These days, the web is full of stories about how to massage your credit history and score to look your best to lenders. On this site and others, you’ve probably seen stories like “Boost Your Credit Score Fast With These 7 Moves” and “Fixing Your Credit? Do These 5 Things, Avoid These 3.”
While these stories are helpful, if you’re seeking a perfect credit score, you don’t need them.
Over the 25 years I’ve been doing personal finance news, I’ve done countless articles and TV stories about managing, improving and restoring credit. But here’s a confession: I’ve used few, if any, of the tips I’ve offered. Yet, my FICO credit score was recently a perfect 850.
So how did I ignore common wisdom, yet end up with a perfect score? Here are the rules I followed.
1. No income, no borrow
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Some of those with credit problems today earned their bad marks at an early age. This is partially their fault and partially the fault of the lending industry.
When I was in college back in the 1970s, the credit game was simple: If you were a student and had no income, you couldn’t get a credit card or otherwise borrow, period.
This, of course, is perfectly logical. What idiot would lend money to someone with no means of repaying it? Conversely, what idiot would borrow money, especially at exorbitant interest rates, that they can’t hope to repay?
Fast forward a few decades and the world is now full of lending, and borrowing, idiots. For many years now, banks have been invading campuses, throwing credit cards at any student who can fog a mirror. And those students have been happily gobbling them up, some apparently with little thought of what happens when you’re charged 15 percent interest on money you can’t immediately repay.
The result of this behavior is depressingly predictable. For banks, uncollectible accounts, big write-offs and fat losses. For students, credit damage that takes weeks to create and years to resolve.
I got my first credit card at age 21, shortly after I got my first job. In the 40 years since, I’ve rarely carried a balance and never paid a bill late.
This is not because I’m particularly responsible. It’s because I was brought up to believe credit is dangerous, so it should be used sparingly. These days, many kids are apparently raised to believe credit is not only benign, it’s part of growing up. Like learning to drive, it’s seen as something everyone needs to experience at the earliest possible age. It’s an American birthright.
Today’s attitude didn’t happen by accident. Lenders took a page from the tobacco marketers’ handbook. They used advertising, along with everything else at their disposal, to carefully craft a message: Credit is your friend, it’s what you’re supposed to use, and the sooner the better.
As with tobacco, the goal was to create a generation of addicts. As with tobacco, it worked splendidly.
If you want to have a perfect credit score, don’t use credit to pad your lifestyle or borrow money you don’t have. And if you want your kids to have a perfect credit score, let them leave home without their American Express card, but don’t let them leave home without that simple lesson.
2. Spend less than you make
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As I said above, I’ve never paid a bill late. That’s not because I’ve always been wealthy and it’s not because I’ve never lost a job, gotten divorced or otherwise experienced financial catastrophe.
The secret? Spending less than you make. Do this, and you’ll automatically create a cash cushion that will come in handy when push inevitably comes to shove. Fail to do this, and when your back is against the wall, you’ll borrow money you can’t immediately pay back and put your potentially perfect credit score at risk.
Obviously, there are situations that will derail even the best laid plans. That’s life. But the bigger the cushion you can accumulate, and the sooner you do it, the better your odds of achieving and maintaining a perfect credit score.
3. Never borrow to buy things that go down in value
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Keeping a perfect credit score doesn’t mean not using credit. As I said, I got my first credit card at 21 and still use them often. And I’ve also borrowed more than a million dollars over the years, primarily in the form of mortgage loans.
What I’ve skipped for the most part, however, is borrowing money to buy depreciating assets, like vacations, cars and clothes.
When I graduated from college, my parents gave me a used Toyota. Within weeks, I sold it and used the money for the down payment on my first home. I then went to a credit union and borrowed money to buy a classic 1958 Triumph TR3. That was my first and only car loan. I drove that car for a couple of years, sold it for more than I paid for it, then bought a used car for cash.
From that day to this, cash is how I’ve paid for cars. How could I afford new cars? Simple. I’ve never owned one. Today I drive a Mercedes that cost its first owner more than $100,000. They drove it 30,000 miles, then sold it to me for $45,000.
It’s this simple: When you borrow, you’re paying someone to temporarily use their money. If what you buy with that money goes up in value by more than what you pay to use it, you get richer. If it doesn’t, you get poorer. And if you can’t pay it back on time, you get a credit score that’s less than perfect.
4. Don’t micromanage
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These days the internet is full of websites and expensive services that urge you to continually track your credit score. Well, here’s a secret: If you have to constantly monitor your credit and micromanage your score, you’re doing it wrong.
That’s not to say you shouldn’t keep an eye on your credit. You should, especially when you’re about to show it to a lender, landlord, insurance company or potential employer. But if you follow simple rules, you won’t need to micromanage your score and you won’t need credit websites and services or stories about credit hacks.
Want perfect credit? Here’s all the advice you need: Don’t screw up. Pay your bills on time, every time, for long periods of time. Do that, and one day you’ll have a perfect score automatically.
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can read more of my work here.