How to Build a Perfect Credit Score for FREE
If you’re making any sort of major purchase where using credit is required, your score will undoubtedly play a major role in the overall cost you’ll end up paying for an item. So how do you build a perfect 800+ credit score for FREE, ensuring you’ll get the best price? It's really more simple than most people believe.
In selling over 8,000 homes, we have helped guide hundreds of people through raising their credit in order to qualify, or get the best rate for their mortgage. By following the steps outlined below, you too can boost your credit to reach that elusive 800+ score with no additional cost to you.
What is a Credit Score?
Before you can start raising your credit score, you first need to know and understand what your credit score is. To put it simply, your credit score is just a report card of how well you manage your money. Credit scores are graded from Very Poor up to Excellent, ranging from 350 up to 850, and where you fall within that spectrum all depends on how your score ranks.
Why is Your Credit Score important?
The better your credit score is, the better your odds are for getting approved for credit, and the better the interest rate you will qualify for. This can be anything from getting a new credit card, all the way up to getting a large loan for a vehicle, or getting a mortgage on a home. Having a high ranking credit score can also help make you money. Instead of paying all cash for a large ticket item (like a home), by putting money down on the item to help reduce your overall monthly payment, you are then freeing up that remaining cash which can then be invested into the market, or something that will gain value in interest such as a 401k.
How do Credit Scores Work?
In order to get a perfect credit score, you’ll need a working knowledge of how creditors rank your score and what guidelines to follow…
Make Your Payments on Time
First, and most importantly, make ALL of your payments on time. This makes up for 35% of your overall credit score. Creditors calculate this part of your score by dividing the number of all on time payments you have made by the total amount of payments you have made, giving them a percentage. This includes payments on mortgages, auto loans, student loans, any credit cards you may have, and any other payments that show on your credit report. We highly recommend paying off your full balance on credit cards every month, mainly because interest rates on credit cards tend to be very high, meaning you’re spending much more than needed if you choose to make just the minimum payment each month. However, if you are making your minimum payment and leaving a balance remaining, it does still count as being on time.
Credit Utilization Ratio
The second most important thing to do is to keep your credit utilization ratio as low as possible. This is responsible for 30% of your overall credit score. Your credit utilization ratio is the amount of credit you have taken out versus your total amount of credit available. In order to maintain a good ratio, you will want to keep the amount of credit you have taken out below 10% of what is available to you. The higher your ratio is, the more of a risk you are seen as from borrowers, which in turn will drop your overall credit score. This is calculated by dividing the amount of credit taken out by what you have available. So if you have a credit card with a $10k limit and use that card for a $6k purchase, then only make the minimum payment, you have a 60% ratio, which is bad. If you make that $6k purchase on that same card, then pay it off in full when the balance is due, you will have a 0% ratio, which is excellent. In other words, do not max your cards out, and again pay them down (or off completely) as quickly as possible to save you money on interest and keep your credit in good standing.
Length of Credit History
The age, or length, of your credit history makes up for 15% of your credit score and is the average amount of time your lines of credit have been open. However, there is a bit more to this than it sounds. Since this is taken by the average, the length of your credit is determined by averaging your oldest line of credit and your newest line of credit. For example, if you have a credit card that has been open for four years, but open a new line of credit today, the length of your credit history is actually two years. It’s important to note that this is only for open lines of credit, so if you have a line of credit such as an auto loan that gets closed once the vehicle is paid off, that no longer has any effect on the length of your credit history.
How Many Lines of Credit Are Open
Would you be surprised to learn that if you have multiple lines of credit open you are more likely to build a better score? It’s true, and the number of lines of credit you have open accounts for 10% of your credit score. This is for a couple of reasons. People who have multiple lines of credit are more likely to have a lower credit utilization ratio, along with more on time payments. Having a mix of credit is also beneficial to your credit score as lenders like to see that you are able to responsibly manage different types of debt without defaulting on any of your loans. In fact, according to Credit Karma, having a perfect mix includes 21 lines of credit including mortgages, car loans, credit cards and other loans. This can take a long time to accomplish, but building a diversified credit profile will definitely help build your score.
The last factor in how your credit score is determined is Hard Inquiries, which accounts for roughly 10% of your total score. Anytime that you apply for a line of credit your credit score is run to determine your eligibility, which in turn is reported to the credit bureaus and shows up as a hard inquiry on your report. Having a large amount or sudden number of hard inquiries can be detrimental to your credit score, as it makes you appear more risky to lenders, so it is important to only apply for credit when necessary. The good news with hard inquiries is they only stay on your credit report for up to two years. Also, if you are shopping for an auto loan or mortgage where your credit may be run several times, the credit bureaus understand this so it should not impact your credit score negatively.
Note: If you do apply for a new line of credit and open that new line, your credit score will temporarily drop for roughly 90 days to six months, but don’t worry. This is due to a combination of the hard inquiry and reduction to your average length of credit history. As long as you make your payments on time as scheduled it will not take long for your score to return to normal and continue increasing.
To recap, to help boost your score always pay off your credit card balance each month, or at least make the minimum payment, keep your credit utilization at or below 10%, help maintain the length of your credit by only opening new lines of credit when necessary and don't close out old credit lines, maintain a healthy mix of different credit lines (to help not impact the length of your credit open 2-3 at a time), and limit the number of hard inquiries received on your credit report. By following the previous guidelines, this is a sure way to help build your credit and reach an 800+ credit score with no cost to you, other than making sure all of your payments are made on time. The next time you have a major purchase come up, you’ll be thankful that you did.