Welcome to the 50th post at Cash Chronicles!
Every once in a while, I check my credit to make sure everything is in order. As of late, I probably have one of the highest scores I have ever had in my life and it took me a while to understand the system and get to this point. I’d like to talk about some of my successes and pitfalls that I have taken on the journey to the 790 credit score.
Before that, I just want to put 790 into perspective. As of 2017, the average credit score in the US was 700, at the tail end of the Great Recession it was 686. This speaks to the low delinquency rates currently seen with the recovery that has ensued after the recession. 750 to 799 is considered very good credit and 800-850 is considered exceptional credit. Despite the term exceptional about 20% of Americans have a credit score of 800-850. The chart below gives an overview of where Americans stand when it comes to their credit score.
Source: Motley Fool
Ok in that sense, I guess I shouldn’t be too excited because my score really only puts me in the top 40% or so. For a credit soaked millennial though, a 790 score seems like something of a win given that so many of us are drowning in debt and unable to afford many of the same things our parents were at the same age.
Why It Took a While to Get Here
Growing up with tight-fisted parents, I was coached to understand that a loan is a loan, and you always have to pay it back. Whether this was a credit card or a home loan or just a loan from a friend until payday. For that reason, I didn’t see the need for a credit card or really any credit for that reason. Why borrow money I don’t have?
Armed with this rationale, I coasted along for much of my young adulthood, relying on roommates to have good credit for apartments, buying everything with cash and paying any smaller bills I had like a cell phone, on time.
However, when I got to a point where I had to get my own apartment in my own name when I moved for graduate school, the management company of the building I wanted to rent from gave me a funny look and said “you’re 23 and you have no credit?” Apparently, those cell phone bills and the past rent paid didn’t really matter because I had never had a credit card.
So even though he was nice enough to approve me, I went about building my credit. Initially it was very limited simply because I had no history. A $500 limit for my first card.
I started to realize the advantage of credit though for smoothing out my payment cycles and that as long as I didn’t carry a balance and got a card without any annual fees, it wasn’t that different from using cash. The only difference was that I was building a solid credit history instead of just using my debit card.
This produced a score in the low 700’s for many years. I had no reason for a big credit line. I even took out mortgages, first for a primary home and then for an investment property. Despite all this and years of on time payments, my score still settled around the low 700’s.
What Brought it Down
Two things happened that really changed my score after many years in the low 700’s.
The first was that I missed a payment on one of my cards. The payment was for some subscription that was probably to a newspaper or magazine that couldn’t have been more than $15. I forgot to put it on auto-pay and the account it was linked to one of my accounts that I don’t check very often.
That one missed payment ended up dropping into the 30 days or more overdue bucket by the bank and the bank notified the credit agencies. My score dropped by more than 50 points. When I applied for a refinance of my home they mentioned just missing one payment was almost as bad as going bankrupt in the sense that it screwed you up for so long after it happened.
That is when I learned of the high impact versus low impact items. Always make sure you take care of high impact items like paying cards and mortgages on time. Even if it’s a few days late it’s better than letting it slide for 30 days because then it will really impact your credit significantly. You can see the breakdown of what is low, medium and high impact here in a screenshot from Credit Karma:
Source: Credit Karma
To be clear, that missed payment was like 6-7 years ago! Apparently it drops off your credit after 7 years (the same time it takes a bankruptcy to come off of your credit) so I should be able to see it come off soon but it’s a costly mistake. I still make it into the green though because I am at 99% of on time payments, any lower than 99% and I would be knocked down to a lower score.
Source: Credit Karma
What Brought it Up
The other item I noticed, and which you can see is still yellow for me, is my credit age. This is like a weighted average of the amount of credit you have versus how long it has been outstanding. In other words, if you have credit of $3,000 that has been available for 5 years but all of the sudden get a new card with a $24,000 line of credit this will shorten your credit history timeline significantly because the time you have had the majority of your credit is much shorter.
Source: Credit Karma
Looks like I need another year and a half of aging to get me up there, maybe to above 800?
The other item keeping me below the 750 mark was the number of accounts. Apparently if you have less than 10 credit accounts then it’s likely you won’t get above the 750 mark. I only exceeded 750 when I started to fly more for work and take advantage of airline miles credit cards. Although there is a fee associated with these cards, the travel benefit they would grant me outweighed the cost after I did the math so I signed up for a couple in the past few years. The main advantage to these is that I was able to take advantage of some exceptional sign up bonus miles offers.
Source: Credit Karma
So far I have 7 credit cards but only 3 of which have any fees. I make sure the 3 I pay for are the low fee options, not the Amex $450 platinum or gold cards that are out there. That, with my two mortgages and the place I rent, thanks to www.payyourrent.com gives me 10 accounts, just enough to make it over the hurdle.
After adding up the size of the lines I had acquired over the years I was surprised to see that I had over $100,000 in lines from credit cards.Needless to say, that is way more than I will ever need, although a big line did come in handy for my wedding, which I was able to pay entirely on one card and get a free trip for my family out of it.
Conclusion
So the big factors that determine pushing up your credit score above 750 are the following:
- On time payments – never ever miss a payment or it will be with you for 7 years!
- Number of accounts – You need at least 10 to significantly bump up your score. The good thing is innovative websites are helping you track your history better through things like lying your rent.
- Age of Accounts – The bigger you have had longer the better.
- Low Usage of the Accounts You Have – You have to pay it back, look at credit cards as free short term loans as long as you pay off the balance monthly you will be fine. Never draw down a large percentage of your line, you will be negatively impacted.