Mastering Your Credit Score

Mastering Your Credit Score

Whether you are aware or not, you have a credit score. It is a 3-digit number that is used by credit-based companies (credit card companies, lenders, etc) that determines your credit worthiness. This number goes up and down depending on your various factors of your financial profile and the higher the number is, the better. Many people don't think about their credit score until they need it for a financial transaction. However, it is important to be proactive about building a strong credit score foundation. I would like to encourage those who have not really planned out how they want to utilize their credit score in the future to take action in 2023 as a goal. In this post, I will go into detail about how credit scores are calculated and what you can do today to take control of it and master it.

Credit Reporting Agencies

Before we get into how to master your credit score, let's first take a look at how the system works. When you want to deal with your credit score, you will often come across these three names:

These are the 3 main credit reporting agencies in the United States who are responsible for collecting data about your credit history and sharing it with companies that have a need for this information.

When companies have data related to your credit, they will typically* submit that information to Equifax, Experian, or TransUnion. The data can include:

  • Credit account information, including payment history, balance of an account, when the account was opened, etc
  • Debt collections
  • Bankruptcies
*Keep in mind that creditors are not legally obliged to report at all. This is usually not favorable if you have good credit data with them. When dealing with well known creditors such as American Express and Chase, your credit data will be reported. For newer companies or lesser known ones, double check if they report your credit data or not.

Credit Scoring Models

Currently, the most commonly used credit scoring model for lenders and card issuers is FICO, but you will see VantageScore come up too especially with free credit health check tools. While VantageScore is used less now, it is gaining some market share and it is still helpful in gauging your overall credit health. Improving one of these scores will usually improve the other since the models look at the similar categories of data. Here is a breakdown of two scoring models:

VantageScore 3.0 Credit score ranges

Credit score ranges Rating
300-600 Poor
601-660 Fair
661-780 Good
781-850 Excellent

VantageScore scoring model categories

Category Influence
Payment history extremely influential
Age and type of credit highly influential
Percentage of credit limit used highly influential
Total balances and debt moderately influential
Recent credit behavior and inquiries less influential
Available credit less influential

FICO 8 and 9 Credit score ranges

Credit score ranges Rating
300-579 Poor
580-669 Fair
670-739 Good
740-799 Very good
800-855 Exception
FICO has a different credit score ranges for specific industries such as auto lenders and credit card issuers. The difference is that the Poor rating is 250-579 instead of 300-579.

FICO model categories

Categories Influence
Payment history 35%
Amounts owed 30%
Length of credit history 15%
New credit (inquiries) 10%
Credit mix 10%

Steps to Master Your Credit Score

Step 1: Make Payments on Time

The highest weighted category for both FICO and VantageScore is your payment history so it is extremely important that you first and foremost make your minimum payments on time. Anything aside from that will not have as much impact. If possible, pay off your statement balance (NOT current balance) so you do not accrue interest. While interest charges do not impact your credit score, it is going to negatively impact your personal financial health.

The statement balance represents your total charges up to your previous billing cycle. Your current balance represents your total charges up to your current billing cycle. Paying your current balance can affect your next balance report that gets sent to credit reporting agencies. If you pay off your entire balance, your next report may show up as 0% credit utilization in the billing cycle. From a reporting perspective, it will seem as if you have not used the credit at all which will impact your credit score. Credit reporting agencies look for low credit utilization not zero credit utilization.

Step 2: Sign Up for Free Credit Health Checks

Always stay on top of your credit score. The best way is to sign-up for tools that provide free real-time credit scores. You should get access to either your VantageScore and FICO credit score so you can monitor it on a routinely basis.

Before signing up for a fancy new app or website that offers free credit scores, you may already have access to tools from your pre-existing credit card accounts. Here is a list of some of the main card issuers that provide free credit score tools:

Card Issuer Scoring Model Credit Bureau
American Express VantageScore 3.0 TransUnion
Bank of America FICO Score 8 TransUnion
Capital One VantageScore 3.0 TransUnion
Chase VantageScore 3.0 Experian
Citi FICO Score 8 Equifax
Discover FICO Score 8 TransUnion
U.S Bank VantageScore 3.0 Experian
Wells Fargo FICO Score 9 Experian

If you do not have access to any free credit score tools, I recommend using Credit Karma which provides the VantageScore 3.0 credit score for free from both Equifax and TransUnion. Their UI is very easy to use and their reporting is more comprehensive compared to the card issuer tools. All these tools do soft pulls to get your data so you will not have any impact to your credit score.

Step 3: Build A Strong Credit Age Foundation

The most time-consuming category to make improvements on your credit age (length of credit history). Because of this, it is important to plan ahead on what possible credit needs you may have in the future. Here is a list of common ones:

  • Getting a mortgage for a house
  • Getting an auto loan for a car
  • Getting a new credit card for a big purchase (to take advantage of spend requirements for welcome bonuses and save money)
  • Getting a personal loan for home improvements

Each new credit-based product on your credit report will lower your credit age. To minimize the impact, I recommend opening at least two credit-based accounts you plan to have for 10+ years. I recommend more than two if you think you will get more into real estate investing or credit card churning.

FICO considers closed accounts when calculating credit age. VantageScore only considers open accounts. In general, it's better to keep accounts open when possible.

Step 4: Increase Your Credit Limit

If you have credit cards, you can occasionally increase your credit limit. Having a higher available credit will improve your percentage of credit limit used (VantageScore) and amounts used (FICO) categories. Here are ways you can increase your credit limit:

  • Keep your annual income profile updated on your card issuer accounts. They will occasionally raise your credit limit if your income increases.
  • Some card issuers require a manual request to raise the credit limit. When you are not looking to apply for any new credit-based product in the next 6 months, consider applying for credit limit increases across all your credit cards where you need to manually request a credit limit increase. I recommend doing all the requests within a 14-day window so the hard inquiry impact is minimized.
  • Avoid closing accounts. If you are not planning on using an account anymore, try to keep it if you can. Closing accounts will lower your overall credit limit which will cause your credit utilization rate to increase and impact your credit score.

Final Thoughts

Your credit score is your biggest asset in the world of borrowing. Having an excellent credit score will open doors on the best deals for credit cards and lending products on the market. It is better to be prepared in case you want to take advantage of credit-based products later. I recommend at least starting off with no annual fee credit cards if you are new as they make an excellent savings tool when used properly.

Hope this article has helped given you a better plan on managing your credit score in 2023! If you enjoyed reading this post, please consider subscribing to Pocket Finance Club to keep up with the latest financial news and tools to improve your pocket. We have a Twitter account and a Facebook page. We are also now sending out newsletters to members for posts going forward.