Ace Your FICO Score

Welcome to the How To $ave A Buck Newsletter! Each week, I share actionable ideas in personal finance, investing and how to save a few bucks in the process!

You have 2 credit cards. And your credit score is 740.

Your friend has 12 credit cards. Their score is 810.

How can that be?

Welcome to the wide world of Credit Card Scores - where the amount of credit cards does not imply a low score. In fact, the opposite can be true!

The Credit Card Score is a pie. Some pieces are larger; others are smaller.

All pieces represent a different metric. And the 3 credit-reporting agencies, Experian, Transunion, and Equifax use them to report on you.

Your score may differ at each agency, because some may have incomplete or incorrect information.

So it’s crucial to review your credit report once a year. You can get your personal credit report FOR FREE, from each agency once a year.

Let’s return to eat some pie...

FICO is the scoring system, which stands for Fair Isaac Corporation.

It ranges from 300-850, and tabulates from the criteria below.

1) Payment History (35%): The most important part of your credit score. When creditors report that you paid on time, it's good for your credit. Any issue such as late payments or filing bankruptcy, damage your score. TIP: automate your payments so you’re never late!

2) Amounts Owed (30%): This measures how much you owe on your available credit. Your credit utilization, meaning your ratio of card balances to credit limits, has the largest impact here. Lower is better, and it's recommended that you keep your card balance below 30% of your credit limit. TIP: try not to use all the credit available to you. And aim for 15% or less!

3) Length of Credit History (15%): Creditors view people who've used credit for a long time as less risky. Your length of credit history includes both how long you've had your oldest credit account and the average age of your credit accounts. TIP: if you have kids, authorize them on your card or get them a no-fee card early on to help establish credit early!

4) New Credit (10%): Applications for new credit have a small impact on your score. It's not a big deal to apply for the occasional loan or credit card. But if you apply for new credit too often, it can lower your score. TIP: be strategic about your credit applications.

5) Types of Credit Used (10%): Agencies like it when you have a mix of credit card and loan accounts. Since this only has a small impact, there's no need to get a new loan or credit card solely to diversify.

Now that you know how the score tabulates, let’s return to my first comment.

If a credit user has 2 credit cards, but maxes out each and might pay late once in a while, their score may look pretty sad.

If you have 8-9 credit cards, diversify your usage, pay on time and have a long history, your score will likely be higher.

Take a look at your current credit available to you.

Do you pay on time? Any defaults on your credit? Do you request new lines of credit often?

Check out the below suggestions for ideal credit behavior.

1. Have one installment loan - like a mortgage or auto loan, and pay on time.

2. Get a charge card (not a credit card) - the balance is always paid in full.

3. Maintain credit accounts at least 6 months old; some at least 3 years old.

4. Have a mix of credit cards with high balances (10K+) and low utilization.

5. Have few inquiries for new credit
   

The best thing you can do is start auto payments on all your cards. Set this up with your bank account and make it happen. You are rewarding yourself for future behavior.

Be mindful of your spending! Credit is a tool, not a free-for-all spending binge on material goods. Buy what you can AFFORD.

When your score is high and reflects a good borrower (you), you'll start seeing the credit issuers flock to you.

Save On,

Chris