Getting a perfect credit score is possible. You just have to take some specific steps to get there.
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850. That's the best credit score you can have, according to FICO, the nation's most widely used credit scoring provider. Nearly 3 million Americans have achieved that impressive feat, and you can, too.
You don't need an 850 to get the best credit cards or lowest interest rates. A score of 700 or above is generally considered to be good, and a score of 800 or above is excellent. Some lenders may have slightly different thresholds -- but those are safe benchmarks.
There aren't any special secrets to joining the ranks of elite credit users. All you need to do is use credit wisely and understand how your score is calculated.
Here are six steps that will get you there.
1. Always pay your bills on time
Late payments are the worst credit mistake you can make. A single 30-day late payment can drop a 780 FICO score by over 100 points. That's the difference between a good score and a fair one, and it could prevent you from getting the lowest interest rates on a loan or the best rewards credit cards.
Check the due date on your bills and always pay them on time. If you have trouble remembering, automate your payment so you don't have to remember it.
Reach out to the financial institution immediately if you know a payment is going to be late. It may agree to not report the late payment to the credit bureaus if you have a good history of paying on time.
2. Limit the amount of credit you use
You need to use some credit to have a credit history, but how much credit you use has a big impact on your score. Your credit utilization ratio is the percentage of available credit that you use each month.
Keep this under 30% whenever possible -- lower is better. This tells creditors that you're living comfortably within your means and that you don't have trouble paying your bills.
A high credit utilization ratio, on the other hand, indicates a heavy reliance on credit. That tells lenders there's a greater risk you could default on your loans.
3. Have a mix of credit types
A small portion of your credit score is based on your credit mix. There are two main types of credit: revolving and installment.
The most common type of revolving credit is credit cards. You have a monthly limit, but the amount you spend varies from one month to the next. Installment debts have a predictable monthly payment that you pay for a fixed period of time.
Creditors like to see that you have experience responsibly handling both types of credit. That doesn't mean you should run out and take out a loan you don't need. Credit mix is only 10% of your credit score. The other factors listed above matter far more.
4. Limit how often you apply for new credit
Every time you apply for new credit, whether it's a credit card or a loan, the lender does a hard credit check. This drops your score by a few points. That won't be a problem if your application is approved. If you apply for new credit and are denied frequently, however, it can take a toll on your score.
Credit scoring models understand that it's normal to shop around for new lines of credit, so they usually consider any hard inquiries that take place within a 30- to 45-day period as a single inquiry. If you’re credit shopping, make sure you get all your applications in during this window. Avoid applying for new credit after this or you'll have another hard inquiry on your report.
5. Think carefully before you close old credit accounts
Credit scoring models also look at your average credit account age when calculating your score. It seems strange to hold onto an old credit card you no longer use. But if you've had it for years, leaving it open can boost your average account age -- even if you never use the card.
You have to consider each credit account differently. If you have a card that charges a high annual fee, you're better off closing it even if your credit score takes a slight hit.
6. Check your credit report for errors at least once per year
Your credit report is your financial report card, but that doesn't mean it's always accurate. Financial institutions make errors, like forgetting to report a recently closed account to the credit bureaus or confusing you with another person who has a similar name. Identity thieves can also rack up fraudulent charges in your name.
Make sure your credit report is an accurate reflection of your credit history by checking your reports once per year through AnnualCreditReport.com. You get one free report per year from each of the three bureaus. Look them over for any outdated or incorrect information or any accounts you don't recognize.
If you find any errors, reach out to the credit bureau and financial institution associated with the account immediately. Place a fraud alert on your account if you believe you're a victim of identity theft. Creditors will take extra precautions to verify your identity before opening new accounts in your name.
If you follow the six steps above, your credit score will rise over time. And if you're diligent enough, you may even be one of the lucky few that has a perfect credit score.
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