How to go from Good to Excellent Credit for Free?

Question

I looked up my Fico score for the first time in March of this year--it was 766. At that point, I had two credit cards, one that I used for almost everything and a store card that I hardly ever used. The following month, I applied for a margin trading account at my brokerage and it dropped a single point to 765. I have no debt and always pay my bills on time. (I had some unpaid hospital bills around 8 or 9 years ago...not sure if that could still be affecting my credit.)

My bank's website (Bank of America) suggested that a lack of available credit was negatively impacting my score so I signed up for another credit card to get an additional $5000 of credit in addition to the $9400 I already had.

Apparently this was a big mistake because it caused my score to drop to 744 between June and July. Now, the reasons for my low score include "length of time resolving accounts have been established" and "lack of recent installment loan information."

Obviously, there's nothing to do about the first other than to wait.(Patience has never been my strong suit). Regarding the second, I don't see any reason to buy something with an installment loan other than to improve my credit, which I don't think anyone would argue is a rational reason to intentionally take on debt.

Is there anything I can do to raise my score without having to take out a loan with interest? I read somewhere that there is a type of "installment loan" that you pay into over time and get the money back once you've paid a certain amount but I'm not sure if that will work in my situation.

Answer 1

TL;DR: It doesn't matter.

At a point of sufficient credit score, your income is far more important, for loan approval, than your credit score.

Apparently this was a big mistake because it caused my score to drop to 744

Not really, except for the questionability of opening a margin account. A credit score of 744 is sufficient for the best rates.

Credit score algorithms are dynamic and advice that may have been good in years past may not be applicable today. Pay your bills and don't have unnecessary credit, that will lead to your best credit score.

For me, despite not following conventional wisdom, I am "enjoying" the highest credit score of my life. I have closed accounts that are just unnecessary and have done some other things that the experts say I should not do to keep a high credit score.

However, all that doesn't matter. I do not have a need for credit and will likely never have a need beyond my rebate card. I feel like this is also true for you. What difference does it make if you have an 822 or a 744? Probably none. At that point, your income counts more toward loan eligibility.

Answer 2

Patience has never been my strong suit

Unfortunately this is what you need to build up credit. The activities that increase your credit score are paying your bills on time and not using too much of the available credit that you do have. The rest (age of accounts, recent pulls, etc.) are short-term indicators that indicate changes in behavior that will make lenders pause and understand what the reasons behind the events are.

Also keep in mind that your credit score shouldn't run your life. It should be a passive indicator of your financial habits - not something that you actively manipulate.

Is there anything I can do to raise my score without having to take out a loan with interest?

Pay your bills on time, and don't take out more credit than you need. You're already in the "excellent" category, so there's no reason to panic or try to manipulate it. Even if you temporarily dip below, if you need to make a big purchase (house), your loan-to-value and debt/income ratio will be much bigger factors in what interest rate you can get.

As far as the BofA card goes, if you don't need it, cancel it. It might cause a temporary dip in your credit, but it will go away quickly, and you're better off not having credit cards that you don't need.

Answer 3

I can think of one short-term solution: lower your debt-to-credit ratio. Even if you pay off your credit card before the due date, the balance you owe is registered as a debt on your credit score for that statement period. If you pay off your balance before the statement period closes, the amount will be zero.

Debt-to-credit ratio is one of highest impact factors used in computing the credit score.

The dip from the hard pull should be only temporary. Additionally, there are different FICO scoring models that lenders use, which can provide significant variance. Once your score is in the mid 700s, however, that and sufficient income should be sufficient for a prime-rate loan, credit card, or other service for which the credit score is relevant.

Answer 4

Patience is the key here, I hate to say! There are five factors to FICO credit scores:

1. payment history (35%)
2. credit utilization (30%)
3. length of credit history (15%)
4. credit mix (10%)
5. new credit (10%)

Payment history is adversely affected by late payments - so always pay on time, otherwise your report will be haunted for seven years!

Credit utilization has to do with how much of your available credit is currently in use - lower is better, but 0% isn't good either because they want to see that you're using credit. 10% or less is a good goal, and try to keep any single card balance to 30% or less when its statement close date rolls around.

Credit history is based on the average age of all of your accounts, cards or otherwise, the older the better. Don't close either of your other cards (because that would cause your average account age to fall), and make sure to use the store card at least occasionally, because lenders sometimes decide to close unused lines of credit.

Credit mix has to do with the different types of credit you hold and is why your bank's website suggested taking out a loan. It also has to do with the number of accounts overall; I've never found a satisfactory answer for what the sweet spot is, but I suspect it's in the 6-12 range? You wouldn't want to get several new ones at the same time because...

New credit is affected by the credit inquiries (hard pulls) that occur when you apply for new cards or loans. Inquiries stay on your report for two years before falling off. This is almost certainly where your score dropped.

You also mentioned not knowing if some hospital bills are still affecting your score. You'll want to review your credit reports and find out, plus checking your credit reports regularly is a really great habit to get into because errors (and fraud) can and do happen. There are three credit reporting agencies: Experian, Equifax, and TransUnion, and you'll want to review all three. You can get one free report from each of them every year: https://www.usa.gov/credit-reports

It can take a couple of months for a new credit account to show up on your credit report, so your score should recover and go even higher once that happens. Sit tight, as annoying as that is!