The Quest for a Perfect Credit Score
What does having a perfect credit score mean to you? Well, it might mean being able to show up at the dealership and buy your next car without worrying about how you will finance it.
Or, it might mean having peace of mind knowing that you can purchase your dream home because you’ve qualified for a relatively low-interest rate.
Either way, having a perfect credit score can open up many opportunities you may otherwise not have access to.
Now, you may be saying to yourself, “I have a good job, I pay my bills on time, what more do I need to do?”
Well, if you’re planning to finance any big-ticket purchase in the next twelve months, or even apply for a new job, effectively managing your credit is essential to achieving these goaks.
That’s because we’re currently in an economic environment where loan approval rates are falling, and borrowing costs are rising. And so, it’s crucial, now more than ever, to do the work to build up your credit profile even if you already have a solid credit score.
To be sure, according to the credit reporting agency Experian, only around one percent of Americans have been able to attain a perfect 850 credit score.
And while the goal of a perfect score may seem elusive or simply put, not relevant, practicing good credit management habits towards that end can help give you optionality, access to better financial opportunities and potentially save you thousands of dollars in borrowing costs in this challenging credit environment.
So how do you go about maximizing your credit score in this uncertain economic environment?
What you should do is focus on the basics.
And while you may already be proficient in many of the credit management basics, taking a few moments to check your credit report to review your account profile, account summary, and payment history for potential errors can help you maximize your purchasing ability and avoid unnecessary costs in a rising rate environment.
How to Navigate Your Credit Report
Now, with a perfect credit score seemingly elusive to so many, the big question here is, what does having a solid credit score mean to you?
Well, for Craig, a talented tech professional, it meant being able to use his high earnings to secure his dream of buying a new home. You see, Craig’s impressive skills earned him a handsome salary, and the world seemed to be his oyster.
Now, despite his financial success, Craig had always felt a nagging uneasiness about his credit and could never quite shake the feeling that he wasn’t in complete control of his financial destiny because he didn’t understand his credit report or how the items in it affected his credit score.
Then, one day, while browsing through his bank account, Craig stumbled upon an advertisement for a free credit report. Intrigued, he decided to pull the report and was shocked by the contents. That’s because his credit score was far lower than he had imagined, and he realized he needed to take control of his financial journey.
But where should he start?
Well, determined to turn his credit score around, Craig began doing some homework and discovered the secrets of credit utilization, payment history, and credit age and how they affected his credit score. Now, as Craig dove deeper into the rabbit hole of all things credit, he soon realized that this was the knowledge he had been seeking all along. But could he apply this newfound wisdom to his own financial situation?
Well, soon enough, Craig embarked on his journey of credit transformation. He diligently paid off his outstanding debts with a focus on reducing his credit utilization. At this point, Craig was determined to prove his creditworthiness to the world, and nothing could stand in his way. And, as the months passed, his credit score began to rise, and he felt a growing sense of pride and accomplishment.
However, was this newfound knowledge enough to truly conquer his financial fears?
Craig soon faced his most significant challenge yet: purchasing a home. As he began the mortgage application process, he couldn’t help but worry that his past credit mistakes would come back to haunt him. After all, despite his progress, could he truly overcome the shadows of his financial past?
But when the results of the mortgage application came back, Craig was overjoyed. His diligent efforts to understand and improve his credit score had paid off and he was approved for a mortgage with a favorable interest rate. In that moment, Craig truly understood the value of his journey.
And, as Craig settled into his new home, he couldn’t help but reflect on his incredible transformation. No longer was he the high-earning tech professional who felt powerless over his financial destiny. He was now a financially savvy individual, unafraid to confront the challenges of the credit world.
Indeed, what Craig’s story tells us is that while it may seem like our current routines are enabling us to do all the right things to manage our credit, what really counts is what’s in your credit report. To be sure, the act of simply reviewing your credit report and understanding the factors driving your score is one of the most commonly overlooked factors when it comes to optimizing your credit score.
So, what do you need to do to level up your credit score and set yourself up for borrowing success?
Well, according to John Ulzheimer, the author of “The Smart Consumer’s Guide to Good Credit,” there are several steps you should take to get a better understanding of your credit score and, ultimately, what you should do to improve it.
Get Copies of All Your Credit Reports
The first step to better understanding your credit profile is to obtain a copy of your credit report from each of the three major credit bureaus. Now, a common mistake many individuals make is just pulling one copy of their credit report.
