Do you pride yourself on having a good credit score? In the world of credit, there’s good, and then there’s excellent. Even if you are doing most things right when it comes to watching out for your score, there are several lesser known ways to maintain what you have and take your credit to the next level.

Understanding how your credit score is calculated is an important place to start. Six basic credit factors go into calculating this score. While all factors matter, some affect your score more than others. From roughly highest impact to lowest, these factors are:

  1. Derogatory marks
  2. Payment history
  3. Credit card utilization
  4. Age of credit history
  5. Hard inquiries
  6. Total accounts

Below is an explanation of each category and strategies you can employ to improve your score.

Derogatory Marks

The category that most affects your credit score is derogatory marks. A user receives derogatory marks by missing a payment, having outstanding payments go to collection, or declaring bankruptcy. One area that can trip up even the savviest is medical bills. It’s not unheard of for people to discover they have outstanding balances on medical bills they didn’t know existed or to not pay at least the minimum payment on a disputed medical bill.

Strategies:

  • Regularly check your credit score so you don’t receive any unwelcome surprises.
  • Never miss a payment by setting up automatic payments, even if it’s just for the minimum.
  • Even if you want to dispute a charge, still make a small payment on the bill to keep it in good standing so your score will not be negatively affected.
  • If necessary, you can send a delete letter to negotiate to have negative information taken out of your credit report (more information can be found here).

Payment History

This category has a large impact on your score but is easy to manage—make your credit card or consumer loan payments on time, at all times. There is very little margin for error in this category; anything less than 99% payment history is not considered excellent and anything under 97% is considered bad in the world of credit. This means that, especially for someone opening a first credit card, one late payment can greatly impact the score due to the limited number of payments. The more you use your credit cards, make your student loan payments, and complete any other monthly payments, the easier it is to keep your percentage high.

Strategies:

  • To get your percentage up, use more credit cards and pay them off every month.
  • Always set up automatic payments, even if it’s just for the minimum. This avoids human error. One specific strategy that works for some is to set recurring payments to a minimum amount, then set a reminder to change the amount of the payment (or just make an extra payment) once you have confirmed available funds.

Credit Card Utilization

This is the percentage use of your available credit. If your credit card maximum is $10,000 and your balance is $600, that’s 6%. This is only in relation to credit card balances, not loans or mortgages. You should aim to be below 30% utilization to be considered excellent in this area.

Many people pay off their monthly balance and consider their work done. Keep in mind that your credit card utilization percentage will change based on when the credit card report is run. If you pay your bill at the end of month but the report is run on the 25th, you could still have a high credit card utilization.

Strategies:

  • Obtain a handful of cards with high credit limits and maintain low balances.
  • Always accept more credit when your credit card company offers or call to request a higher maximum.
  • Make more than one payment per month.
  • Rule of thumb: low balance, high limit.

Age of Credit History

This is a category that is hard to influence and is best managed with patience. Your credit age or length is calculated by averaging the age of all accounts in your name. For example, if you have 11 cards: one that you have had for 30 years and ten new cards you have had for just two years each, the average age would be 4.5 years. The higher the age, the better your score in this area. With an average of 7 years or more, your score will be considered excellent. If an account is closed, it will be counted if it still appears on your credit history, which goes back ten years.

Strategies:

  • Don’t apply for new credit cards or other debt unless you really need it.
  • Don’t close old accounts if they are not charging you yearly fees.

Hard Inquiries

Hard inquiries, when a financial institution checks your credit to make a lending decision, negatively impact your credit score. This could happen when you apply for a new credit card, a car loan, or other lines of credit. Although they typically fall off after two years, having too many can take a big toll on your score.
But in order to build good or excellent credit, you need to apply for credit. Thus, it is necessary to experience hard inquiries to build credit (you have to have extended credit in order to prove that you can be responsible with credit, and thus earn a high credit score). Balance credit inquiries with the other factors discussed here in a way that makes sense. Keep in mind that obtaining a free credit report on a website like Credit Karma is considered a soft inquiry, so it doesn’t affect your score.

Strategies:

  • A good rule of thumb is to not apply for more than one new credit card or loan per year.
  • Once you have excellent credit, don’t apply for a new type of credit unless you really need it.

Total Accounts

This number refers to the total number of accounts an individual has, open or closed. Typically, if you have opened more than ten accounts in your entire adult life, that is considered excellent in terms of credit. Student loans contribute to this—if you have 16 student loans, each account counts towards your total number of accounts.
If you opened a credit card but no longer use it, don’t close it if you aren’t getting charged for it. Closing an old card also reduces the amount of credit that comes with that card, which will affect your total available credit and thus, your credit utilization percentage. However, if your total card balances only make up a small percentage of your available credit, then closing a credit card wouldn’t change your overall utilization percentage significantly if the card is removed from the scoring equation. And, as discussed above, closing a card with a longer history will cause the age of your credit history to decrease.

If you don’t use a credit card for a while, it may close on you automatically (although, the credit card issuer will likely reach out to you a few times before they close it, letting you know that you should use the card soon otherwise it will be closed). This could negatively affect your credit, but not in the way many people expect. Contrary to popular belief, this is not an automatic derogatory mark against you. In fact, a closed card is considered a closed card no matter the reason it was closed. But just as when you choose to close a credit card, having a card closed on you can still negatively affect your credit score by reducing your available credit or the age of your credit history.

If trying to improve your credit in this area, it is generally to your advantage to keep more accounts open. Short term, it may hurt your credit because of the hard inquiries, but after the inquiries fall off, you would have a healthy number of accounts and the age of credit will only get better with time.

Strategies:

  • Aim for a total number of accounts above 10.
  • Don’t forget to balance this by limiting the number of hard inquiries—remember that every time you apply for a new credit, it affects your score.
  • Avoid canceling credit cards with high credit limits or that you have had for a long time if they don’t have high annual fees.

Main Takeaways

Even if you think you have good credit, still check your score regularly. Using a site like Credit Karma prompts a soft inquiry, not a hard inquiry, so you can keep on top of your score and the factors that affect it. Make sure to set up automatic payments, even if it’s just for the minimum. Even if you aren’t concerned about being able to pay off your bill, it’s still easy to forget and your credit score will pay the price.

There is give and take among all the factors discussed above. Although you need credit to have good credit, carefully consider how each area affects the others in order to ensure that you continue to build and maintain the best credit possible.

 

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
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This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2019 Wealthspire Advisors

Crystal Wipperfurth, CFP®, CRPC®

Crystal is a wealth advisor in our Madison, Wisconsin office.