Having a high credit score gives you so many options.
You can get the credit cards with the highest rewards, and you can get the absolute lowest rates on any loans you use.
It can even increase your chances of getting a job or getting into a nice apartment, since employers and landlords often check it. It’s the financial industry’s best estimate of how responsible you are, and it can carry over to other realms outside of just finance.
This article will go into detail on how to improve your credit score, preferably to over 800. I’ll give you both the industry facts as as well as some personal tips I’ve discovered along the way, since I’ve had an 800+ credit score since I was about 21 or 22.
How FICO Credit Scores are Calculated
Here is the breakdown of how a credit score is calculated, by myFico:
There are several different ways to calculate a credit score and a bunch of companies that do it a bit differently, and each method has various pros and cons.
Each method also has a range, with the main ones having a 300-850 range. The chart above shows the default way that the general FICO score is calculated, by the FICO company.
Generally speaking, having over 750 puts you in the very top bracket, where you’ll get access to the best cards and the best loan terms, and will have no problems when employers or landlords check your credit.
If you can go further, t0 800+, then you’re comfortably in the top tier and roughly at the maximum end of the range.
35% Payment History
This is the single biggest factor: how reliably you pay your bills. By never, ever missing a payment over the course of years, your credit score will start to climb.
This can actually be kind of forgiving. Even if a payment is a few days late by mistake, most companies have a grace period where they won’t report you to the credit agencies. You generally have to be quite late in order for it to officially become a late payment. It’s best not to take chances though; pay all your bills every month like clockwork.
Automate your payments if it helps you. I personally like to sit down in the third week of each month and check every one of my accounts to pay them and keep everything tidy. It takes about ten minutes.
30% Amounts Owed / Credit Utilization
Creditors like to see that you’re not using anywhere near the maximum amount of credit available to you.
If you have 2 credit cards, each with a $5k limit, and each of them is filled to $4.9k, then it looks to them like you’re being irresponsible. Just like how some people’s expenses reliably expand to equal their income, this example looks like someone who naturally tends to borrow as much money as they can. That makes them look risky.
Instead, it’s best to have very high credit limits, and then use only a small fraction of them. A rule of thumb is to use less than 10% of your total credit limit, and to not use more than 10% of any individual credit account.
You can optimize this by adjusting both variables; you can spend less, and you can open new credit accounts or ask for increases on your existing credit limits in order to minimize your credit utilization ratio each month. You can also spread your purchases across multiple cards so that you never use a large portion of any card at once.
15% Length of Credit History
If someone opened their first credit account 6 months ago and has paid 100% of their bills on time, that looks pretty good. It’s a nice start.
But it doesn’t look anywhere near as good as someone who has had several credit cards for 10+ years who has never missed a payment on any of them, and has never missed student loan, mortgage, auto loan, or utility bills.
Some of this obviously just has to come with time, but your actions can influence it as well.
Suppose in one example, you open up your first credit card account today, and open up another credit card account 5 years from now. Ten years from now, one of your accounts will be 10 years old, and the other will be 5 years old, so the average age of your credit history will be 7.5 years.
Now, suppose that you open up a card account today, and then open up a new card account every two years. At the ten year mark, you’ll have 6 credit accounts that are 0, 2, 4, 6, 8, and 10 years old. The average age will only be 5 years. It’s generally better to have fewer, older accounts, rather than having a clutter of many newer accounts.
Also, it’s almost never a good idea to close an old account. Those old accounts are your “anchors” that you should try to keep forever, because they dramatically increase your overall length of credit history.
10% Credit Mix
There are two main types of credit: “revolving” credit and “installment” credit. Ideally, you want at least one of each, because it shows creditors that you can handle multiple types of loans.
Credit cards are the main type of revolving credit. If you have at least one credit card, then you have some revolving credit. It’s “revolving” because there is no end-date; you can just tap into it as much or little as you want each month, and pay it off regularly.
Student loans, auto loans, and mortgages are examples of installment credit. They have a natural end-date, and they expect regular payments each month of the same amount.
10% New Credit
If you open up a bunch of new cards at once, it looks risky. Lenders will wonder if maybe you lost your job, and you need to stay afloat with credit in the meantime. Or maybe you had a big medical bill and are becoming insolvent.
VantageScore is a newer competing model, created through a joint venture by Experian, TransUnion, and Equifax.
Previous versions 1.0 and 2.0 of VantageScore used a different range, but the current versions 3.0 and 4.0 also use the 300-850 scoring range.
Here’s their breakdown of how the score is calculated, courtesy of VantageScore:
It’s clear that although calculations may vary a bit, the same key factors apply for maximizing your various credit scores: have a long, reliable, and diverse credit history, and keep a low credit utilization ratio.
How I Got to 800+ by age 22
By the time I was a senior in college, my credit score was already effectively in the top range, at 800+, and I’ve kept it there ever since. It flirts near the maximum of 850.
My first landlord out of college checked it, and was astonished at how high it was for my age. I didn’t do anything special, and I can give you the exact steps I took both on purpose and by accident to increase my credit score so fast.
Step 1) Became an Authorized User
You can become an authorized user on a parent’s account even before you’re 18.
My father, despite not being a wealthy man and living in a trailer park, had an 800+ credit score, had several credit cards, and put me on one of them as an authorized user so that I could go shopping for our household with his money. Mostly for groceries and things.
If you have a responsible teenager, this is a way to help them become familiar with responsible card usage. If you are a responsible teenager, talk to your parents about becoming an authorized user.
The side benefit was that, years later up until I was 25, I was still an authorized user, and it appeared on my own credit report. It made my credit history and payment history look a lot older than it really was, simply because that’s how the companies view it.
