Once a month I receive an email from my credit card company that my FICO score is ready for view. I usually open the app to check on my score, just to be aware, and then I don’t look back at the score until the next month. I’ll preface what I’m about to say by telling you I don’t particularly care about my credit score. I’m not planning on borrowing any money. And I hate to break it to you, but a credit score is not a metric you should use to gauge your financial health.
:steps back off soap box:
Like any other month, I open the app to view my score. Except, instead of seeing an increase, I see my score has dropped 43 points. Immediately, I fear fraud on my credit report. I hadn’t operated my financial life any differently in the last 30 days and this huge drop was alarming. I opened up my account summary and there it was… a large outstanding balance. Except, it wasn’t some bogus transaction from a hacker. It was me! In the last month, I made a large (planned) purchase on my card. As that’s not a normal occurrence, I completely forgot to pay off the balance before my statement cut.
For me, it didn’t much matter that my score fell or that it took six months to bring my score back to where it was before the drop. But for many, rebuilding or building your credit plays a vital role in a future purchase.
Pay your bills on time. 35% of your credit score is based on whether or not you pay your bills on time. That’s it. The largest factor impacting your score is whether you make at least your minimum payment on time. Of course, I want you to be able to make more than a minimum payment. But, the minimum is your minimum requirement.
Monitor your "credit utilization." This is the next largest factor in your credit score calculation. In other words, of what’s made available to you, how much are you using? This metric makes up 30% of your credit score calculation. In my case, this is what led to my dramatic score decrease. If your credit card has a limit of $5,000 and your balance is $2,500 your revolving utilization is 50%, not good. In fact, the lower your revolving utilization, the better. Once your revolving utilization falls below about 30% it will no longer negatively impact your score. But more importantly, the lower the balance, the less interest you’ll pay to your credit card company.
There are a few other factors which collectively make up the remaining 35% of your score including: credit history, types of credit in use, and inquiries. Though these are all important components of your score, it can be much more difficult to influence these components of your credit score calculation. For example, your credit history is almost exclusively impacted by the passing of time. There is little we can do to increase our credit scores by way of our credit history.
Again, I don’t really care about my credit score or yours, for that matter. But, if you are attempting to build or rebuild credit for a specific purpose make sure you are diligent in your habits. Keep old accounts open, keep your balances low (at, or near, zero), and make your payments on time.