NEW YORK ( MainStreet) -- 850.
That was the number inexplicably printed on a letter Bank of America sent me along with a notice of approval for a new credit card I wanted. It’s the highest score you can get on a metric that banks and other lenders use to determine if you are likely to repay the money you borrow.
You won't get a mortgage or a credit card without a good score, which, according to Susie Henson, a spokesperson for Experian, one of the three credit bureaus in the U.S. that track your credit score, is meant to answer this question:
“What is the likelihood that this consumer is going to go delinquent on this debt within the next 24 months?”
Not only was I credit worthy, according to Experian, the bureau Bank of America used, I had perfect credit.
How did I get it?
It’s actually quite simple, and anyone can do it: Don’t borrow too much money too often and pay all your bills on time, for a long time.
There’s no trick or secret to perfect credit. You just have to prove to the credit agencies that you’re likely to pay your bills when you are loaned money. You prove this by passing a series of tests they have determined are good proxies for whether you will do so.
Perfect Is Relative
Your credit score is a lot like your SAT score: it can fall within a range of numbers; the top number is “perfect,” and everything below is less than.
Unlike the SATs, a perfect score won’t help you much more than a merely “pretty good” score.
“No bank has a product or offering that is exclusive to someone with an 850,” said John Ulzheimer, president of consumer education at CreditSesame.com, a website that offers consumers a free credit score. “Most banks will offer someone with a 760 or higher the best published interest rates.”
So, your “perfect” credit score may not need to be a pristine 850.
“The perfect score is the score the lender wants to see to give you the credit you are seeking at the rates you are looking for,” said Tom Quinn, vice president of product management at FICO, one of the two firms that develops the credit score algorithms.
If you have above a 780, or even 760, you should be able to get the loan you need with the terms you want, experts said.
Juggling the Variables...
Your credit score changes all the time, and you could even have two different credit scores at the same time, depending on what “model” was used (there are several), for what purpose (a credit card application or home loan, for instance) and what “scorecard” a bank used within that model and purpose.
A model is the specifics of the algorithm used to build your score; for instance, how much to consider that mound of student loan debt versus a missed credit card payment.
VantageScore, which is on its third iteration of its formula, and FICO, which is testing its ninth, are two firms that build and update these algorithms.
“The weightings are different,” said Jeff Richardson, a spokesperson at VantageScore. “As things change, a credit scoring model needs to be updated. That’s a reflection of keeping up with the changing credit environment and the product mix that’s out there.”
For instance, in the past, student loans weren’t as prevalent as they are now, Richardson said, and credit scoring models have changed to reflect that.
Within these models, VantageScore and FICO create slightly tweaked custom versions for each lender. There are versions for getting a credit card that are slightly different than for getting a car loan. A bank issuing a credit card wants the most accurate information possible on whether a customer will pay his bills -- not whether he will pay his mortgage.
The lenders stratify customers with a third level of granularity: scorecards. These are further adjustments to the model depending on the kind of borrower. Is it an unemployed 24-year-old woman living in suburb of a small city? Or, like me, is it an employed 33-year-old man living in a large city? There are 12 scorecards, one for each type of borrower, said FICO’s Quinn.
A Bank of America spokesperson confirmed that the bank used the FICO 8 model to determine my credit score but wouldn’t tell me whether it used the off-the-shelf version or one geared toward issuing me a credit card. She also wouldn’t tell me what kind of scorecard the bank used for me. My score could have come out differently had I gone to a lender that used VantageScore, rather than FICO, and if I had been applying for a car loan rather than a credit card – or if I was a different kind of person.
And it actually gets a lot more complicated. Your credit score can change day-to-day, depending on another long list of factors that I’ll touch on below.
But what’s really important to remember when thinking about your credit score is that there are many variables beyond your control that can swing it a few points one way or another, and that you shouldn’t worry too much about them.
Here's what you should worry about.
There are five main factors that go into determining your credit score: payment history, credit indebtedness, time in file, pursuit of new credit and credit use/mix of credit.
What it all boils down to is this: Lenders trying to figure out whether you’ll pay them back in a timely fashion if they lend you money.
Beyond the specific factors, there are three important things you should know:
- 1. Credit agencies only go back seven years into your credit history, so if you missed a payment eight years ago, it won’t show up on your report, except…
- 2. If you’ve filed for bankruptcy, this will take ten years to fall off your report.
