5 Tips to Achieve an Excellent Credit Score

A credit score is a 3-digit number creditors use to evaluate how likely you are to default on a loan. It is an essential financial health measure. This number can range from 300 to 850. While there are multiple credit scoring models, the FICO credit score is most widely used by lenders and credit institutions. According to this article by Equifax, generally, credit scores above 800 is considered excellent, between 740 and 799 is very good, 670 to 739 is good, and 580 to 669 is fair. A score below 580 is poor and individuals with scores this low may find it difficult to qualify for credit.

Having an excellent or even good credit score can save you money in the long-run. For instance, with an excellent score, you qualify for the best interest rates and lower overall finance charges. You gain better negotiating power, an improved likelihood of gaining approval for loans and cards, and generous credit terms. 

If you want to improve your credit and are willing to take the necessary steps, this post is for you. My husband and I both have credit scores of 800+, and we are sharing five practices we follow to keep our credit score healthy.

1. Pay on Time

Payment history is the most crucial factor that determines your credit score  and accounts for 35% of your FICO score. Lenders are highly interested in whether there is late payment in your history because this indicates how financially reliable you are. Your past behavior is a strong indicator of future conduct. Obviously, late payments will lower your score. However, even if you had late payments in the past, you can work on re-establishing and building a good history. Start by paying on time every single time. Not  just your credit cards, but also pay all loans, utilities, and any other bills on time. If you need to, set reminders on your phone, outlook calendar, or utilize automated payment options. Also, if you have delinquent accounts, bring them up to date as soon as possible. Remember, to improve your credit history, avoid late payments at all cost.

2. Improve Your Credit Utilization Ratio

Credit usage is another significant factor in determining your credit score. It accounts for 30% of your FICO score and refers to how much of your available credit you are utilizing. Your goal is to have a low credit utilization ratio. Ideally, the percentage of credit card usage to credit limit should be below 10%, but you should aim for below 30% at the minimum. Here’s an example. If you have two credit cards, with credit limits of $5,000 each, then your total credit limit is $10,000. If you have a balance (or owe) $1,500 on one card and $3,000 on the other card, your credit usage totals $4,500. Therefore, your credit utilization is 45% ($4,500 divided by $10,000).

There are two ways to decrease your credit utilization. You can lower your balance by paying off credit cards and loans, or you can increase your credit limits. Some credit card companies allow users to request a limit increase online for almost instant approval. However, be careful with increasing your limit if you are not disciplined enough to refrain from using it. The best option is to pay-down and pay-off loan balances. We highly recommend that you practice paying off credit card balances in full. If you have a high card balance and need some tips on paying them off quickly, click here to read our previous post about paying off credit card debt.

Here’s another tip; call your credit card service line and find out when they submit records to the credit bureau. Typically, card companies do this once every thirty days. However, the timing may not coincide with your due date. Hence, if your payment date is a few days later, you can appear to consistently carry a high balance even if you pay your balance in full. Once you know the reporting date, pay-off your card a few days before.

3. Keep Credit Cards Open

The length of your credit history has an impact on your credit score. It accounts for 15% of your FICO score. A longer credit history provides lenders with a better indication of future behavior. Therefore, keeping your paid-off credit cards open can benefit you. If you have older cards, keeping them open enables you to maintain a longer credit history, which can increase your score. It also reduces your credit utilization ratio, another way it can increase your score. However, if these are cards you aren’t using, make sure they don’t carry any annual or extra fees. Also, avoid jumping from card to card. Instead, do your research to find and keep a card with the features you need at the lowest cost.

4. Use Your Credit Cards

Some persons work hard on paying off high balances and then avoid credit cards altogether. I get it; as the saying goes, “once bitten, twice shy.” I have heard people talk about having bad credit in the past and only paying in cash. They believe that paying in cash means they have healthy finances. They also assume that it is bad to use credit cards. That’s furthest from the truth.  In fact, to build a good credit history, there needs to be a record of on-time debt payments. Hence, using a credit card can be highly beneficial.

The key is to use your card as a payment method rather than a method of financing. With the high-interest rates on cards, it is best not to carry a balance and incur interest. Instead, be disciplined to only use your card for items you can pay for in cash. In fact, some cards offer cash back benefits, which is an added bonus for using your cards as long as you are not carrying a balance.

Here’s a fact you might find interesting, we use our cards for everything, even a thirty-five cents postage stamp. Having, using, and paying off credit cards can positively impact your score both in terms of your credit history and your credit utilization ratio.

5. Minimize Hard Queries

When you apply for new credit such as a car loan, a credit card, a mortgage, or a personal loan, you generate a hard query on your credit report. Hard queries adversely affect your credit score and can stay on your credit report for up to two years.

Obviously, you can’t avoid taking on new credit. There are times when you need to buy a house or a car or even get a student loan. Also, having credit allows you to build a good credit history. In the right circumstances, a hard query is not always bad. Hard queries can result in a temporary decrease in your score but subsequently, lead to an improvement. Hence, we are not recommending avoiding these types of queries. Instead, we suggest minimizing the number of hard queries on your account. Refrain from taking on too many new credit accounts in a short space of time. Multiple new credit accounts can signal that you are a financial risk because you are taking on too much debt. It accounts for 10% of your score.

Don’t confuse hard queries with soft queries on your credit report. They result from you checking your credit report or when a lender checks your credit to pre-approve you for an offer. Soft queries can also result from an employer conducting a credit check. Soft queries have no impact on your credit score.

Final Thoughts

Remember, paying on time, improving your credit utilization ratio and maintaining a healthy history, accounts for 80% of the factors affecting your credit score. New credit (10%) and credit mix (10%), accounts for the remaining 20%. Credit mix refers to the variety of your credit accounts, which signal your ability to manage diverse credit products. Your credit mix would often depend on your credit needs.

As you start working on building your credit, it is important to keep track of your credit score. Monitor your credit for inaccuracies or even fraud. Inaccuracies and identity theft can hinder your efforts. You can use several free credit monitoring services that would provide you useful information on your credit.

Having a good score can open doors for you. Hence, it is worthwhile to do all you can to ensure your credit is healthy.

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