My credit score is 800. It will probably never be a perfect 850, and I don’t particularly care. I also don’t care too much if it goes up 30 points or down 30 points.
Am I crazy? Let’s talk about it.
What is a Credit Score and Why Does It Matter?
I have bad news for you: you’re being spied on.
I don’t mean by Google, or Facebook, or big tech in general—although that’s probably true too.
Your lenders, credit card companies, and even retailers are keeping tabs on what you are doing with your money. Sometimes, it’s to try to figure out more about you so they can market products to you. For instance, Marketers are surprisingly very interested in whether or not you’re pregnant.
Sometimes, they’re just trying to track if it’s a good idea to lend money to you. Your credit, loan and payment history gets reported to the three credit reporting agencies. Information from your credit report goes into calculating your credit score—a three-digit number that’s usually between 300-850.
Having a credit report matters for two key reasons:
- A higher credit score makes you more likely to get approved for a loan or credit card
- A higher credit score makes it more likely you will be offered better credit terms such as a lower interest rate
How is Your Score Calculated?
The precise calculation depends on the company determining your core. But here are the factors they take into account:
The bottom line here is that timely payments are good, late payments or missed payments are bad.
This category is very important.
How much of your available credit are you using?
If your one source of credit is a credit card with a $10,000 limit and you have a $1,000 balance, your utilization is 10%, which is pretty good.
But if your balance was $9,000, your utilization is 90%, which is awful.
This metric is also very important and can be improved either by lowering your balance or by getting a higher credit limit
Credit History Length
This is the average age of your credit accounts.
So if your only source of credit is an account you opened yesterday, that’s not very good.
If you have a credit card that you’ve had for 20 years and another you’ve had for 15 and you’ve been paying your mortgage for 17 years, your average account age is pretty good.
In general, a longer history is better.
The date you opened your oldest and newest accounts is also important.
Do you just have credit cards or do you have a mortgage and a car loan as well?
Believe it or not, having a few different sources of credit makes your score better.
If you’ve recently opened a bunch of accounts, your score won’t like it too much. Same goes if a bunch of people have just pulled your credit with “hard inquiries.”
Good Credit is About Common Sense
Sure, there are a few hacks out there to improve your credit score. For instance, you can call your credit card company and ask them to increase your credit limit (which will improve your utilization). But like most things in life, the basics are what really matter.
You build your score over time by opening a few lines of credit and paying your bills on time every month.
This is the first reason why I don’t really care about my credit score. It might go up or it might go down, but chances are it will stay pretty high because as time passes, evidence piles up that I am reliable at paying my bills.
Sure, my score might take a hit because I haven’t used my oldest credit card in years and the bank that issued it might close the account, but my score will be fine. It might go down temporarily, but it will slowly rebound.
My Score is High Enough
A score of 800 is pretty darn good.
A perfect score of 850 is appealing because, well…it’s perfect. But I really don’t need a perfect score just to serve my vanity.
I already bought a house, which is one of the big reasons why people need a good credit score. Sure, I still open the occasional credit card for the sign up bonus and one day I might want to buy a rental property, but even if my score dips a little I should still be able to get a good interest rate.
Should You Care About Your Credit Score?
The answer is very likely “yes.” Especially if you are about to buy a house or you’re just building your credit.
Once the ball gets rolling, your credit score will more or less take care of itself. But it doesn’t happen overnight.
And before you buy a house, it’s a good idea to stay on top of your credit. Don’t open new accounts, don’t cancel old ones, call your credit card companies to see if they’ll raise your credit limits.
Having a good credit score can help get a good rate on a mortgage, and lower rates on a mortgage can save tens of thousands of dollars over the course of the loan.
Even though I say I don’t care about my score, your credit score is definitely important. The good news is that if you build good credit habits, you need to worry about your score less and less over time.
The credit score wasn’t designed to be hacked. It was designed to improve for people who consistently demonstrate responsible behavior over time.