Credit Score

Building your credit score is important. As stupid and boring as this sounds, it is sort of an important score you get that will determine how you will be treated in the financial sector. There are usually four things they consider in determining your score:

1. Payment history

2. Average account history

3. Credit utilization

4. Recent hard inquiries

 

Payment history

This is quite intuitive. Don’t miss payments - well, at least try to make the minimum payment.

 

Average account history

This is sort of weird, it’s the `average’ account history, meaning that it is the average age of all your credit cards and loans. More on this later.

 

Credit utilization

This part is basically how much credit you have against how much debt you have. To clarify, `credit’ is the amount of money you can borrow, thus `credit limit’ is the maximum amount of money you can borrow. `debt’ is the actual amount of money you borrowed. For example, if I had a credit card with a $10,000 limit, and have $1,000 unpaid balance, I’d have a credit utilization of 10%. You want this generally low at all times.

 

Recent hard inquiries

This is how many inquiries you had for the last 12 months. Generally, if you apply for credit cards or big loans, you’d have a hard inquiry occur. You want this generally low. So before you take out a big loan (like a home mortgage), you want to stop applying for credit cards for a while.

 

Given these metrics for your credit score, here are the general recommendations:

1. Keep old accounts

2. Keep a high credit limit

3. Pay off your debts

4. Don’t apply for (`get’) too many credit cards before a major loan application

 

It might sound sort of oxymoronic, but basically what you need to have is a lot of old accounts with high credit limits, and not have any balance on them. So the general suggestion is to have the ability to be in debt, but don’t actually be in debt. I made the mistake of getting credit cards, getting the welcome bonus, and cancelling them. However, I think the best way to do it is to get the welcome bonus, and `downgrade’ your card to a card without an annual fee. Usually, premium credit cards would have a `downgraded’ version of themselves. For example, the capital one Venture card has a $99 annual fee, but a generous welcome bonus and rewards program. If you think you `sucked everything out’ of the card, then you can downgrade the card to capital one VentureOne, which is a similar card but without an annual fee. This way you get to keep your credit history.

 

There are a ton of ways one can do this, and there are thousands of youtube videos explaining this in depth, and I suggest you check them out if you need a good credit score. But I wrote the general idea (seemingly intuitive.. right?). Also, the key is patience. It’s not something that you should worry about every day, but also not something that you should neglect for years. I’d suggest checking nice websites like credit karma once every couple of months or so.