Lesson 5: Maximize Your Credit Score

Summary:

This chapter focuses on how to get the best credit score you can with your existing credit history by studying the credit reports of people who have 850 (maximum) credit scores
People with 850 credit scores have at least 6 revolving accounts with a very low utilization rate of about 1% (on average)
People with 850 credit scores have at least 5 term-loans (on average)
People with 850 credit scores have a long credit history (10 years or longer)
People with 850 credit scores DO NOT have any negative marks (collections or late payments)
Race, gender, address, bank account balance, employment status, income, etc. do not impact your credit scores

How can you use that information to make your score better?

Pay down any revolving accounts to 1% (some activity is shown to be better than none)
Do not close revolving accounts that are paid in full because you will lose the payment history
Do not pay off (or refinance) any term-loans because you will lose the payment history
Do not open new accounts within 90 days of applying for new credit without being advised to do so by a professional working on your behalf
Consider a pay-for-delete option for any collection accounts (more on this in Lesson 7)
Consider a “Goodwill Deletion” request from any companies that you have late payments with (more on this in Lesson 7)

Wise Credit Management is a free Bible-based class that teaches how credit really works by showing factual information directly from the Credit Bureaus and FICO, and simplifies the subject to show everyone how to build good credit or handle bad credit. The class is fairly comprehensive and focused on getting good credit to qualify for a good mortgage rate and terms. WiseCreditManagement.com is a free community for members to take the class, join local groups (online or in person) for mutual support, and to find local professionals who volunteer to use their skills to assist members to success.

I am not a lawyer or Credit Repair Organization.

Home ownership is the way most Americans build wealth and a lack of education about credit is a huge contributor to the growing “Wealth Gap” in our country. Wise Credit Management is focused on teaching how to get good credit and qualify for a good mortgage rate and terms.

My work is protected by the “fair use” section of U.S. Copyright Act.

Ecclesiastes 3 ~ There is a season and purpose for everything under heaven… a time to plant and a time to reap. ~

2 Corinthians 9:6 ~ Whoever sows generously will reap generously. ~

Galatians 6:9 ~ Let us not grow weary while doing good, for in due season we shall reap if we do not loose heart. ~

Three different books, written by two different authors, with one main theme: Good things take time.

In this lesson we will study the details of how people get to an 850 credit score, and from that knowledge we can get the best understanding of how to maximize your credit score in your situation in your timeframe. My objective in developing and teaching this lesson is not to get you to 850, however we will discuss how you can get the best credit score possible before you make a major purchase (hopefully a home).

Your credit score gets higher when you do the right things over a long period of time. What are the right things? Establish 5 to 11 lines of credit using different types of accounts (term and revolving). Have small revolving account balances that you pay off monthly. And finally, be patient because only time builds history.

According to the myFICO app, FICO® High Achievers (people with close to 850 scores) opened their oldest accounts 25 years ago on average. According to CreditKarma (creditkarma.com/advice/how-i-got-the-highest-credit-score), the average length of credit history for someone with an 850 credit score is 30 years. Remember that 15% of your FICO® Score is based on the length of your credit history. That metric is measured in months of on-time payments and factors in the average age of your accounts, the age of your oldest account and how long it has been since you opened an account. According to the Illustrative FICO Score Scorecard (fico.com/independent/assets/Machine_Learning_and_FICO_Scores-4511WP_EN.pdf) you only get the maximum number of points for an account after it reaches 48 months. So we can extrapolate from this that your newest account needs to be over 4 years old to get to 850. We can also take away from this scorecard that you are penalized for opening a new account.

According to Experian (experian.com/blogs/ask-experian/perfect-scores-who-has-them-and-what-do-they-have-in-common) only 1.2% of all FICO® Scores are 850. Who has an 850 credit score? Are they all “millionaires”? Remember that age, salary, job title and employment are not factors considered in your FICO® Score. In fact, 38% of people who have 850 scores have incomes estimated to be under $75,000. To go even further down the income ladder, about 20% of people with 850 scores have estimated incomes of under $50,000. So you do not have to be a high income earner to have great credit.

According to the same Experian blog, people with 850 scores had an average of 6.4 credit cards compared to the national average of 3.8. The average balance of someone with 850 was $3,000 compared to the national average of $6,445. So, someone with an 850 has more tradelines with lower balances and lower Utilization Ratios. From this we can easily see that as your Utilization Rate goes down, your credit scores go up.

According to myFICO (myfico.com/credit-education/credit-scores/amount-of-debt) a low utilization ratio may have a more positive impact on your FICO® Scores than not using any of your available credit at all (0% utilization).

According to CNBC (cnbc.com/select/perfect-credit-score/) Jim Droske, President of Illinois Credit Services, has an 850 credit score. He has 6 credit cards, the average age of his accounts is almost 11 years, and he has a 1% utilization ratio.

On a different post by Experian (experian.com/blogs/ask-experian/credit-education/score-basics/850-credit-score/) it states that your credit score is affected by your utilization ratio on all accounts in total and on each individual account.

From all these pieces of information we can reasonably conclude that to get the maximum credit score, you should have about 1% utilization on all of your revolving accounts. However, that conclusion may be taking one statement too far. If you are in a position to “experiment” and find out if your score is higher with 1% utilization on all accounts or just one, please feel free to post your results for the Wise Credit Management community to learn from your experience.

