I've got five easy steps for you that are the road map to getting an 800 credit score
and saving 10s of thousands of dollars in interest.
Let's get started.
Alright, so some of what we're about to cover you may have heard before but I really want
to focus on making this as simple possible because the topic of building your credit
is oftentimes unnecessarily complex and I promise you it's really not that hard starting
with step one which is always making your on-time payments and not only is this step
one but this should be priority number one no matter what and that's because you’re
on-time payment history not only makes up 35% of your credit score but a late payment
will also stay on your credit report for seven years.
Now whether you're talking about your small credit card balance or your student loan payments,
in order to be considered an on-time payment you must be making at least the minimum payment
due.
My suggestion is to always pay off all of your balances in full and on time but I realize
if you have some credit card debt here a mortgage payment a car loan student loan balance and
everything in between then that's easier said than done but no matter what your situation
is…at the very least you need to be making the minimum payments and another important
thing to note is that a payment is usually not considered late unless it is 30 days past
the due date so if you forget to pay off your credit card balance the card provider is typically
not going to report that to the credit bureaus until you are 30 days past the due date and
while you will usually incur some kind of late fee, you may be able to call up your
card provider or lender explain the situation especially if it was an honest mistake and
hopefully get that late fee waived.
It's a 5-minute phone call and the worst they can say is no.
But the easiest way to avoid all of this headache is just to set up something like autopay.
Most major credit card providers and lenders for that matter offer some form of autopay
which you can set to pay the minimum balance, a specific amount, or the entire statement
balance which again is what I recommend and some lenders will even offer you lower interest
rates if you have autopay set up so that one's kind of a number brainer.
Lastly when it comes to on-time payments, most payments are due on a monthly basis which
means each line of credit you have is an opportunity to make 12 on-time payments each year, and
the more on-time payments you have the smaller impact one missed payment would have on your
credit score.
For example, if you only have one credit card and you've made four on-time payments but
you missed the fifth payment well that means that you've missed 20% of your payments whereas
if you have a good credit mix which we'll talk more about later and are making multiple
on-time payments across multiple lines of credit then missing one payment isn't as big
of a deal but this one is easily avoidable and will have the biggest impact on your score
so just set up autopay and enjoy perfect on-time payment history.
Alright so that first step alone is going to set you on the right path but the second
step makes up an additional 30% of your credit score and that would be your credit utilization
and in this case we want to keep your credit utilization as low as possible.
This is sometimes where people get a little bit confused so let's make it as simple as
possible.
Your utilization is simply your total balance across all of your lines of credit divided
by the total credit that is available to you.
So for example let's say I have two credit cards one of them has a balance of $500 and
the other has a balance of $200 and let's say each of those cards has a credit limit
of $1000 meaning that's the most amount of money I could spend in any given billing cycle.
That means that our total balance is $700 and that is divided by our total available
credit which is $2000 meaning our credit utilization in this example is 35%.
Credit utilization below 30% is typically considered good but we're shooting for an
800 credit score so we need to do better than good.
I usually keep my utilization below 5% which I achieved using a little-known loophole in
the credit system but before we get to that if you're already getting a bit overwhelmed
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Alright so the little-known loophole that I use to lower my credit utilization is paying
off certain balances before my card statement is processed each month.
Remember that your credit card statement is just a snapshot and anything else that happens
throughout the month is not really relevant if it doesn't show up on your card statement.
For example, let's say one of my cards has a $10,000 credit limit but I make a large
purchase of $8000 on that card.
Well if I don't pay down that balance before my statement is processed, my utilization
on that card would be 80% which is obviously horrible for my credit score.
So instead I could pay down a majority of that $8000 balance before my statement is
processed, still reap the benefits of putting that large purchase on my credit card while
also keeping my utilization low.
But don't get hung up on this utilization stuff too much because it can make your head
spin and there are of course Gray areas like charge cards for example which technically
don't have a hard credit limit and therefore don't really contribute to your utilization.