Step 2) Got My Own Card
Once I turned 18, I got one of those starter credit cards with a low limit.
I barely used it, but kept it around, and now it’s an 11-year-old account that contributes to my average age of credit history. I also gradually increased the credit limit over time.
Step 3) Perfect Payments, Zero Balance
For my first credit card, and all of them after, I always paid them off each month in full.
I never carried a balance, never paid a penny in interest, and never had a late payment. That goes without saying if you want to build a rock solid credit score.
Step 4) Skipped Store Cards
It seems like every time I go shopping, a store clerk asks me if I want to save a few bucks on my purchase by signing up for some low limit store credit card.
There can certainly be perks to these things if you shop at one store chain heavily, but for most people, they just accumulate in their wallet and are barely used. Some of them even come with hidden fees.
I skipped all of these. No store cards for me. That way, I don’t have a variety of low-limit newer cards, and instead just have a small number of old, high-limit accounts.
By this point, at age 21 or 22, I already had an 800+ credit score.
Step 5) Inherited an Account
My father unfortunately passed away when I was 25. When I called to close his credit card account that I had been an authorized user on for nearly a decade, the company instead asked me if I’d like to inherit it. After all, that’s an easy way for the company to get a new customer- me.
This wouldn’t be a smart move if the account had a lot of debt, or had a bad history. But my father managed his credit well, had a balance of zero, and had a perfect payment history. So I said, “sure”, and became the owner of that account. I then monitored that account very closely for more than a year, and occasionally saw some old reoccurring charges come up (like his annual AAA membership bill, and that sort of thing). I made sure to cancel those. Definitely watch out for that!
Now, I’m 29 years old and have a credit card with a 30 year old credit history. It’s older than me. It’s a quirk, but that’s how it works. If you’re in the sad position of having a relative pass away, talk to the credit card company about what options you have for those accounts; you might be able to make better use of them than just letting them be closed.
Step 6) Diversified my Credit
I graduated from college with nearly $50k in student debt.
That sucks, but on the bright side, it counts as an “installment” loan, and thus I now had two types of credit; revolving and installment. This means my credit is diverse, which is good for a credit score. Over the next few years, I paid almost all of it off, but purposely kept a few thousand dollars of the loan active, since the interest rate is super-low.
Even to this day, I still owe a little bit. Just a few thousand dollars. I could pay it off at any time, but I don’t, because I keep it open to maintain at least one installment loan, and give little payments each month. Also, the interest rate is so low, that I essentially treat it as like a small margin account. I have reliably invested my money to earn 10-15% per year, so I have prioritized building assets over paying off liabilities.
One of the downsides of not having diversified credit is that some lenders might not recognize you as being credit worthy even if you have a high credit score. A co-worker of mine was fortunate enough to graduate college without any student loans because her parents paid her way through, and she never had any debt in her life. In her mid-20’s, she tried to buy a Lexus, which she had the money for, but wanted to finance part of it. The lender turned her down, because despite having a high credit score, she had never taken out any loans in her life, and only ever had revolving credit in the form of credit cards. She ultimately was able to just buy the car with cash, but the point is, an empty credit history can cause some issues, even if there are no mistakes or missed payments.
It’s a good thing to have both an installment loan and a revolving loan in your credit history. If you’re someone that has never had a credit card, or has never had any type of installment loan (auto, mortgage, student, etc), it could be impacting your ability to get either of those things in the future.
Step 7) Opened a Few Premium Accounts
With my inherited card account, and my own credit account that I opened at 18, I had 2 credit accounts at this point. One of them was already fairly old, and the other one was super old.
I opened two more cards, and these were the premium type that give great rewards and are only available to those with excellent credit. They come with high limits. The advantage here, besides the perks of the cards themselves, is that it reduced my credit utilization by a lot.
My four credit cards collectively have an extremely high credit limit, and because my spending levels are pretty low, my credit utilization each month averages about 1% or 2%.
Step 8) Checked (and Still Check!) my Credit Report Regularly
The three credit reporting agencies, active in many countries, are Experian, Equifax, and TransUnion. They’re the companies that keep detailed records of your credit and make it available to people that request it.
Thanks to the Fair and Accurate Credit Transactions Act, all three companies are required to provide U.S. residents with a copy of their credit report if requested, once per 12 months. They do so through the website AnnualCreditReport.com; that’s the only source for free credit reports authorized by this Act. They don’t show you the scores for free, but they show you their records of your payment history, so you can check to make sure there are no mistakes. You can also pay a fee to receive more information, like the actual score.
If you are about to make a huge purchase, it might make sense to go to that site and get your free report from all three companies. If not, it makes more sense to spread it out, since you can only get one from each company every 12 months. Optimally, you should get one report from one company every 4 months, because that is the maximum way to check your report reliably over time.
I also maintain a free account at Credit Sesame, where I get up to date information and notifications on my creditworthiness based on TransUnion data. They also calculate a similar score, based on similar principles to the FICO model, to give you an idea of where you stand.
The importance of having a high credit score cannot be overstated.
It lets you have the highest reward credit cards, ensures you won’t have trouble when applying for a job or apartment, and lets you borrow money at the lowest possible interest rates. It’s hard to fully escape the effects of having a low or mediocre score, and you might not even be aware of who is looking up your credit history to use against you, or in your favor.
It’s based on obvious things, like paying your bills reliably. But the smaller and less intuitive things, like maintaining a really low credit utilization ratio, increasing the age of your credit accounts, diversifying your credit to both installment loans and revolving accounts, and checking your credit history regularly for errors, are the extra steps to take to truly maximize your credit score to the highest possible tier, over 800.