Reported Balance & Timing

Remember that your monthly balance is what gets reported to the credit bureaus, not whether or not you pay off your balance every month. So if you have a streaming service charged to one card (~$20 per month), a cell phone charged to another card (~$50 per month) and one tank of gasoline every month charged to your third credit card (~$100 per month), your credit utilization rate will include a balance on each account even if you pay all of them off when you get the monthly statement.

All Zero Except One (AZEO)

There is a common belief among people who pay very close attention to their credit scores that having a low balance on only one credit card will give you the highest credit score. That method is known as the All Zero Except One (AZEO). Speaking as a finance professional (and amateur data scientist), I see some evidence to support that assertion. However, we do not know the exact algorithm and myFICO.com itself says that you don’t need to carry a balance at all to improve your credit (https://www.myfico.com/credit-education/blog/carry-credit-card-balance-myth), however this article was written by a “finance writer”, not The Wise Credit Professional, who is analyzing actual credit scores and coming to data driven conclusions while trying to get you the highest score possible.

In short, everyone’s situation is different. I am in favor of using each credit card for a small expense that you would have whether or not you are trying to improve your credit. Every month your credit card will show a balance, then you should pay off every credit card every month. But you might try AZEO and see if that works best for you. Use your own data and results, and as I stated earlier, please post your results so everyone can learn.

Credit Mix

Another important factor is your credit mix. There are several different types of credit accounts including term loans and revolving credit card accounts. According to the myFICO app, FICO® High Achievers have an average of 11 revolving accounts (credit cards) and 5 installment accounts (home, auto, etc.). It’s also worth noting that Authorized User accounts do not count toward the calculation of the credit mix attribute.

The myFICO.com website also states that it is not necessary to have one of every single account type (credit cards, retail accounts, installment loans, finance company accounts and mortgage loans). Your mix of different credit types is important because it is a factor. However, it is one small factor and it appears as though you do not need to emphasize this factor in your credit history in order to get to 850.

Ten percent of your credit score comes from New Credit, and much of that is from new inquiries. According to myFICO.com, only inquiries from the last 12 months are calculated into the scores but the inquiries remain on your credit for 24 months. We already know that a new account will drop your score and since the Illustrative FICO® Score Scorecard shows that inquiries drop your score, we can reasonably conclude that to get an 850 score you can not have any applications for new credit within the past 12 months. In other words, to get an 850 score, do not apply for new credit.

Late Payments or Derogatory Accounts

Again, according to Experian (experian.com/blogs/ask-experian/credit-education/score-basics/850-credit-score/), 0% of people with 850 credit scores have any late payments. According to the Illustrative FICO Score Scorecard, one late payment could drop your score by 65 points. That impact will reduce over time but could still drop your score by 20 points for 7 years.

At this point, please let me emphasize how important it is to activate Auto Pay on your accounts. One missed payment could impact your credit score for 7 years.

What is the fastest way to increase your credit score? Pay your revolving credit card accounts down to 1% of the credit line. If you are in the process of applying for a mortgage and need a few extra points as soon as possible, you could pay down an account and your mortgage professional could use Rapid Rescore to update your scores. That alone might save you .25% on your mortgage, which could save you thousands of dollars over the life of your mortgage.

How can you get an 850 credit score? The easiest answer I can give is to have about 5 term loans, 6 to 11 revolving accounts with a 1% utilization rate on each account, have a healthy mix of account types, all your accounts need to be over 4 years old with an average of about 10 years and you cannot have a single late payment or derogatory account.

What credit score do you need for the lowest interest rate on a mortgage? According to most pricing models, any middle mortgage score (the median of FICO® 2, 4 & 5) between 780 and 850 will get you the best interest rate.

Maximizing Your Score Before A Major Purchase With Credit

This Lesson was focused on a study of people with 850 credit scores. We used that data to build principles for us to follow when we are simply trying to get the highest credit score possible before a major purchase with credit. For some people who are very interested in getting an 850, this was probably enlightening. But for most people who just want to save the .25% on their mortgage (thousands of dollars over the life of their loan) this lesson was designed to lay out exactly why I tell people very simple things.

1% utilization ratio
Maintain a term loan for credit mix
Don’t pay off term loans early unless a professional advises you to do so
Don’t shut accounts that you paid off (unless you are addicted to spending on credit)
Don’t apply for new accounts within 90 days of applying for a major loan
Get monitoring so you know if anything “pops up” on your credit report that shouldn’t be there (myFICO.com)

Recovering From Disaster

What is the “worst” thing for your credit? Most people think that’s bankruptcy. But if you are drowning in debt for years while trying to work your way out, or worse if you have collection accounts and lawsuits hanging over your head, bankruptcy protection might not be the “worst” thing.

How can you recover after bankruptcy? Go back to Lesson 4 and learn to reestablish your credit.

Is it possible to get a bankruptcy off your credit report prior to 10 years after filing it is supposed to stay on there? Perhaps, but often that takes work from a professional and we are not going to focus on that right now.

Can you buy a home after Chapter 7 Bankruptcy? FHA will approve you in as little as 2 years after bankruptcy as long as you rebuild your credit during that time. See Lesson 4 for step-by-step instructions. You can buy a home while you are in Chapter 13, with the Bankruptcy Court’s permission.

Sometimes it might be difficult to think about building a future when you are going through a very difficult situation. If you are drowning in debt and need help to see the way to dry land, the next few chapters are for you.

Next: Complete the Lesson 5 Quiz (first make sure you completed the Lesson 4 Quiz)