When we think of financial perfection, many of you may think of Warren Buffet. Someone who has more money than you could ever dream to see in a lifetime and a savvy sense of investing must also have an immaculate credit score. But you would be surprised at what his FICO score is… 718, according to Fortune Magazine. It may shock you to learn that somebody with as much business sense and seemingly no financial issues could have a less than perfect credit score. Understanding some of the key factors that affect credit scores can help to give a better insight as to how to improve it.
Use of Credit
When calculating your score, the amount of debt you have outstanding as well as the balances of your accounts can make a big difference on your credit score. Caring high balances or balances that are close to the credit limit can have a negative impact on your score.
Ideally, you want to use no more that 25% of your available credit. If you are using more than this, it can show that you are living outside of your means or relying on credit as part of your income. Using credit cards for the rewards program or to pay everyday expenses is perfectly acceptable; however, it is important to pay off the balance each month, and preferably before the billing cycle ends. And if you must use your credit card for a large purchase, try spreading the purchase across a couple of your accounts to lessen the impact to your credit.
Now, when we consider somebody like Warren Buffet, he may have no need to have credit card or, and more likely, he uses his credit card heavily. And even though it probably gets paid off each month, it may look as if he is carrying high amounts of debt.
Number of Accounts
Surprisingly, it is good to have more than one credit card. It shows you are able to handle the responsibility of managing multiple accounts. The fact that you may have never had a credit card or ever taken out a loan may be preventing you from having a higher score. So for somebody like Warren Buffett, there may never have been a need for credit. And unfortunately, having not credit is almost as bad as having poor credit.
Payment History
One of the major considerations to your score is your payment history. Late payments can affect your score for years. If you have debt that has gone to collections or have filed for bankruptcy, you may see the impact on your score for up to 10 years. The ability to make all of your payments on time shows creditors you are responsible with your finances and will help to increase your score.
Credit Requests
Each time you request a new line of credit, an inquiry is placed on your credit which lowers your score says Lexington Law. The effects of an inquiry can last for up to three years. You’ll want to avoid applying for multiple accounts during a short period of time; otherwise you could see a significant drop in your score.
Errors
Your score may be lower than it should be and it may not be your fault. It is important to review your credit report frequently to ensure there are no mistakes that could be lowering your score. If you do find some discrepancies you can contact the credit reporting agencies and start the process of getting it fixed.
Hopefully you’ve noticed that the balance of your bank account hasn’t been mentioned. Fortunately, credit scoring systems don’t take into account how much money you have or how much you earn. While this information may be important when applying for credit, it has no bearing on your score. So even though you may not see the amount of money that Mr. Buffett may spend on a dinner party in a lifetime, you do have the chance to at least beat him in the credit score arena.