And why is this a mistake?
Well, Ulzheimer recommends obtaining reports from all three major credit reporting agencies, including Experian, Equifax, and TransUnion, instead of just one because the information contained in each report can vary. That’s because lenders and creditors may report information to just one or two bureaus and not all three at the same time, which can result in differences in your credit report and credit score.
Therefore, be sure to download a copy of your report from all three agencies, preferably in a consolidated format. Now, while each bureau will offer you a copy of your credit report from their website, you can get a free copy from all three bureaus once a year by visiting htttps://www.annualcreditreport.com.
Check for Errors
Alright, now that you have your credit reports in hand, what you’ll want to do is take a moment to review each copy for errors. You can start by looking for inaccuracies in your name, address, or Social Security number, and make sure that the accounts listed on your report belong to you and reflect accurate information.
And why do you need to look for errors? Well, according to various surveys out there, as many as 33% of the respondents have indicated that they’ve found at least one mistake in one of their three credit reports in the past year, and that could be costing them money!
Indeed, errors in your personal information or accounts listed on your credit report can negatively impact your credit score and your ability to obtain credit on favorable terms. That’s why it’s essential to check for errors on your credit report at least annually to ensure that your credit score is not negatively affected by inaccurate information.
Review Negative Items
Now, after you’ve reviewed your credit reports for mistakes, take the time to work through any negative items that may have shown up on your credit report. These negative items include things like late payments, collections, charge-offs, bankruptcies, and other delinquencies.
And, it’s worth noting that these negative items can stay on your credit report for several years and lower your credit score, making it more difficult for you to obtain a loan on favorable terms.
That’s why it’s essential to remember that the longer you wait to address negative items on your credit report, the longer it will take you to get to your ideal credit score. Ultimately, reviewing your credit report for negative items is an essential step in understanding your credit score and taking the necessary actions to improve it.
File a Dispute if Necessary
Now, if you find inaccurate or negative information in your credit reports, it’s essential not to panic. That’s because, more often than not, there’s something you can do about it, and that’s filing a dispute. Indeed, by filing a dispute, you can ensure that your reports reflect current and correct information which can improve your score in certain situations.
And, so, how do you go about filing a dispute?
Well, the first thing you should do is contact the credit bureau reporting the error or inaccuracy in writing and provide them with supporting documentation to prove your dispute. Now, each of the three major bureaus offer a way to complete this process through their website.
Then, after you’ve notified the credit bureaus of any errors, you should wait for a response. The bureau will investigate the dispute and typically respond within 30 days. If they find that the disputed information is inaccurate, they must correct the information on your credit report.
And what do you do if they don’t correct the information?
Well, if the credit bureau doesn’t resolve the dispute in your favor, you can try directly contacting the creditor that reported the inaccurate information and ask them to take a look. At that point, you can provide them with the same supporting documentation and request that they correct the information.
Now, if the creditor or lender doesn’t correct the inaccuracies, you can request that the credit bureau conduct a reinvestigation of the disputed information. At that point, if the dispute remains unresolved, you can add a statement to your credit report explaining the inaccuracy and provide any supporting documentation to back it up.
Either way, taking steps to correct any errors on your credit report is essential to improving your credit score and your overall creditworthiness. So, if you notice any inaccuracies or errors on your credit report, don’t hesitate to dispute them with the credit bureau and the lender involved.
Dealing with Negative Items
Now, if you do find adverse facts on your credit report and know that they’re not items that you can dispute, then it’s time to bite the bullet and do the work to address them. Indeed, one way to deal with old debts that show up as negative items on your credit report is by negotiating to settle your debt or by paying them off. Now, depending on your situation, this approach may involve dealing with an old debt, a court settlement for a judgment, or an old utility bill.
And how should you approach this task?
Well, according to John Ulzheimer, you should first reach out to the creditor or debt collector and work out a payment plan or settlement that you can afford. In this case, you can offer to pay off the debt in full or suggest a settlement amount that is lower than the total amount you owe. And, if the creditor agrees to your offer, be sure that there’s a written agreement in place and that you’re keeping track of all the payments you make.
Now, once you’ve paid off or settled the debt, the creditor should report the updated information to the credit bureaus, which can help improve your credit score. And at this point, it’s critical to remember that paying off old debts won’t necessarily remove them from your credit report entirely. Even so, their impact on your credit score will lessen over time as the account ages and eventually falls off your report.