- 3. The other exception to the seven-year rule is student loans. If you become delinquent, it never drops off your credit report. If you wish to have that blight removed, you must pay the loan back in full and then make sure that the collection agency notifies the credit bureaus that you have done so, according to CreditSesame.com’s Ulzheimer.
Your payment history is obviously the most important indicator and counts for 35% of your score. If you always pay all your bills, it’s a good indication that you’ll pay your future bills. According to Quinn, the model basically asks, “Has this consumer missed payments in the past? If he has, how many, how recent and how severe?”
Missed payments count against you, but if they were small and a long time ago, then not that much. The easy solution: Pay all your bills on time.
Credit indebtedness looks at what kind of debts you currently have and how much they are – and it’s worth 30% of your score.
There are two kinds of credit – installment debt and revolving debt. The former is things like student loans and your mortgage, big lump sums that you borrowed and are slowly paying off. The latter is debt you incur on a regular basis, like when you use your credit card.
Lenders want to see that you have a manageable amount of debt and that you use it responsibly. If you have a $300,000 mortgage and $40,000 in student loans and a $10,000 credit limit on a credit card with a balance of $7,000, that’s a heavy debt load and will result in a lower score.
“How consumers use their revolving credit is very predictive,” said Quinn.
Keep your debt at manageable levels; if you have a $10,000 limit on your credit card, don’t feel like you need to hit it – stay well below it, ideally not charging more than 30% of your limit before paying it off, said experts.
Some experts say it’s good for your credit to carry a balance on your credit card – that is, not pay the bill off in full every month. That's wrong and it costs you a ton of money in interest charges. The rates credit card companies charge are astronomical -- as much as 79.9% -- and those carried balances can add up to huge fees. I’ve never carried a balance, and I have perfect credit.
One factor to note is that the time of the month your credit report is pulled can affect your score depending on what type of balance you are carrying. If it’s pulled the day before you pay your bill and you are carrying a high balance, your report – and score – will look very different than if it’s pulled the day after you pay.
Time in file is how long you’ve had credit and is worth 15% of your score. This is determined by how long you’ve had credit (when you got your first credit card or loan) and the average age of all your accounts.
Parents who help their children get a credit card at the earliest possible date are helping them with this category – but these efforts can backfire if the child (or parent) uses the card in ways that impact the more important first two factors.
Pursuit of new credit is how often you try to get a new credit card or loan, and it’s worth 10% of your score. If you go from bank to bank, trying to get new credit cards, that will hurt your score. However, the credit algorithm understands if you are, for instance, shopping for a mortgage; over a short period of time, the small amount of harm you’ve done to your credit by trying to get a mortgage at a half dozen different banks will go away.
The remedy here is simple: Don’t apply for lots of credit. When you get some, make it last.
Credit use/mix of credit is a measure of whether you use only installment credit or revolving credit and is worth 10% of your score. The higher-scoring borrowers have a mix of credit. In other words, diversify the type of credit you use.
If you only have a credit card but not any installment credit, your score here will suffer, but it’s of such little importance that borrowing more just to increase it is almost certainly a waste of time and money.
What I Did Right...
So, how did I get my 850 score? I didn’t borrow too much money, too often and paid all my bills on time, for a long time.
I got my first credit card in 2001. That helped me establish a long credit history. While I’ve never missed a payment, my credit report only lists my month-to-month payments from 2008 through 2015 – seven years. In 2011, I got another credit card – I’ll admit, for the points – and made every payment from then until now. In late 2014, I got a credit card at a J. Crew store when buying a suit to collect a huge discount on the purchase. I paid the bill that month and immediately cancelled the card.
With all three cards, I’ve never gone above – or even close to borrowing 30% of my limit.
In 2013, I borrowed $351,000 to buy an apartment. I have since made every monthly mortgage payment on time.
And that’s it, the sum total of my credit history. As you can see, I’ve not borrowed too much and always paid my bills on time. Simple as that.
One last piece of advice if you value your credit score: Live within your means.
I have paid my credit card bills on time by setting up automatic payments from my checking account. The credit card company automatically deducts the full amount from my checking account on the last day I can pay it without carrying a balance and owing interest and penalties. That means that my checking account has to have enough money in it to pay the bill. If I spent more money than I made, I would overdraw my checking account, which can be expensive, depending on your bank.
This knowledge keeps my spending in line. I highly recommend this arrangement. It requires you to keep track of your spending but still affords you the freedom, benefits and safety net of a credit card.