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I Built an 847 Credit Score in my 20’s. Here’s the Secret Formula

Fico Credit Score Range

At the age of 20, I applied for my first credit card. At age 25, my credit score kissed 800. Last month (at age 29), a letter in the mail declared that my official FICO credit score had reached an all-time high of 847 (the maximum being 850).

Using the exact same process, I helped Vanessa achieve very similar results in roughly the same amount of time. As a result, we will both enjoy the steady stream of financial benefits that accompany excellent credit.

There is nothing unique about our credit building progression. Anyone and everyone can use the strategies outlined below to achieve similar success.

Great Credit Pays Well

Our decision to build excellent credit has proven profitable in a variety of ways.

  • Every time we’ve considered borrowing money, we’ve qualified for the lowest possible interest rate because the interest rate associated with nearly every type of commercial loan is determined primarily by creditworthiness (and of course, debt/income ratio). This includes home mortgage loans, auto loans, personal loans, credit cards, etc.
  • Through a seemingly endless supply of credit card offers, we’ve earned thousands in cashback and travel rewards, which has allowed us to travel the world for free.
  • Our insurance premiums (through Geico) have been reduced and we pay far less than most individuals our age.

Although not applicable to us at this time, many employers now review credit history in the hiring process. Many cellular and utility companies review credit information when determining eligibility for service and the corresponding upfront deposit.

The evidence is clear. With each year that passes, credit plays a larger and more critical role in shaping a successful financial life.

How to Build Perfect Credit

Now is the time to discuss the various credit-building strategies that will help you secure and maintain an 800+ credit score. Before we get started, I would recommend that you request a free copy of your credit report(s) and credit score(s) to better evaluate your progress over time.

If you have no previous credit activity, you probably won’t have a credit report. Your credit reports are generated after you open your first credit account, as each creditor reports your payment history and account information to the credit reporting bureaus that generate your credit reports.

If you don’t have a credit report, you won’t have a credit score because each credit score is generated using the information in your credit reports. For example, FICO will not generate a credit score until you have six months of credit activity shown in your credit report. VantageScore, FICO’s closest competitor, will generate a score after just one month of credit activity.

If you don’t have a credit report or credit score, don’t worry about it. The remainder of this article will ensure that you have both moving forward.

Start with Credit Cards

The easiest and most profitable way to build credit is by obtaining a variety of credit cards, assuming you are able to repay the debt balance in full each month. I don’t recommend applying for any type of credit if you plan on racking up debt, as the astronomical fees and interest charges will negate any potential benefits or rewards.

There are four separate methods that can be used to establish your first credit account, which can (and should) be used in combination. For example, when I first learned about credit, I asked my parents to add me as an authorized user on two of their oldest accounts. By the time college began, my credit reports were established and my credit score reached the upper 600’s. This allowed me to apply for a co-signed unsecured credit card in my second year of college. After using the co-signed account responsibly for six months, I was approved for my own Target retail credit card.

By the time I graduated at age 22, I had years of responsible credit usage showing on my credit report and a credit score of roughly 725. Soon after graduation, I began receiving an endless supply of targeted credit card offers addressed to me.

I began selectively applying for the best cards offering the most generous rewards. By using each new account responsibly and paying the balance in full each month, my credit continued to improve. By the age 25, FICO and VantageScore both indicated that my credit score was approaching 800. And now, at age 28, my credit score very rarely dips below 800.

Once the initial credit building process is complete, very little work is required to maintain an 800+ credit score throughout life.

1) Become an Authorized User (AU)

The easiest way to build credit from scratch is by having a trusted family member add you as an authorized user on an existing credit card account. Anyone can be added as an authorized user (although the minimum AU age varies by card issuer), and the account information is usually reported to all three credit bureaus.

As an authorized user, you will receive your own credit card that looks, feels, and operates exactly like the primary account owner’s card. The difference is that the primary cardholder is legally obligated to pay the debt balance on the account.

Any purchases that you make are included in the primary account, and you are not legally responsible for maintaining any existing debt balance on the account. As a result, you definitely don’t want to be an authorized user on a delinquent account, as that could heavily damage the payment history on your credit report.

I would recommend working out an agreement with someone that you know and trust very much. For example, you could agree to use the card for gasoline purchases only, making sure to repay the primary cardholder for the amount charged every month.

2) Apply for a Secured Credit Card

Becoming an authorized user is a great place to start, but you will not receive the full credit benefit because legally the account is owned by someone else.

Applying for a secured credit card is the easiest way to establish an account in your name. Even if you have no existing credit (or poor credit), most lenders will approve a secured credit card because the account is backed by an upfront cash deposit.

