Dec 11, 20224 min read

Building a great FICO credit score

A recent article blew my mind. Our first black Gen Z congressman-elect has bad credit that kept him from getting an apartment in DC. WOW, the cycle of harm continues.

Building a credit score above 800 requires knowledge. There are financial things that are not preventable, but many elements of bad credit are preventable.

Let’s explore ways to improve your FICA credit score. We will look at the criteria used by the credit bureaus. We will look at some do’s & don’ts and conclude with life improving actions that anyone can implement.

“Too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like”

So, here are 5 key things we will focus on

The categories that make up a credit score.
Understand how credit reports are used.
The do’s & don’t of credit management.
Protecting yourself from scams and fraud.
Top actions to protect your credit and identity.

What are the categories that make up a FICA credit score?

Payment history
Amounts owed
Length of credit history
Credit mix
New credit

Payment history (35%)

The first thing any lender wants to know is whether you've paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit. This is the most important factor in a FICO Score. Be sure to keep your accounts in good standing to build a healthy history.

Learn more about payment history

Amounts owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended. Banks can interpret this to mean that you are at a higher risk of defaulting.

Learn more about amounts owed

Length of credit history (15%)

In general, a longer credit history will increase your FICO Scores. However, even people who haven't been using credit for long may have high FICO Scores, depending on how the rest of their report looks.

Your FICO Scores consider:

How long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
How long specific credit accounts have been established
How long it has been since you used certain accounts

Learn more about length of credit history

Credit mix (10%)

FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each.

Learn more about credit mix

New credit (10%)

Research shows that opening several credit accounts in a short amount of time represents a greater risk, especially for people who don't have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.

Learn more about new credit

“Parents need to change their approach for their kids' benefit. Don’t just give them gifts, give them knowledge”

Differences with FICA and Vantage credit scores

The percent of your credit amount used is critical and called utilization. The target is 30% of your available credit limit. We calculate the utilization rate by dividing the balance owed by the credit limit.

It looks like this:

Card A - ($600/$1000 = .60, or 60%) which is 30% over our target.

Card B - ($300/$2500 = .12, or 12%) which is great.

How are credit reports used?

Credit reports are used to determine who get credit approval. They are also used for apartment applications, hiring decisions, and getting into college. Poor to fair credit negatively impacts 33% of Americans. That’s 1 in every 3 people will have a harder time getting an apartment, credit card or a job. Nearly half of Americans have very good to excellent credit. They get the 0% intro APR and get the best apartments.

So, what are their secrets and how do we get that advantage?

Action Plan - Do’s and don’t of credit management

Many credit card websites let you do ‘what if’ scenarios to see the impact of an action. How much damage will I do if I open a new credit card account? What if I take on more debt? The questions can be modeled using their impact tool so give them a try.

In Summary, what can I do to protect myself?

Scam artists and fraudsters steal billions of dollars each year. They know many people are not managing their credit well and don’t look at their credit reports. Someone in America is a victim of identity theft every 3 seconds.

Here are 5 big actions that anyone can take that will help.

Use a credit card or bank app to lock your credit and debit cards when not in use. This is easy and only takes seconds with a button.
Use “Bill Pay” features at your bank to pay bills monthly. This eliminates checks in your mailbox that can be stolen and ‘washed’ by crooks.
Review your credit report regularly. Each of the major credit bureaus will give you a free report annually.
Challenge negative items on your credit report. Credit bureaus are required to ask creditors for proof and will remove an item if they don’t hear back quickly. Most creditors are over-worked and too busy to respond, so you may find a lot of items being removed that will immediately improve your score
The last big action, freeze your credit with the major bureaus. No one can open a new account when your credit is frozen. This stops unknown parties from impacting your credit report.

Remember, building a great credit score is about having the knowledge, avoiding mistakes, and implementing the common actions that will increase your score. Financial institutions have developed an array of products and services, such as secured credit cards and credit builder loans, tailored to helping consumers establish and build credit. See an example at Chime.com.