It was one of the most intriguing calls I’ve ever received. “Hi, Ken. I’ve read some of your writing on personal finance. I just found out I have a perfect credit score, and thought you might like to know how I did it.”
Frank (not his real name) had just bought a car. When he applied for financing, the salesman reviewed Frank’s credit report and said could hardly believe what he saw. “I’ve never seen an 850 before,” he said. It’s the highest score possible from that credit reporting company.
The exact methodology of credit scoring is a closely-guarded secret. Some aspects are well known, while others can only be guessed at.
But even if we can’t be sure exactly how the system works, we can look to the example of someone who has a perfect credit score. Frank doesn’t have any inside information on the scoring system, but he believes these factors have helped him.
- Frank only applies for credit when absolutely necessary. If he can pay for a purchase with cash, he does. Then there’s no bill to pay off.
- Frank asks himself if what he’s about to buy on credit is something he really needs. If he doesn’t need it, he doesn’t buy it on credit. Very often, wants can wait.
- Frank looks for less expensive alternatives to what he wants to buy. The car he just bought was used. Frank saved about half the purchase price, compared with buying a new car.
- Frank never misses a loan payment. He’s never late, and he always pays at least a little more than the minimum.
- When he can, Frank pays off his loans early. Even if the lender charges an early termination fee, Frank figures that he saves money by avoiding future interest charges.
- Frank checks his credit history annually, so he can have the credit reporting agencies correct any errors.
Frank does one more thing. He closes old, unused credit accounts. Many commentators advise against this, because a longer history of active accounts tends to improve your score. Also, the closer you are to being maxed out, the worse your score tends to be. The more credit available, the farther you are from being maxed out.
But it is possible to have too much available credit. In addition, having unused open accounts leaves you more vulnerable to identity theft. But those who understand credit scores note that account longevity is a factor. They often recommend you keep your oldest account active, to enhance your credit score. But for any account, old or new, active or dormant, watch it carefully for signs of fraudulent use.
Frank wasn’t striving for a perfect credit score. It just happened as a natural consequence of his good habits.
If you’ve investigated how to improve your credit score, there’s not much that’s surprising about Frank’s experience. Some of these ideas are pretty simple. But if that’s the case, I have just one question:
Shouldn’t all of us have perfect credit scores?