ELFI Credit Series: How to Play (and Win) the Good-Credit Game

Building and maintaining good credit is all about knowing how credit works. Once you know the rules, you can play the credit game — and win.

The object: 

Maintain a credit score that’s high enough to help you qualify for and get the lowest rates on mortgages, insurance, auto loans, personal loans and to refinance student loans.

Setup:

• Credit score: A three-digit number that represents your credit health. A company called the Fair Isaac Corporation makes the most popular credit score, the FICO score, based on information in your credit report. Scores range from 300 to 850, and higher is better.
• Credit report:A detailed record of the debt you have and how well you pay it back. The three major credit bureaus — Equifax, Experian and TransUnion — compile credit reports based on information that lenders and credit card companies report to them. Potential lenders look at your credit reports before deciding whether they want to take you on as a customer.

Rules:

There are five factors that influence your FICO score:

1. Payment history (35% of your score)
2. Credit utilization (30%)
3. Length of credit history (15%)
4. Credit mix (10%)
5. New credit (10%)

» RELATED: Don’t Just Build Good Credit — Maintain It

How to Play:

To maintain good credit, make decisions and establish habits that align with the factors that affect your credit score.

1. Pay your bills on time — always.

This factor is the biggest contributor to your score, and even one late payment can hurt your credit. Inconsistent payments also show potential creditors that you could be at risk for not repaying your debts, so they may charge you more in the form of higher interest rates and insurance premiums.

When it comes to credit cards, you only have to make minimum monthly payments to be in good standing from a credit perspective. But if you carry a credit card balance from month to month, you’ll have to pay interest. It’s best to pay off your entire balance every month.

2. Don’t max out your credit limit — or even come close.

Credit utilization is the percentage of revolving credit (like credit cards) you use compared to the total amount that’s available to you. If you use every penny, it looks like you can’t manage money responsibly.

As a rule of thumb, don’t use more than 30% of your credit limit on each credit card. So if your credit limit is $10,000, don’t charge more than about $3,000 before paying it down first.

But even if you keep utilization low on every card and have an excellent credit score, it could be concerning to potential lenders if you have, say, 10 credit cards with balances on them, says Barbara Thomas, executive vice president of Education Loan Finance (ELFI).

3. Establish a long history of using credit responsibly.

The longer your credit history, the better. FICO scores consider the age of your oldest account, the age of your newest account and the average age of all of your accounts.

For this reason, err on the side of keeping credit cards open even if you don’t use them — as long as there’s no annual fee. Closing cards lowers the average age of your accounts.

Besides that, there’s not a ton you can do to boost your credit in this category, other than to start building credit early. You can help your kids establish credit as teens by making them an authorized user on one of your cards.

4. Prove that you know how to use (or not use) different types of credit.

Credit mix refers to the different forms of credit you’ve had, including revolving credit (credit cards and lines of credit), and installment loans (auto loans, student loans, mortgages).

If you have several different types of credit, it’ll help your score and show potential creditors that you know how to handle different forms of credit (assuming you make on-time payments). But don’t take out loans or credit cards just to boost your score in this category.

When you apply for new credit, lenders may scrutinize the types of credit you’ve taken on in the past. For instance, seeing a 401(k) loan on a credit report is a red flag, Thomas says.

“If you’re taking out a loan against your retirement savings, you’ve got a problem,” she says. “That means you couldn’t get credit elsewhere.”

5. Avoid applying for multiple types of credit in a short timeframe.

When you apply for a new loan or credit card, lenders do a hard credit inquiry to determine whether you qualify. This inquiry shows up on your credit report and stays there for two years, but it only influences your FICO score for one year.

Multiple inquiries within a short time period is a warning sign for lenders — especially if you’re taking on lots of consumer debt.

“Anyone who has a lot of personal loans, that’s when the alarm bells go up,” Thomas says.

But if you’re at risk for having multiple hard inquiries because you’re shopping for the best rate you can get, there’s a workaround: If you apply for the same type of credit — say, student loan refinancing — within a short timeframe, it only counts as one inquiry, which won’t hurt your credit very much.

Also, some lenders — including many student loan refinance lenders, like Education Loan Finance — prequalify you based on a soft credit check, so there’s no ding to your credit score.

How to win

You win if your credit doesn’t hold you back from doing the things you want in life — whether that’s owning a home, buying your dream car or traveling the world on credit card points. It’s not about achieving a perfect credit score — it’s about having credit that’s good enough to get you where you want to go.

Credit-worthiness is an important factor in maintaining good financial health. And if you’re considering student loan refinancing, your credit score plays an important role in securing great rates. ELFI’s prequalification process is quick, 100% online and won’t affect your credit*. Speak with one of our Personal Loan Advisors today, or see how much you could save today.*

*Subject to credit approval. Terms and conditions apply.