For example, if you apply for a secured card and are approved for a $300 line of credit, a $300 cash deposit (or less, depending on the issuer) is required to open the account.

Once approved, the secured credit card functions just like every other credit card. The only difference is that your cash is held as collateral. If you ever fail to repay your debts, the issuing bank will collect your cash deposit, mark your account delinquent, and then cancel your account.

Secured credit cards are designed to build credit. After using the account responsibly for 6-12 months, your credit profile will improve and you can apply for an unsecured card that offers better rewards and benefits.

3) Apply for an Unsecured Student (or Co-Signed) Credit Card

The best credit-building option is a traditional, unsecured credit card that offers generous rewards and benefits. However, traditional credit card issuers require a positive payment history and by extension, a credit score between 675-725 for approval. If you are just beginning to build credit, it’s unlikely that you will meet these requirements, but there are two potential workaround solutions.

If you are a college student, many issuers offer credit cards designed specifically for students. These student cards offer better rewards than secured cards and have no income limitations or security deposit requirements. Some of the best student credit cards offer cashback rewards like their traditional, unsecured counterparts.

If you aren’t a student, you might be able to obtain an unsecured credit card of your choosing by applying with a co-signer. When you co-sign, the existing credit of both applicants is considered by the issuing bank, and both parties are legally responsible for managing the account and repaying the debt. It’s a serious decision, but co-signing can be a great option if you have someone responsible that you can trust.

For example, my first unsecured credit card was obtained by co-signing with my parents. They had excellent credit, so the application was easily approved. They didn’t need another credit card, so I managed the account, used the card for occasional purchases, and paid the balance in full every month. This strategy allowed me to quickly jump from being an authorized user to a full card owner despite a thin credit history.

4) Apply for a Retail Credit Card

If you aren’t a student and you can’t find a co-signer, you can apply for a retail credit card as a potential workaround solution.

Many retail stores offer their own in-house credit card, and these cards are typically much easier to qualify for than traditional unsecured cards. Most retail credit cards are completely worthless, offering very few benefits while charging ridiculous interest rates or fees. The exception is the Target Red Card, which offers a 5% discount on every Target purchase and unlimited free shipping. The Red Card is the only retail credit card that I own.

If you are approved, you don’t have to spend a bunch of money at the retail store. Make a tiny candy or gift card purchase, let your statement generate with a small balance, and then pay the balance in full. Repeat this process for six months and you will have a solid FICO score, which will allow you to obtain traditional credit cards (and all those juicy rewards).

Build Credit With a Credit-Builder Loan

Credit scoring models like FICO recommend a combination of revolving credit (credit cards) and installment loans (mortgage, auto, student, personal, etc). Establishing both lines of credit at the same time will supercharge your credit building efforts.

If you already have any type of installment loan established, you don’t need to open another loan. All you need to do is continue making timely monthly payments to capture all of the associated credit benefits.

If you don’t have an existing installment loan, you can accelerate your credit-building plan by establishing a so-called “credit-builder” installment loan alongside any type of credit card account. My personal experience, along with the experience of others that I know, suggests that a 30-50 point credit score increase can be realized after obtaining your first installment loan and making a few timely payments.

Meet Self Lender

I’ve done quite a bit of research to identify the best credit-builder loans available today. Historically, these loans were made available through local banks and credit unions (I obtained mine through Alliant Credit Union a few years back, which is no longer available) who were interested in helping their existing customers build credit. This is becoming increasingly rare for a variety of reasons, with profitability being the biggest issue.

In my opinion, the best option available today is Self Lender, who offers small installment loans that are both cost-effective and easy to establish online. As an added bonus, Self Lender never requires a hard credit inquiry to establish the loan.

Self Lender offers several different credit-builder loans that vary by the required monthly payment. The most cost-effective option is their $545 credit-builder loan. There are larger loans available, but they carry additional fees, require larger monthly payments, and won’t improve your credit score any quicker.

Here is how it works:

  1. You pay $9 upfront to establish the Self Lender account
  2. One of the Self Lender banking partners (all FDIC-insured banks) lends you $545 that is held in an FDIC-insured, certificate of deposit bank account (“CD account”) for 12 months. You cannot access the money during this 12-month window.
  3. You make one $48 payment per month (for 12 months) to pay down the loan.
  4. After 12 months, you’ve paid off the loan and the $545 lump sum is yours to withdraw.

