“Small Steps, Big Gains: A Practical Guide to Building and Maintaining Your Credit Score”

This week’s insight lends a different perspective on building and maintaining your credit score.

The new year is of course fraught with attempts (some full-bore, some half-hearted) to improve one’s life. “Quitter’s Day” has come and gone, the day in which most people on average give up on their New Year’s resolutions, but we all know that improvements are not about making radical life changes. Rather, small and consistent tweaks for the better are what lead to long-term positive results; that goes for your health, wealth, and happiness.

A common early-year aspiration is to bulk up a credit score. Getting back to personal finance basics, your credit score is a number that estimates your worthiness in the eyes of a lender. The higher the score, the lower the interest rate you can get on major purchases like a home or vehicle. It’s even a major determinant for your home and auto insurance premiums. A company called FICO (formerly Fair, Isaac, and Company) is the arbiter of your score, and they look at a range of factors to arrive at a number (between 300 and 850).

The two most important categories to get right are making payments on time and not using up more than, say, 30% of your available credit on each account. Together, those metrics comprise about two-thirds of your FICO score. Length of credit history, types of credit used, and how often you apply for new credit make up the remaining 35%.  

But here’s the thing about a FICO score: Whether you have a 770 score or 840, it doesn’t really matter. Some personal finance extremists strive to get a perfect score of 850. Like so many areas when it comes to your money, applying the Pareto principle is a better approach. Those with scores in the high 700s are going to qualify for the same premium loan terms as the few individuals with an 850 score.  

So, if you have a solid score, just keep doing the same things – pay your bills on time (using the auto-pay feature helps), don’t go crazy applying for new credit (particularly if you plan to make a big buy like a new home soon), and don’t use more than 30% of your available credit on each account.  

What’s great today is that most credit card issuers allow users to check their scores for free. Other useful tools like Creditkarma.com and Annualcreditreport.com help you stay on top of your credit.