Going from good to great credit

“How do I go from good to great credit?”

This is a common question from those with a 700+ credit score and can’t figure out how to improve it.

To go from good to great credit, you need to understand how credit scoring measures your financial stress based upon your credit report.

A big factor is available credit. Let’s examine how that works in credit scoring.

Imagine you have three credit cards, each with a $5k balance ($15k total) and a $10k credit limit ($30k total). You pay card #1 down to zero. Your credit score will go up because your open credit is greater – $10k balance vs $30k limit shows a lower financial stress at 33%. Then what happens when you close card #1? The ratio of open credit drops to $10k vs $20k going back to 50% stress, lowering your score. I recommend cautiously crossing in to 50% stress level and certainly never over 70%. I also recommend you closing your accounts only if your stress level will be below 33% after closing; meaning get your card #2 and #3 balances down significantly before paying off and closing your card #1.

One of the worst things you can do to up your financial stress is get a department store card that will save you an instant 10%. Most people will immediately put 70% or more on that card the same day. Another is applying for credit at an electronic store, say Big Bob’s TV and getting $3.5k worth of credit, then buying $5k of stuff. People will instinctively put $3.5k on their new card and $1.5k in cash. That $3.5k used vs $3.5k limit jams your overall financial stress ratio to the danger zone almost immediately.

Other methods for going from good to great credit scores are to build equity faster than the credit report data anticipates. Let’s say you have a car loan at $2k per month for a ‘term’ of 48 months. Scoring calculates anticipated balance against date of credit report pulled + monthly payment due + original balance reported vs. actual balance reported. Most of the time anticipated balance matches actual balance, so generally no score improvement for paying as agreed. Now, paying $2.5k per month lowers the real balance vs. the anticipated balance. That spread lowers your overall stress ratio, raising your score, similar to the above credit card example. As a side note: especially with car loans, specifically state the extra $500 is to pay principle. Otherwise, they are most likely just going to reduce your next month’s payment to $1.5k, getting you nowhere.

I recommend you plan your credit needs accordingly. Try to limit your attempts at new credit (often called a hard inquiry) to no more than 1 or 2 per year, if possible. It can cost you up to 8 points per inquiry. If you are making a major purchase, than have all your credit report inquiries done within 30 days. In some cases, inquires from the same industry category, such as mortgage, won’t count against your score multiple times.

Use SmartCredit.com and it’s Actions buttons to negotiate with your creditors, get better interest rates and stay on top of your credit score.  Going from good to great credit also requires your diligence in preventing identity theft and keeping errors off your credit reports. SmartCredit® is specifically designed to help you with this.

David B. Coulter – founder and CEO of SmartCredit®