What is a Credit Score?
A credit score is a number used to measure an individual’s ability to pay back a loan. The higher your credit score, the more likely you are going to pay back the money you borrow. This is important because the more likely you are to pay your debt, the more trustworthy you are to lenders. Lenders offer the lowest, most competitive interest rates to those they deem trustworthy. Over time, these low interest rates will save you thousands, possibly even hundreds of thousands of dollars over the course of your lifetime. Below is a guide to show you exactly how your credit score is calculated and how to get an 800 credit score.
Credit Score Ranges
Below is a chart of the credit score ranges and the percentage of people within each range.
|Credit Score||Rating||% of People|
|300 – 579||Poor||16%|
|580 – 669||Fair||17%|
|670 – 739||Good||21%|
|740 – 799||Very Good||25%|
|800 – 850||Exceptional||21%|
What does FICO Stand For?
FICO is an abbreviation that stands for Fair Isaac Corporation. This was the first company to offer a numerical measure to determine an individual’s risk.
Why do You Have Different Credit Scores?
Have you ever noticed that your credit score on Experian is different than your credit score on Trans Union which is different than Equifax? Your scores are different because each of these companies use different software with different formulas to arrive at your credit score. So, even though the information put into their system is the same, there are slight variations due to the formulas.
That being said, there is a level of standardization across the board for weighting the results provided by these formulas. Below is a guide of the five factors considered when calculating your credit score.
How is your credit score calculated?
The way your credit score is calculated changes periodically. This is a good thing because the credit reporting agencies (TransUnion, Equifax, and Experian) take into consideration the current economic climate.
As of 2020, this is how your credit score is calculated:
Payment History (35% of your score)
As the name implies, payment history measures whether you pay your bills on time. This has the largest impact in how your credit score is calculated.
Past actions are a good prediction of future actions. Think about it, let’s say for whatever reason, in the past you ended up with some bills going to collections. You eventually paid these off and turned yourself around and now pay everything on time. However, what happens if you hit a rough patch? Will you view not paying your bills as an option because that’s what you did previously?
People with a strong payment history do not view paying their bills as optional. Good times or bad, people with good credit pay what they owe.
From a lender’s perspective, people who have a past of non-payment are a higher risk. The higher the risk, the lower the credit score.
Utilization (30% of your score)
Utilization is the amount you owe relative to the amount of credit available to you. You should never use more than 30% of your available credit.
If you have one credit card with a credit limit of $1,000 do not have a balance over $300. If you have 3 credit cards with a $60,000 credit limit combined do not have a balance more than $18,000.
Length of Credit History (15% of your score)
Time heals all wounds including your credit. The longer your credit history and the longer that credit history shows responsible behavior, the better. You may be able to change your behavior to boost your credit score in all of the other areas but in this area the only thing you can do is wait.
Credit Mix (10% of your score)
Weird, but credit agencies want to see multiple types of credit open in your name. Credit Cards are one type, a mortgage is another. So too is a car loan and student loans. Together they make a diversified portfolio. If you pay these debts on time and in full, you are showing responsible behavior.
New Credit (10% of your score)
Have you ever heard someone tell you to hold off on getting that new credit card? Usually its when you are in the process of buying a home. The mortgage lender tells you not to make any big purchases, do not open any new lines of credit, do not quit your job, be as financially boring as possible. When you close on your house, then you can make the big furniture purchases.
If you start opening a ton of credit card accounts in a short amount of time lenders will see you as a higher risk. I mean, why exactly do you suddenly need all these extra credit lines?
Each time you try to open a new line of credit, the lender pulls your credit score. This is called a hard inquiry. These will temporarily shave off some points from your credit score.
How to get an 800 Credit Score
Whether you need to fix a bad credit score fast or you just want the bragging rights that come along with an 800 credit score, this comprehensive guide for how to get an 800 credit score is for you.
Whenever you want to improve an aspect of your life whether it be losing a few lbs or improving your financial well-being, you need to view the journey to get there as a lifestyle change.
Increasing your credit score works the same way. Making changes to increase your credit score and then going back to old habits that led to a poor credit score will put you right back to where you started. Each of the habits discussed below is a way of life going forward.
Find Out What You Need to Fix
Find out what you need to fix by reviewing your credit report. You are entitled to receive one free credit report each year from each of the three major credit reporting agencies (TransUnion, Equifax, Experian). When you receive your report, look at what it says. Identify what is bringing your score down. You now know what you need to fix.
Improve Your Payment History
This is calculated by taking the number of on time payments divided by the total number of payments. The result will give you the percentage of payments made on time.
If you do not have a strong payment history there is a way you can boost your score in this area. The examples below will explain what you can do to improve your payment history.
For instance, let’s say you have a credit card that has been open a year and a half. The total number of payments during this period will be one payment per month for the duration the account is open, or 18 months = 18 total payments.
Let’s also say that during the course of those 18 months you accidentally missed one payment. How will this affect your score?
Well, you will have 17 on time payments divided by 18 total payments yielding a 94.44% payment history.
94.44% sounds good right? Wrong. 94% is basically like receiving an F in the credit score world.
How do you combat this?
In this next example let’s say you have two credit cards that have been open for 5 years. The total number of payments is 12 months x 5 years x 2 credit cards (120 total payments).
You still accidentally missed that one payment. How is this going to impact you?
119 on time payments divided by 120 total payments yields 99.16% on time payment history. Much better!
- Do not miss a payment.
- Have more credit available for a longer period of time. This way, if you accidentally miss one payment it’s not going to have as dramatic an effect on your credit score.