To be sure, negotiating to pay off old debts can be a helpful strategy for improving your credit score when you have a negative item on it that can’t be removed. And remember to be proactive when you do find negative items, negotiate with your creditors for a lower payment when you can, and always keep records of all payments made towards the debt.
How to Optimize Your Credit Score
Alright, so now that you’ve reviewed your various credit reports for inaccuracies, what else can you do if you already have a solid credit profile or are looking for ways to optimize your credit score?
Well, according to credit experts, the factors that truly affect your score include 1) age of your accounts, 2) credit utilization, 3) types of accounts, 4) recent credit inquiries and 5) payment history.
Age of Accounts
Let’s start by taking a look at the age of your credit accounts. Now, a common mistake many financially prudent individuals make after reviewing their credit reports is closing out those accounts they haven’t used in a while.
Now, while this approach could make sense if you’re trying to simplify your financial household, like we’ve discussed in previous posts, but closing out the wrong accounts could materially affect your credit score.
Well, that’s because having a more extended credit history indicates that you have experience managing credit and are a responsible borrower, which makes you appear more trustworthy to lenders and creditors.
Indeed, your credit score considers the length of your credit history, which makes up around 15% of your overall credit score. Now, for many of us, this credit history is often based on that first credit card that you opened in college that may no longer seem relevant to your life situation. But whatever you do, don’t allow that account to be closed because it could negatively affect your credit score.
Indeed, in this challenging credit environment, it’s crucial to review your credit report, identify the accounts with a long and positive credit history, and ensure that you avoid allowing them to be closed for inactivity.
Does this mean that you have to start relying on credit cards again? Well, not necessarily. In most cases, you can keep your credit accounts from going inactive by making a small $50 purchase and them immediately paying it off in the same month.
And what happens if your oldest account gets closed out? Well, closing out an aged account can lower the average age of your credit, which can negatively impact your credit score. So, from this perspective, keeping your oldest credit accounts open and active is generally recommended as long as it financially makes sense.
Manage Credit Utilization
Now, let’s talk about credit utilization. And what is credit utilization? Well, credit utilization is the amount of money you owe on your credit cards compared to the total amount of credit that’s available to you. For example, if you have a credit card with a $30,000 limit and you owe $15,000 on it, your credit utilization ratio is 50%.
Now, why does this matter? Well, your credit utilization ratio is a big factor in your credit score. You see when you use too much of your available credit, it can make you look like you’re not great at managing your money. That’s why keeping your credit utilization ratio around 30% is ideal for maintaining a solid credit profile.
Indeed, if you consistently use a high percentage of your available credit, it can make it seem like you’re relying too much on debt to fund for your lifestyle, which can make lenders and creditors worried about giving you more money in the future.
So, then, as you review your credit report, be sure to review your credit utilization and remember to keep it low, ideally under 30%, to maintain a good credit score and show lenders and creditors that you’re responsible with your money.
Hold a Variety of Accounts
Now, another factor to consider when you’re trying to boost your credit score is to focus on the kinds of accounts you have open. That’s because lenders and creditors like to see a mix of credit types, such as credit cards, installment loans, and mortgages, to demonstrate that you’re able to handle different types of credit responsibly.
And why does this matter?
Well, the types of credit you use often makes up around 10% of your overall credit score. So, if you only have a mortgage and credit card on your credit report, for example, then your overall score could be lower than someone who has an auto loan, mortgage, credit card, store card, and personal loan. That’s why having a mix of credit types can improve your credit score and demonstrate to lenders that you’re responsible with debt.
Even so, before you go out and start opening up multiple credit cards, it’s worth noting that not all types of credit are created equal. For example, having a mortgage and a car loan can be viewed more favorably than having simply five credit cards from different banks.
And why’s that?
Well, that’s because installment loans, such as a mortgage or auto loan, require regular, consistent payments over time and can demonstrate to lenders that you can manage long-term debt. So then, as you look through your credit report, be sure to have a mix of various account types.
Either way, it’s crucial to keep in mind that different types of credit are viewed differently by creditors, and having too much of any one type of debt can have a negative impact on your credit score.
Limit Credit Inquiries
Now, while it may be tempting to open a bunch of new accounts as a way to diversify your credit profile, there are a few things you should consider before doing so. Indeed, Lynnette Khalfani-Cox, author of the book, “Perfect Credit,” notes that credit inquiries can impact your credit report, so it’s essential to be mindful of how often you apply for a new loan or credit card.
