Your FICO score is just a 3 digit number, usually between 300-850, that impacts your long-term quality of life. Banks and lending institutions primarily use your FICO score to decide whether to lend to you, and if so than on what terms. Naturally, the worse your FICO score, the worse deals you’ll get on mortgages and even credit cards. And, in today’s consumer economy, having better access to better credit is potentially life altering. With a 760 FICO score, you’ll get the best deals from virtually every financial institution, and today I’m gonna teach why and how you can get it.
Why should you try getting a high credit score?
A good credit score saves people hundreds of thousands of dollars over their lifetime. That’s because people with excellent credit scores get better rates for financing anything from a credit card bill to a car or a house. The best example is that people with better credit scores get better mortgage rates.
They receive these benefits because they’re considered low-risk borrowers. As a result, banks and other financial institutions compete to win them by offering better financing rates and other perks.
Conversely, people with low credit scores are considered high-risk borrowers. Banks and financial institutions give worse rates and higher fees to people with low FICO scores to reduce the risk of lending to them. People with low credit scores could even be passed over during life-altering situations like needing a business loan or a mortgage for their dream house.
So, a higher credit score translates to a better life for most people. The best part is that there are no disadvantages to a higher FICO score.
Improving credit score with credit cards
FICO calculates your credit score using the following metrics:
- Payment history
- Amount owed
- Length of credit history
- New credit/inquiries
- Credit mix
Credit cards affect your credit score in many ways–even a credit card application affects your credit score. Your credit usage, payment history, and spending habits also strongly affect your credit score.
Your credit score even declines if you close a credit card because you reduce your available credit and will likely increase your credit utilization rate.
So you should carefully monitor your credit card use to maximize your financial security. Unfortunately, most Americans aren’t familiar with how deeply credit card use affects their credit score.
The National Foundation for Credit Counseling reported that 62% of American adults admitted having carried credit card debt the past year. This is just one example of a habit that hurts your credit score that most Americans don’t even know about.
You can save yourself from a bad credit score by using the 5 following tips.
1. Make Sure your payments are always on time
The easiest way to improve your credit score is to pay your bills by their due date. This activity falls under the ‘payment history’ category, which accounts for roughly 35% of your credit score–so it has a strong effect on your credit score.
Conversely, not paying bills on time damages your credit score. A late payment of 30 days can stay on your credit card for up to 7 years.
But, you can ask your credit card company to remove a late payment demerit by providing a legitimate reason for missing the payment and after proving you can make payments on time for an extended time.
The best way to avoid late payments entirely is to set up automatic payments through your banking app.
2. Have a low credit utilization ratio
A credit utilization ratio is the balance on your credit cards relative to your total spending limit. This activity falls under the ‘amount owed category’, and it impacts 30% of your FICO score.
A low credit utilization ratio means you don’t owe a lot of money. Naturally, this is interpreted by financial institutions as evidence that you’re financially stable and responsible.
The best way to reduce credit utilization is to only spend a fraction of your total credit every month. Also, avoid charging more to your credit card than you can easily pay.
3. Having a high spending limit to boost that credit ratio
A high spending limit proves that you’re already trusted by banks and institutions, so it further improves your credit score. A higher spending limit indirectly affects your credit score. If you have a high spending limit and a low credit balance, your credit utilization rate decreases, which is 30% of your credit score like I mentioned before.
For instance, you could have a $1,000 balance on a $6,000 limit card, which is a 16.6% credit utilization ratio. Versus, a $1,000 balance on a $12,000 limit card only has an 8.3% credit utilization ratio.
You can raise your spending limit by calling your credit card company’s customer service and requesting a spending limit increase. You’re not guaranteed to receive a spending limit increase, but at least you won’t be penalized for requesting it.
Also, only increase your spending limit if you have the discipline to not overspend. Otherwise, you’ll actually reduce your credit score.
4. Keep your credit cards for long time for a good credit score
‘Length of credit history’ is 15% of your credit score. Credit lenders take borrowers responsibly using credit long-term as a green flag because it shows you’re financially responsible. Specifically, credit rating sites recommend owning a card for at least 5 years.
So, keep your credit cards open as long as you can, especially if they don’t have annual fees. You could make one or two small purchases annually with the credit card and quickly pay the balance to demonstrate you’re a good borrower.
That being said, again, holding onto a credit card long-term is only worth it if you have the financial discipline to not overspend, since that’ll actually hurt your credit score.
5. Negotiate to have a lower APR
Annual percentage rate (APR) is your credit account’s interest rate. APR not only applies when your credit card carries a balance, but also may apply to other transactions like cash advances and late payments.
The benefit of a lower APR is that your balance will accrue less interest if you don’t pay your credit card balance every month. The lower your card’s APR, the less you’ll pay in interest.
So a lower APR makes it easier to pay your credit card balance and make timely payments, both of which improve your credit score.
In conclusion, getting a high FICO score isn’t that difficult. You just need to be financially responsible, pay your bills on time, avoid overspending, and demonstrate that lenders can trust you. All you have to do with your credit card is spend moderately, have a high credit limit, and pay your balance on time.