Never Carry a Balance on Your Credit Cards
Each month, whatever amount you spend, must be paid off in full, no exceptions. If you cannot pay the credit card bill in full when it comes due then, you are living above your means.
Paying the minimum balance is not sufficient and reflects poor financial habits. Be better than that. By implementing this practice, you will be:
- Maintaining your payment history (35% of your score)
- Avoiding consumer debt that can easily get out of hand
- Being able to sleep better at night.
Pay your monthly recurring bills in full and on time
This also includes rent, mortgage, car insurance, utilities, etc. If you cannot pay these in full when they come due you are living above your means. Have the mentality that these bills are mandatory. They money is aside to pay for them before any miscellaneous fun expenditures. This is really important when trying to fix your credit score fast because payment history makes up such a large portion of your credit score.
Decrease Your Credit Utilization
You should never, ever use more than 30% of your total credit limit. That being said, the lower the better.
However, what happens if you have one credit card with a $1,000 credit limit? In this example, let’s say you usually spend about $500 per month on the credit card. This means that your credit utilization is continuously 50%. The dollar amount may be low but the utilization is high. How do you remedy this?
Call your credit card company and ask them to increase your credit limit. If they increase your credit limit to $2,000 and you still spend $500 per month then your credit utilization is now 25%. Your credit limit increased and your utilization decreased.
After calling your credit card company and increasing your credit limit, take a month or two to prove to yourself that just because you have a higher credit limit doesn’t mean you are going to use it. Once a couple months go by and your credit score has seen a boost from the lower utilization, consider opening up a new credit card. You should only open up a new credit card if you are honest with yourself about whether you can handle the responsibility of a new line of credit. This does not mean you should start opening up all kinds of new credit cards. Remember, whatever you spend needs to be paid in full and on time each month.
Lengthen Your Credit History
Your credit history is determined by taking the average number of years your credit lines have been opened.
For instance, if you have one credit card that has been opened for 10 years and then you get a second credit card then your average credit history is 5 years.
This also means if you close a credit line that has been open for some time then, your credit score can decrease.
For instance, if you have student loans that have been open for 8 years, a credit card that has been open for 5 years, another credit card that has been open for 1 year, and you want to pay off your student loans today then, your credit history will go from 4.67 years (8 years + 5 years + 1 year / 3 accounts) to 3 years (5 years + 1 year / 2 accounts).
- Don’t be afraid to pay off student loans.
- Do start building your credit early. This way, when you pay off those student loans, closing the account will hurt your score a lot less. 3) Also, have patience. You are working towards a credit history of 9 years + in this category.
Add Different Lines of Credit (Credit Mix)
Believe it or not, having more debt/credit available to you improves your credit score. Word of caution: Do not use this as an excuse or reason to go into debt. Keep in mind consumer debt is never good.
In a nutshell, this is how it works. You have multiple credit cards (don’t go overboard) leading to higher credit limits. This helps both your credit utilization and payment history because, 1) you have multiple credit lines, with 2) a higher credit limit, leading to 3) lower utilization, and 4) higher total number of payments (refer to payment history examples).
This aspect of the credit score does not include just credit cards. Student loans, car payments, and mortgage payments all go into your credit mix.
Pay each on-time and in full and this will help boost your credit score by showing lenders that you can handle different types of debt responsibly.
It is important to note that you can achieve an 800 score without putting yourself into debt using car loans, and other consumer debt. Once again, do not use this category as an excuse for going into debt because it will hurt more than help.
Decrease the Number of Hard Inquiries
Do not all of a sudden open up numerous lines of credit cards and other loans.
This will reduce your credit history and lenders will wonder why you are borrowing so much money. Credit agencies will view you as a higher risk and your credit score will decrease.
Hard inquiries impact your credit score for one year and show up on your credit report for two years. After two years, the hard inquiry drops off your report and it is like it never happened.
One important thing to note, if you are shopping around for different loans for instance, a mortgage. If your credit is pulled multiple times within a span of a couple weeks, those inquiries will be grouped together and treated as one hard pull.
The ideal 800 credit score will show zero hard inquiries within the past 12 months.
Opening Your First Credit Card
If you are just starting out and have no credit history, this one’s for you. This is your first step for how to get an 800 credit score. Knowing how to use credit cards responsibly is important regardless of whether you are a college student making a few hundred bucks each month or someone making $1M. Everyone needs a credit history.
If you do not have any credit history, starting off with a secured credit card is a great option. In essence, this type of card works very similarly to a debit card or pre-paid credit card. You go to the bank, give them, for instance, $700 as a security deposit. The bank uses the $700 as collateral if you do not pay your bill. Your credit limit on the credit card will also be $700. Tada! You now have a credit card to start building your credit history. Eventually you will move on from this method, but for those just starting out, this is a great option.
Demonstrate responsible behave with a secured credit card. Pay off the entire monthly balance on time and in full.
As of 2020, one of the best secured credit card is the Discover it Secured credit card. There is zero annual fee, the security deposit (aka the $700) that you give is refundable, you earn 2% cash back at gas stations and restaurants (up to $1,000 each quarter), and you earn unlimited 1% cash back on all other purchases. You can also view your FICO credit score on your monthly statements, mobile device, or online for free which is a great way to monitor how you are doing. Note: This is not a sponsored post.
- Learning how to get an 800 credit score is a balancing act.
- It is possible but you will need to monitor your credit score and know what areas are driving your score down so that you know what you need to work on.
- You are entitled to receive your credit report from each of the three major credit reporting agencies once per year. Obtaining your report will not hurt your credit score so you should definitely take advantage of this service.
- Implement the strategies above, be patient, and you can achieve an 800 score.
- Have questions? Let me know! I am happy to answer.
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