The Road To 740

Welcome to Q & A Wednesday on Millionaire Habits, where I answer one of your questions every week for the benefit of over 24,000 people.

💡 Question: “Steve, I have shitty credit and it’s keeping me from getting a decent mortgage. How do I fix it?”

Last week, I showed you how important your credit is and why it matters even if you’re not buying something expensive. Today we’re taking the next step.

The goal: A credit score of at least 740. If you’re there, congrats! If you aren’t, let’s talk about ways to kick that number up so you can get lower interest rates and fewer security deposits.

The #1 thing to do if you want to boost your credit score is to be proactive as hell. Don’t take it lying down; don’t just assume it’ll get better.

First, let’s discuss how credit scores work.

How Credit Scores Work

Your credit score is a numerical representation of your creditworthiness and is used by lenders to assess the level of risk associated with lending you money or extending credit. The most commonly used model is the FICO score, developed by the Fair Isaac Corporation.

Here’s an overview of how your credit score works:

• Credit Reporting Agencies: Credit reporting agencies, also known as credit bureaus, collect and maintain information about your credit history.
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• Credit Scoring Models: Credit scoring models use the data provided by credit reporting agencies to calculate your credit score. These models consider various factors to evaluate your creditworthiness and generate a three-digit credit score, usually ranging from 300 to 850.
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• Key Factors Influencing Credit Score: Credit scoring models take into account several factors when calculating your credit score, including:
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  • Payment History (35% weight): Your track record of making on-time payments and any history of late payments or delinquencies.
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  • Credit Utilization (30% weight): The amount of credit you currently use compared to your total available credit. Lower is better.
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  • Length of Credit History (15% weight): The age of your credit accounts and the average age of all your accounts. More history is better.
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  • Credit Mix (10% weight): The variety of credit accounts you have, such as credit cards, loans, and mortgages. A diverse mix is better.
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  • New Credit Inquiries (10% weight): The number of recent applications for credit and new credit accounts you have opened. Less is better.

Credit Score Interpretation: The resulting credit score helps lenders assess your creditworthiness. Higher credit scores indicate lower credit risk, making you more likely to be approved for loans or credit with favorable terms and lower interest rates.

How To Improve Your Score

First, the bad news: Improving your credit score takes time. It’s not like paying a bill. This can be a long-ish process, but it’s worth your effort.

While there are several ways to boost your score, here are four of the most effective strategies:

Pay your bills on time: Payment history is crucial in determining your credit score. Consistently paying your bills, including credit card payments, loan installments, and utility bills, by their due dates demonstrates financial responsibility. Never be late on a payment, or your score will suffer.
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​How to make this easy: Set up automatic payments or use calendar reminders to ensure you never miss a payment.

Reduce your credit utilization: Credit utilization refers to the available credit you currently use. Keeping your credit utilization below 30% of your available credit is recommended.

For example, if your credit card has a limit of $10,000, try to keep your outstanding balance below $3,000. High credit utilization can indicate a higher risk to lenders and negatively impact your credit score.

How to make this easy: Pay down existing debts and avoid maxing out your credit cards to improve your credit utilization ratio.

Maintain a healthy credit mix and length of credit history: A diverse credit mix and a longer credit history can improve your credit score. This may include a mix of credit cards, loans (such as auto loans or mortgages), and other lines of credit.

However, it’s important only to take on credit that you can manage responsibly.

How to make this easy: Keeping older accounts open and in good standing will improve your credit history length.

Limit hard credit inquiries: Every time you apply for a credit card or loan, a “hard inquiry” is made to check your credit. Hard inquiries can reduce your credit score by at much as 5 points and stay on your credit for up to 24 months (or two years).

How to make this easy: Keep new credit cards and loan applications to a minimum and space out each request whenever possible.

Your credit is important, so take it seriously. Regardless of your credit, use these techniques to improve it (or keep it pegged at ‘Excellent’).

Chat later,

– Steve