If you have large balances on your card try to pay them down before your statement is
processed and overall try to use less than 10% of the total credit that is available
to you in order to keep that utilization low as well.
But the other much easier way to instantly improve your utilization is by increasing
your credit limit.
Remember that equation I showed you earlier where your balance is on top and your total
available credit is on the bottom?
well by increasing the denominator which is the total available credit in this case that
will decrease your utilization and usually you can get a credit limit increase by calling
the number on the back of your card or in some cases filling out a simple form online
and getting an instant increase so maybe give that a shot before you go do credit card gymnastics
with your balances.
Alright so honestly those first two steps make up 65% of your credit score so Needless
to say they are by far the most important but there are a lot of other variables you
need to be aware of and don't worry these ones are much more passive but will require
some patience.
I say that because the third step is improving the age of your credit which makes up 15%
of your score and obviously the only real way to improve the age of your credit is to
just wait things out and let your current lines of credit get older.
So if you have not yet opened a basic beginner credit card then definitely go ahead and do
that because the sooner you get started the sooner you'll be able to have those older
credit lines on your report.
I, for example, am only 23 years old but I opened my first discover it credit card on
my 18th birthday which means despite my young age I have lines of credit that are over five
years old and I'm rapidly approaching that 800 credit score because of that.
My biggest tip with this one is if you're opening your very first credit card make sure
that that is a simple no annual fee card because no matter what you'll want to leave that account
open pretty much forever because closing your oldest line of credit would have a huge impact
on your score so get something like the discover it credit card and even if you eventually
get better products and aren't using it anymore just leave that account open it's not going
to hurt anything and it's actually going to be really good for the age of your credits
and therefore good for your score.
Obviously, with step three you really just have to be patient so be strategic about the
accounts you open and then really focus on steps one and two.
Speaking of which that brings us to the 4th step which is carefully timing your new credit.
This is where things get very minute but new credit does make up 10% of your score on its
own and the reason I say the timing of this is very important is every time you apply
for any line of credits you'll likely see what's called a hard inquiry show up on your
credit report for up to two years and each hard inquiry is going to have a temporary
negative effect on your credit score.
So if you're thinking about applying for a car loan or a mortgage in the next few years
then I would try to avoid hard inquiries as much as possible because when a mortgage lender
pulls your credit report for example you want your credit history and your credit score
to be as pristine as possible because even a slightly higher interest rate on a several
$100,000 loan could cost you 10s of thousands of dollars in interest.
Not trying to scare you and again the first two steps are much more important but just
be aware of this and think carefully any time you apply for a new line of credit because
that hard inquiry is going to stick with you for two years.
Alright, the 5th and final step is simply being aware of other variables but don't stress
about them too much.
This would be things like your credit mix meaning do you just have credit cards or do
you also have a mortgage and an auto loan and student loans?
Technically a better credit mix is going to be good for your score but from my perspective,
taking out a car loan or slowly paying off your student loans just to improve your credit
mix is a horrible idea and the interest you will pay on those balances will far outweigh
any benefit you will see from improving your credit mix.
I for example only have my credit cards and my mortgage and otherwise I've never had any
other line of credit in my name and I was still able to build a fantastic credit score
at a young age so again I say don't stress about these other variables too much.
Lastly, you might also want to be aware of your rent and utility payments because while
they usually don't have any impact on your credit score, if you or your landlord is using
some kind of rent reporting service then yes that can be a fantastic way to safely build
credit but that also means that a late rent or utility payment could mean a late payment
on your report which as we talked about earlier we want to avoid at all cost.
So I know that was a lot of information at once but honestly if you can pay off all of
your lines of credit on time and keep your utilization low then you'll probably build
score in the mid to high seven hundreds relatively quickly and be well on your way to an 800
or better.
Be sure to check out today's sponsor aura using the link down below to keep track of
all of these different variables and check out this video to see which cards I carry
with me every single day.
Take it easy and I'll see you in the next one!