Many people address other things in life before they look at their bills, which means that they have late payments to contend with. If you want a perfect credit score, your bills always need to be paid on time. Even people who can only manage to maintain a score of 800 (which is still very good) only do so by not having a single late payment.

Every form of credit has due dates for payment, and it’s very important that you adhere to them. If you have trouble with money management, start by recording everything you spend and earn for a month. Use that to establish a monthly budget and stick with it.

Ensure that this budget addresses your sources of credit before it does anything else, and you should be good to go.

Watch Your Utilization

Your credit utilization speaks to the percentage of your total credit that you have used. For example, if you have a credit card that has a limit of $3,000 and you use $1,500, then you have used 50% of your available credit.

Note that this metric alone accounts for 30% of your FICO score, so no one needs to tell you that you don’t want to mess up here. When you use nearly all or your entire pool of available credit, it is less likely for you to be able to access any more lines of credit.

This is because the metric implies that you have bitten off more than you can chew. The general rule is to try to stay below 30% utilization. However, you need to get more aggressive than that if you want entry into the 850 credit score club. People who have such scores tend to use 5% or less of their available credit.

Assuming you don’t have too many lines of credit, you can take out more to improve this metric. The best way to understand this is to look at the example above. Using 50% of your available credit is a problem.

While this may not bring your metric below 5%, if you were to take out another card with a similar credit limit, your utilization would fall to 25%, which is much better. This is because your total available credit would become $6,000, of which you only used $1,500. You can then use this as a start to setting things right.

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Don’t Close Old Accounts

Those old lines of credit that you’ve paid off may have more use than you think. A big part of your credit score calculation is the credit history that you have. This is the reason that someone who has never taken out any form of credit doesn’t have a good credit score, even though the person isn’t in debt.

You can’t ascertain a person’s payment history and habits if there’s nothing to base the assessment on. The same applies to those who have paid off lines of credit. You never know when you may need credit again. When you’ve paid off your balance, you put your account in good standing.

This is something that lending institutions continuously report to credit bureaus, which means that your credit history continuously appears to be favorable.

Be Mindful of Debt Classification

This is something that many people are oblivious to. Though all your sources of debt are reviewed when your credit score is checked, not all of them are judged in the same way.

Credit card debt, for example, is judged very harshly when compared to something such as a mortgage or an auto loan since these are used to acquire assets.

Therefore, you want to pay special attention to any kind of revolving debt that you have under your belt. Keep your reliance on such sources as minimal as possible.

Limit the Hard Inquiries

A hard inquiry is the kind of credit check that a lending institution does when they are processing your application. Hard inquiries account for 10% of your score. You may not think that’s much, but 10% can bring a 700 down to a 630.

You can’t avoid this when you apply for credit, but you can manage the frequency of it. Generally, you want to avoid making multiple inquiries in a six-month time frame. Note, however, that if the inquiries are very close to each other, they are usually not calculated separately.

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