FICO includes Buy Now Pay Later loans on your credit report
Buy now, pay later loans are positioned on FICO credit scores to reflect their growing role in consumer finance. (Scripps News)
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For a few precious weeks last year, I had perfect grades.
Sometime during the summer, I clicked one of these credit renewal links, signed in, and saw the magical number 850.
I have never had perfect credit, and I may never have it again. After a month or two, my scores were back in the 820s. Although exceptional, it wasn’t perfect.
Full credit, or even “exceptional” credit, opens the door for American consumers. This means lower interest rates on your loan. You are more likely to rent an apartment or find a job. Insurance premiums become cheaper.
The Motley Fool reports that about 1.8% of Americans have a perfect FICO credit score. People with perfect credit are often older, like me. Many of them live in Minnesota.
My journey to perfect credit is remarkable, if only because I’ve spent most of my adult life as the epitome of imperfect credit.
I started my professional career making $17,000 a year, with five-figure student loans, and no assets more valuable than pizza coupons.
By the time I was 40, I had enough money for retirement. Student loans are gone. My wife and I owned a house. But now I had five figures in credit card debt. The balance increased year by year.
I finally kicked my credit card habit. I spent 50 years paying off cards. My credit score gradually increased.
I started writing about personal finance in 2022. I practiced what I preached. That means I saved more, borrowed less, and moved the rest of my debt to interest-free credit cards. (Yes: We also accept credit cards.)
I remember the day my credit score hit 777. The rest of the way to perfect credit was a gradual process. Once again, let’s break down the components of a credit score.
There are many credit scores. For simplicity’s sake, we’ll focus on the well-known FICO score.
Payment history: 35%
Jenelle Dito, FICO’s vice president of consumer empowerment programs and partnerships, says the most important factor in your credit score is “as simple as paying your bills on time and as agreed.”
Missing a payment by even a day or two can result in late fees and other negative consequences.
But late payments “typically aren’t reported to the credit bureaus until 30 days have passed,” said Courtney Alleb, a consumer finance advocate at Intuit Credit Karma.
If that happens, it will be a big problem.
“The reality is, one missed payment or one late payment can have a significant impact on your credit score,” Alev says.
Even if you miss a payment, “you want to pay it as soon as possible,” Alev says. If your payments are 30 to 60 or 90 days late, your credit score may drop accordingly.
An easy way to avoid missing payments is to set your payments to automatic payments. Another is to set alerts and reminders. You can often do all of these things on the website where you pay your bill.
For me, managing my bills wasn’t a big problem. But over the last few years, I’ve moved small bills to automatic payments.
I’m afraid to automate big things because my checking account balance is unstable. Instead, list all your monthly bills in a Google Drive file and mark them as they’re paid. It’s a rough idea, but it’s effective.
Amount owed: 30%
This is the second largest factor in your credit score. Measures credit utilization, or the amount of credit available.
If you have $100,000 of available credit on your card and credit line, and the total balance on those accounts is $50,000, you’re using 50% of your credit.
We often hear that keeping your credit utilization ratio below 30% is a good goal.
“But the reality is, if you want perfect credit, you want your credit score to be less than 10%, or even less than 5%,” Alev says.
FICO’s Dito says that while 30% may be good as a motivational goal, the number doesn’t mean anything special in the world of credit scores.
“Nothing magical happens at 30%,” she said. “The guidance we’re trying to provide is that lower is better.”
There are several ways to lower your credit utilization. One is to pay down your line of credit.
Others are less obvious. For example: If you are paying off your credit card, you may want to close it. However, if you leave it open, unused credits can improve your score. (And your credit history: see below.)
As I paid off my credit line, my credit score slowly increased. A few years ago, I started keeping my old credit cards.
To keep your account open, it can be helpful to make a claim every now and then. I currently have three, each covering a different monthly subscription, and all set to automatic payments.
Length of credit history: 15%
This FICO factor is self-explanatory. Credit agencies reward you for your credit history.
“The sooner you can get listed in the credit bureau’s database, the better,” said Cynthia Chen, CEO of Kikoff, a company that helps consumers build credit.
It may seem counterintuitive, but you can’t start life with perfect credit. To accomplish that, you need a credit history. The system “favors people who start building credit early,” Chen said.
It also supports the old one. That’s one of the reasons I have good credit.
New credit: 10%
This FICO component is primarily negative. Every time you take out a new car loan or credit card, you earn new credit.
It’s no big deal if you get new accounts here and there. But “if you’ve recently opened a large number of credit cards, that could be seen as a yellow flag by lenders,” Alev says.
Timing is critical with new credits.
“Let’s say you’re planning on buying a home in the next few months,” said Sarah Lassner, credit card expert at NerdWallet. “Maybe you should hold off on applying for a new credit card.”
When you apply for new credit and the creditor pulls your file, it’s a “hard search.” That can hurt your credit score, and your ability to qualify for a mortgage.
My mantra these days is “Never borrow.” And with the exception of my 2021 car loan, I’ve been living off of it. I get a new interest-free card every few years, but only to pay off debt I already have.
Credit mix: 10%
This metric looks at your ability to handle different types of credit.
Credit cards are considered “revolving” credit, meaning you can borrow, pay back, and borrow again. A mortgage is an “installment” credit, meaning that you repay a set amount of money at regular intervals over a period of time.
It’s good to have both.
How did I get a perfect credit score?
Looking back at my own credit journey, I can clearly see the path to perfect credit.
By the time my score reached 850, I had a strong payment history. My credit utilization rate was at an all-time low. My credit history is long and getting longer. I didn’t take advantage of the new credit. The credit mix also included both installment and revolving loans.
Why did I lose my perfect trust?
That’s hard to say. Credit scores are fickle. And maybe the god of trust was punishing me for doing the right thing.
When my credit score was near perfect, I got a new interest-free credit card and loaded it with debt from an old home equity loan. This move saved us hundreds of dollars in interest. But it was also new credit and it took a toll on my credit utilization rate.
As I sit here today, my FICO score is 818. It’s not perfect, but it’s good enough.