That’s because when you apply for credit, the lender will check your credit report, which is called a hard inquiry. And too many hard inquiries in a short period can negatively impact your credit score.
So then, what approach can you take to prudently apply for credit?
Well, when you apply for credit, it’s vital to be strategic and only apply for credit when you need it. Remember, each hard inquiry can lower your credit score by a few points, so it’s best to space out your credit applications over time.
Additionally, if you’re shopping around for a loan or mortgage, multiple inquiries from different lenders within a short period of time will only count as a single inquiry, as long as they’re made within a certain timeframe.
Now, when it comes to credit inquiries, there’s also something called a soft inquiry, which doesn’t impact your credit score. And soft inquiries are typically made when you check your own credit score or when a lender checks your credit profile for promotional purposes, such as offering you a pre-approved line of credit.
Either way, it’s vital to be mindful of how often you apply for credit and to only apply for credit as you need it. That’s because multiple hard inquiries in a short period can negatively impact your credit score, so it’s best to space out your credit applications over time. And remember, checking your own credit score or having a creditor check your credit for promotional purposes won’t impact your credit score with a soft inquiry.
Maintain a Perfect Payment History
And last, but not least, the most essential component to building a solid credit score is to pay your bills on time. Now, while this may seem like a no-brainer, the fact is that your payment history can influence over a third of your overall credit score!
And even if you have solid credit today, one missed payment can lower your credit score by over 100 points! And to add insult to injury, it can take as long as seven years to have this one unfortunate credit event fall off your credit report.
So, what can you do to ensure that you have a solid payment history?
Well, if you want to ensure that you have a solid payment history and boost your credit score, Lynnette the Money Coach, has some great advice for you.
First and foremost, she suggests that it’s essential to make all of your payments on time. As we pointed out earlier, late payments can significantly impact your score, so it’s crucial to pay your bills on time every month.
And if you find that you’re forgetting to make all of your payments on time, now is an excellent time to consider setting up automatic payments or prioritizing which bills you should immediately pay.
Now, from this perspective, you’ll want to make sure that you pay the most important bills first, such as your rent or mortgage payment, then your car payment, credit cards and finally your utility bills.
And if you need help getting started with paying your bills, be sure to check out our report on financial procrastination to identify ways to move past analysis paralysis and payment indecision.
Now, if you’re going to be late on a payment, it’s essential to communicate with your creditor as soon as possible. That’s because you may be able to negotiate a payment plan or a due date that works better for your financial situation.
And one thing that you definitely want to avoid is skipping payments altogether. That’s because skipping payments can be one of the worst things you can do for your credit score. Even if you can only make a partial payment, it’s better to do so than to skip the payment altogether.
And by following these tips from Lynnette, you can ensure that you’re on the right track to achieving a solid payment history and on your way to an ideal credit score.
Why You Should Regularly Check in on Your Credit Journey
The last thing we’ll discuss when it comes to your journey towards a perfect credit score is doing the work of actually monitoring your credit report.
Now, while it’s essential to pull all three of your credit reports at least annually, tracking your progress should be a quarterly or even monthly endeavor.
And why’s that?
Well, frequently staying on top of what’s going on with your credit profile can help provide you with feedback on the progress that you’re making and help you quickly get ahead of any issues that may periodically arise.
For example, if you’re working on paying down your debt, checking your credit report can help you confirm that this information is being accurately reported and show you how lower debt utilization can positively affect your overall score.
What’s more, experts recommend that it can be a good idea to review your credit report more frequently, especially if you’re planning to apply for a loan or make a big purchase in the near future.
Indeed, the Money Coach suggests that it’s a common best practice to check your credit report several months before applying for a loan and closing on your purchase. This approach will give you time to correct any errors or address any issues that could negatively impact your credit score.
What’s more, checking your credit report frequently can also help you avoid identity theft by allowing you to spot any unauthorized accounts that could indicate fraudulent activity. That’s because identity thieves often use stolen personal information to open new credit accounts or take out loans in someone else’s name. And by regularly reviewing your credit report, you can identify any accounts you didn’t open or any activity you don’t recognize.
Consider Credit Monitoring Services
Now, if you’re not in the habit of checking your credit report on the regular, consider subscribing to a credit monitoring service. Now, it’s worth noting that your mileage may vary when it comes to these kinds of services but in the end it could save you time and money.
For example, when it comes to credit monitoring services, John Ulzheimer, has some mixed opinions.
