How to Work Towards a Perfect Credit Score

Are you looking to improve your credit score? Achieving a perfect score is certainly something for which to aspire, but it’s actually not that necessary. Just 1.5% of scorable U.S. consumers earn a perfect 850 credit score, according to Ethan Dornhelm, VP of Scores & Predictive Analytics at FICO® [1]. Most lenders agree that as long as you have a healthy history with a score of 750 or above, you too can receive the best possible rates.

So don’t worry about being perfect, simply taking baby-steps in improving upon your situation is all that matters. Start learning the secrets and start building upon these healthy financial habits to help you improve and strengthen your credit score!

How do credit scores work

Credit score calculation is broken down into 5 main categories, each carrying different weights that affect your scores.

  1. Utilization = 30%
  2. Payment history and derogatory marks = 35%
  3. Average age of accounts = 15%
  4. Total accounts = 10%
  5. Credit inquiries = 10%

Financial Institutions use this key number to determine your eligibility for loans and rates. The higher it is, the better rate you’ll get.

1. Know your utilization ratio

Get familiar with this word “Utilization”. This fancy little word essentially just means how much you spend relative to your credit limit. In financial terms, we speak of ‘utilization ratios’ when calculating your total spending. For example, if your credit limit across two cards totals $10,000 and you spend $1,000 on one card and $2,000 on the other card, your utilization ratio equates to 30%.

What to do: Keep your spending in check. Just because you’re given a $10,000 credit line doesn’t mean you should max it out. It is commonly recommended to keep your utilization ratio to be below 30%[2]

bonus tip artBefore applying for loans, be sure to pay off your entire balance and keep a low utilization ratio 1 to 2 months before your application. This could help boost your scores when lenders run a credit check. [3]

2. Make Consistent Payments

Pay it off! Ideally you’d want to pay the full balance every month to avoid high interest rates, but if you really can’t, pay at least the minimum balance so as to keep a good payment history with your lender. Payment history accounts for 35% (the highest) of your credit score calculation, so you want to keep this record squeaky clean.

What to do: Show banks that you are able to make consistent payments over time on the statement balance every month. Missing just one payment can have a detrimental effect on your score and will be on your record for 7 years. [4]

bonus tip artSet your payments up to be on auto-pilot. This helps you manage multiple credit cards and you’ll never miss a payment nor get a derogatory mark ever again.

Empeople VISA Credit Card holders can use the automatic payment feature to pay their credit cards on-time, every time. While logged into Digital Banking, select the Manage Card tab located on the menu and click on Credit Card site. You may also select the Orange Gear Wheel to the left of your credit card and click on Manage Credit Card.

3. Extend your Average Age of Accounts

Improving your score or obtaining the elusive “perfect” score is a marathon and not a sprint. It can take decades of hard work, consistency and dedication to achieve an ideal score. That’s what matters to lenders the most – the more consistent and reliable you are over a long period, the more trustworthy you become.

What to do: Whether you’re early in your credit history journey or late into it with a couple mistakes, don’t worry. Stay the course and slowly build or improve your credit over time. Follow all the best practices here and pay off your balance in full every statement.

bonus tip artNever close your accounts! Although it may seem like a good idea to close your credit accounts so that you’re not liable for anything on them, closing your accounts erases that specific credit history and decreases the average age of your account, thus reducing your credit scores. <[5]

4. Limit your Total Loan or Credit Accounts

This is actually a tricky one. Having more credit cards when you have no self-control can spiral you into overspending and will accumulate even more debt. However, lenders like to see you diversify your debt portfolio to see how well you deal with each one accordingly. If you have established a solid track record of making on-time payments, this method can help marginally boost your scores.

What to do: When the time is right and when you can afford to, diversify your debt portfolio through multiple types of loans. For example, many people have student debt history, along with auto and personal loans, and perhaps a mortgage. This “portfolio” of loans is a direct indicator that you can handle any type of debt. [6]

bonus tip artBe honest with yourself on your spending habits. If you know that you’re an impulsive spender and aren’t the best at managing multiple credit cards and debt, it is strongly advised to keep new lines of credit and debt to a minimum.

5. Minimize your Credit Inquiries

As previously discussed regarding Total Accounts, having many accounts is not necessarily a bad thing. However, applying for too many credit accounts too soon can affect your score greatly.

How this works is that every time you apply for a new credit line, your lender does a credit check through one of the three credit bureaus. When the lender does this, the credit bureaus log your information in and counts the request as a “Credit Inquiry”. Whether you are approved or not, it still counts. [7]

What to do: Keep your credit inquiries to a minimum if possible. Never blindly apply for credit cards since every credit line application you submit will slightly decrease your score.

bonus tip artIf you are applying for an auto loan or are a  first-time homebuyer looking to apply for a mortgage, try to avoid applying for a new credit line too soon. Applying too close could, in the short-term, damage your score and leave you with a far less attractive rate.

In conclusion, if you’ve followed-through with all the to-do’s, we guarantee that your score will see some improvements over time. The key is to be consistent, always make full payments each statement period, never carry too much of a balance, and the rest is just time. Like fine wine, it only gets better with time.

Empeople’s Visa Credit Cards offer free access to your FICO® Score, so you’re always on top of it.

credit score imageReferences

[1] Washington Post – How I Got a Perfect 850 Credit Score

[2] Experian – What is a Credit Utilization Rate?

[3] NerdWallet – 5 Ways to Boost Your Credit Before Applying for a Mortgage

[4] Equifax – How Long Does Information Stay on My Credit Report?

[5] Credit Karma – How to Cancel a Credit Card: The do’s and don’ts every cardholder should know

[6] Credit Karma – How Can Different Types of Credit Affect Your Credit Scores?

[7] MyFico – What Are Inquiries and How Do They Affect My FICO Score?