Many would believe that having a high credit score gives you access to more than just credit cards and low-interest rates on loans. Low scores are around 300, according to FICO. But the perfect credit score — which by 2019 only 1.6 percent of Americans had — is 850.
For some, it may take seven years and a spotless history to reach that milestone. But that’s not the case for “The Money Coach” Lynnette Khalfani-Cox, who reached an 850 credit score in 2021. To help others do the same, the author of “Zero Debt: The Ultimate Guide to Financial Freedom” shared her five-step method to help others do the same in a recent CNBC article. The personal finance guru broke down how to build credit, how credit scores are calculated and much more.
How Paying Your Bills Builds Credit
Thirty-five percent of your FICO credit score is based on how often debt payments are made on time. But paying bills late or missing payments has a “substantial impact” on your credit score. Whether it’s for a credit card, auto loan, or personal bank loan, late payments are reported to the credit bureau at least 30 days after the due date. They stay on your credit report for up to seven years and further decrease your score after 90 days.
Autopay is a great resource to help monitor bills and avoid missing upcoming due dates. This allows bill-payers to directly pull the funds from their bank account on a pre-scheduled date.
Understanding Hard Credit Inquiries On Your Report
Typically, when individuals apply for loans or credit cards, financial institutes and credit bureaus will conduct a hard inquiry into one’s history. It shows on your annual report and allows lenders to see how often someone has applied for credit. For example, seeking a mortgage, personal, or auto loan means applying with multiple lenders at the same time.
But too many hard inquiries within a “short period amount of time can negatively impact your credit scores,” according to Experian data. Khalfani-Cox advises future borrowers to apply for credit only when necessary.
“Don’t apply for credit unless you truly need it, because you don’t want to have a whole bunch of inquiries that are lowering your credit score unnecessarily, said “The Money Coach.”
Minimize Your Debt-to-Income Ratio
Too much debt is bad for your credit score and can affect your approval for a loan. The common advice to maintain a high score is to keep your debt below 30 percent utilization.
Khalfani-Cox recalls being $100,000 in debt earlier in her career and life. It took her four years to recover and understand the concept of debt-to-income ratio.
“A turning point in terms of me wanting to monitor and improve my credit rating happened after I started digging myself out of debt,” she said. “My credit score jumped like 100 points after I finally paid off my credit card bills. That’s when I noticed the really strong link between how I’m handling the debt side of the equation — specifically the credit card bills — and my credit score.”
How Length of Credit History Affects Your Score
Around the same time Khalfani-Cox earned her perfect 850 credit score, she paid off a mortgage loan. She shockingly noticed her score dropped by seven points to 843.
Good credit is built over time, seven years to be exact — which is initially difficult for young borrowers. Fifteen percent of your score is based on the length of your credit history. The longer an account stays open reflects positively on your score. But what some don’t realize is that closing accounts can also negatively impact your score.
The Benefits of Multiple Lines of Credit
Khalfani-Cox recommends having multiple lines of credit, accounting for 10 percent of your score. She boosted her score with multiple mortgages, but others do so with home loans, installment loans, Best Buy credit cards and etc.
“When you show that you can responsibly juggle all those types of loans, you get brownie points for that,” she said.
Credit cards often come with rewards and benefits like travel vouchers and interest-free financing. An Experian study found that Americans between the ages 40 and 74 held more than four credit cards by late 2020. Meanwhile, over the same time frame members of Gen Z were taking on more debt by opening several credit card accounts, up 9 percent from 2019.