On the one hand, Ulzheimer acknowledges that credit monitoring services can be useful in helping you detect potential fraud or identity theft. That’s because these services typically monitor your credit report, notify you of any changes, such as new accounts or hard inquiries, and allow you to address suspicious activity sooner rather than later.
On the other hand, Ulzheimer cautions that credit monitoring services are only a partial solution when it comes to protecting your credit. That’s because while these services can alert you to potential issues, they don’t necessarily prevent identity theft or fraud from occurring in the first place.
That’s why Ulzheimer suggests taking a more comprehensive approach to protecting your credit instead of relying solely on credit monitoring services. This approach includes regularly checking your credit reports, monitoring your bank and credit card accounts for suspicious activity, and taking steps to protect your personal information, such as using strong passwords and avoiding phishing scams.
Dealing with Identify Theft
Now, these perspectives bring us to our final credit management topic and that’s dealing with identity theft. And whether this topic is relevant to you or not, you should know that, according to data from the AARP, there were 42 million people affected by identity theft in 2021, and the victims lost $52 billion.
What’s more, when your identity is stolen, and credit accounts are opened in your name, it can ruin a credit profile you may have spent years diligently building and protecting.
So then, from this perspective, it goes without saying that protecting your identity is essential to optimizing your credit score. And so, how do you go about protecting your identity?
Well, one approach is to put a freeze on your credit report through each of the three credit reporting bureaus. That’s because when you put in a freeze, it restricts access to your credit report by potential lenders, which makes it more difficult for identity thieves to open accounts in your name. Indeed, at the very least, be sure to check out services like Lifelock, or even proprietary services offered by credit reporting agencies like Experian, Equifax or Transunion to help you accomplish this task.
And what do you do if you’ve reviewed your credit report and find that your identity has actually been stolen?
Well, if you discover that you’ve become a victim of identity theft, first and foremost, it’s essential to act quickly to minimize the damage. This means contacting the lender associated with unauthorized accounts or account activity and reporting the fraud. You should also consider filing a report with the Federal Trade Commission (FTC) and placing a fraud alert or credit freeze on your credit report.
What’s more, you should also review all of your other bank and credit card statements for any suspicious activity. And if you do notice any transactions that you don’t recognize, be sure to contact your bank or credit card company immediately and keep detailed records of all correspondence and phone calls related to the identity theft.
Now, there’s no guarantee that you’ll completely avoid having your information used in a malicious way. However, taking these steps can help you minimize your chances of financial loss and maximize your overall credit score.
The Quest for a Perfect Credit Score
Now, the quest for a perfect credit score can seem insurmountable and challenging to many. Indeed, even if you have a solid credit profile today, it still takes diligence and discipline to preserve and grow the score you’ve worked so hard to build over the years.
Even so, in today’s challenging economic environment, where loan approvals are in decline and interest rates are on the rise, it’s vital, now more than ever, to be a good steward of your credit even if your goal isn’t to obtain a perfect 850 score.
This approach begins with making sure that you pull your credit report at least annually from all three major credit bureaus. Then, be sure to review your reports for inaccuracies and correct them as soon as you discover them.
And, as you go about managing your credit, stay focused on the essential items that can help or hinder your score. This includes avoiding closing out your oldest accounts, maintaining low credit utilization, having a mix of various credit types and paying your debts off on time. Remember, even one late payment on your report can affect your score by over 100 points!
And finally, make a habit out of reviewing your credit more than once per year. Doing so will allow you to track your progress toward your ideal credit score while allowing you to stay ahead of any potential irregularities. And if you do find errors or suspect identity theft or fraud, be sure to act quickly. The longer you wait, the longer it can take to get your credit back on the right track, which could mean the difference between closing on your next big-ticket purchase.
Either way, taking these steps today will not only help you on your quest for an ideal credit score, it can move you one step closer to becoming the master of your financial independence journey.
Read More Recent Posts
- Is a Roth Conversion Right for You?
- Mid-Year Checkup: Navigating the Maze of Restricted Stock
- The Quest for a Perfect Credit Score
- Set Financial Boundaries and Gain Peace of Mind
- Asset Location vs. Asset Allocation: The Winning Formula for Wealth
- Inflation, Banking Crises and Recession: Position Your Money for Success
- What’s the Cost of Too Many Financial Accounts?
- Is Financial Procrastination Derailing Your Life Plans?
- Is Credit Your Superpower or Kryptonite?
- What Drives the Value of Your Employer’s Stock?