In many ways, your credit score is more important than your social security number. I’ve encountered a few real estate clients who had zero credit. They were afraid of the entire premise, and they were never educated on the power of credit when you’re looking to buy a home or rent an apartment.
Your FICO Score follows you everywhere, and it’s a crucial part of your entire life as an adult.
I was lucky to have a mother in the lending industry. I heard about credit ad nauseam. As an adult, I’ve been able to use credit to my advantage to buy two homes, take advantage of credit card perks, and rent apartments.
My credit score has saved me thousands of dollars already, and it’ll save us hundreds of thousands over my lifetime.
As a parent, these credit lessons will be passed on to my kids.
Companies like Affirm and Upstart are attempting to turn the lending industry on its head. They’re looking at other factors outside of the popular FICO Score to qualify consumers using hundreds of data points.
I’m all for it! But in the meantime, here’s what you can do now to improve and maintain your credit!
The most important factor in a high credit score is your payment history. This accounts for 35% of your score. It’s not rocket science. Pay your bills on time.
It’s recommended that you only spend 30% of your total available credit in a given period. You should never carry a balance if you can avoid it. But as you spend a larger percentage of your available credit, your score will drop. Your goal should be to not spend more than 30% of your available credit.
Keeping this number low is also important for a little known reason. When banks become uneasy with a borrower's financial situation, they’ll sometimes drop your available balance without any notice.
This happened a lot during the Global Financial Crisis
Oftentimes, they’ll reduce your available credit to what you owe. Bringing your debt-to-credit ratio up to 100%. The result is a much lower score.
You should never carry a balance and pay exorbitant interest rates.
The only reason you should close an account is if you can’t trust yourself to not spend your available credit. 15% of your credit score is attributed to the average age of your credit accounts.
I recently closed a mortgage that was seven years old. That dropped my credit score by 25 points. It’s not the end of the world, but it’s a consequence of closing one mortgage and starting a new account with a different bank. Remember those credit cards you got in college…keep them. They‘re your most valuable cards.
The best time to develop your credit is when you don’t need it. Waiting to improve your credit score too late will lead to higher costs when you’re trying to do most grown-up things. By implementing the three strategies above, you'll be 80% of the way to better credit.