Self Lender handles all of the administrative and credit reporting details for you, which is one of the main selling points, and the entire process will cost you $40 out of pocket. The math is as follows:

  • $9 origination fee + $31 of interest (calculated as $576 in total payments [$48*12] – $545 received after 12 months)

The massive credit score boost is worth far more than $40 out of pocket. Furthermore, when you consider my credit card strategy above, a single credit card signup bonus will finance nearly a dozen Self Lender installment loans. Self Lender is a no-brainer if you have no existing installment loans.

Build Credit With Rent Payments

All three major credit bureaus (Experian, Equifax, and TransUnion) include rent payment information in your credit report if they receive it. The problem is that many credit scoring models don’t use this information when calculating your credit scores.

For example, the most commonly used version of the FICO scoring model (FICO 8) doesn’t include rental payment information when calculating credit scores. The newer, less adopted FICO 9 does include rental payment information, as does VantageScore, but these scoring models are rarely used by creditors today. Perhaps in the future, all credit scoring models will utilize rental payment information, but that isn’t the case right now.

There is another problem. The credit reporting agencies include rental payment information in your credit report, if they receive it. Very few rental agreements require the landlord to report your rental activity to the credit agencies. The vast majority of renters will require a third party for reporting purposes, which often charge fees.

For example, RentTrack is one of the largest third-party rental reporting services available. Landlords can (but most won’t) create a portal through RentTrack, where tenants then signup and pay rent. RentTrack records and sends all payment information to each major credit agency, benefitting tenants, while also helping to simplify the rent collection process. The service costs $2.95 per month.

While there is nothing wrong with using rental payment information to build credit, the limited application and ongoing fees make the process inefficient. With credit cards and credit builder loans widely available and easy-to-establish, there is little reason to pursue this strategy for the time being.

Maintain Great Credit With Good Habits

Regardless of your chosen credit building method(s), there are best practices that should be followed. Optimizing the official FICO credit scoring guidelines that I discussed earlier will allow you to establish solid credit habits that will accelerate your credit building plan and help maintain a great credit score throughout life.

  • Payment History (35%)

Payment history is the most important factor in the FICO credit scoring model (and every other scoring model), and even one missed payment can have a large negative impact on your credit score.

When you obtain a credit card, you should show purchase activity most months to ensure that your account is reported to the credit bureaus. Neither the transaction amount nor the transaction quantity matter, so don’t feel obligated to make unnecessary purchases.

You should also establish automatic payments from your bank account each month to prevent any type of interest charges or late fees.

  • Credit Utilization (30%)

Credit utilization, also called amount owed, is the percentage of available credit being used at any given point in time. For example, if you make a $2,000 purchase on a $10,000 credit limit, you are utilizing 20% of the available credit on that credit card.

FICO officially recommends that you keep your credit utilization below 30% for each individual account, but you will see additional credit score improvements by keeping your utilization below 10%.

There are some interesting nuances in the way credit utilization is reported to each credit bureau, so if you are interested in diving deeper into credit utilization, you’ll find some interesting insights in another recent article of mine.

  • Credit History (15%)

Your credit history represents the amount of time that each account has been established, including the age of your oldest account, newest account, and the average age of all accounts.

When you first start to build credit, your credit history will be very short. That is why it’s important to begin as soon as possible.

  • New Credit (10%)

According to FICO, opening too many credit accounts in a short amount of time will have a small negative impact on your FICO score, as will having too many recent credit inquiries.

But based on my own personal experience, I don’t think you should be worried about searches for new credit. First of all, hard credit inquiries only impact your credit score for 12 months, and even during that time, the effect is small. If some of your credit inquiries result in new accounts, you will experience a decline in your average age of accounts (a factor in your credit history). But this too is unimportant, because new accounts eventually become old accounts, which will ultimately age your credit history and increase your credit score.

  • Credit Mix (10%)

A combination of credit cards and installment loans is preferred in the FICO model. As I demonstrated above, both types of credit are very easily established.

The Cash Cow Conclusion

Using the exact methods detailed in this guide, I built an 820 credit score before my 27th birthday. Vanessa followed the same strategies and has equally impressive credit.

By following the rules and guidelines I’ve set forth in this article, I have not doubt that every member of the Cash Cow Community can achieve something similar.

With credit playing a pivotal role in our modern economy, I really can’t think of a valid reason to neglect or ignore your credit profile. It simply doesn’t make sense.

The modern credit scoring system isn’t going anywhere. The only question is whether you’ll pay to play (via excess loan interest, higher insurance premiums, utility deposits, etc.) or be paid to play (via cheaper loans, credit card rewards, cashback, etc.)

The ball’s in your court.

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Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.

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