All three of my credit scores are over 800. Only 18.4% of Americans achieved that score in 2011 according to the Fair Isaac Corporation (FICO). So while three 800+'s aren't perfect, they're pretty darn good.
I'm no personal finance guru. If I can get my scores over 800, nearly anyone can.
In Theory: Components of a Credit Score
First, understand where your score comes from. According to FICO here's how it breaks down.
- 65%: Amounts Owed and Payment History
- 15%: Length of Credit History
- 10%: Variety of Credit TypesMost people begin with credit cards (revolving credit) and installment loans like cars and a mortgage later.
- 10%: New Credit
Pay on time, don't max out accounts, and minimize the number of accounts with balances.
Leave your oldest accounts open so you don't accidentally shorten your history.
In Practice: 5 Dos and Don'ts to Get to an 800 Plus Score
That's great, in theory. Here's how I put it into practice.Do: Auto Pay as Much as Possible.
- I used to pay late because I forgot. Now I schedule automatic payments so I know the bills will get paid. Many creditors offer auto pay through their websites, as do banks and credit unions from their end.
- When you check out at many retailers, they'll invite you to save money by getting their in-store credit card. Don't do it. These "little" cards encourage you to spend more than you would have, and are easy to forget about. I completely forgot about a $55 balance on one card. That non-payment lowered my score for seven years.
- Americans borrow for everything, and an MIT study found we spend more using credit versus using cash. Before every purchase, I ask if I could afford it outright. The answer isn't always yes, but I minimize my frequency of borrowing so I only borrow what I know I can pay back -- on time.
- What I make and spend immediately effects what's left to pay my debts. I tracked my spending for 30 days and used that information to build a budget. I know how much money I have, so I'm rarely caught short.
- Errors on a credit report mean incorrect scores. I review each of my credit reports once a year through annualcreditreport.com. Since there are three bureaus (Equifax, Experian, and TransUnion), I check one every four months. If there are mistakes, I dispute them quickly so they are corrected and don't hurt my score.
*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
- credit cards
- credit scores
- Fair Isaac Corporation
- credit unions
- Credit History