Good credit

A few years ago, before I really got into finance, I was in line at a Walmart, listening to a lady talking to her friend about going through the process of getting a house built by Habitat for Humanity.  These houses are built with donated labor and some donated materials, and the lucky homeowner generally pays a fraction of what they would if they had to buy it on the market.

She was worried that she might not qualify due to her poor credit, and didn't know what to do.  I helpfully chimed in that if she wanted to raise her credit score, all she had to do was make her payments on time.  

She scoffed, as if that was something that would never happen, and it dawned on me that not everyone had the same attitude towards debt as I did (namely, that it's bad, and you should try to stay away from it as much as possible, especially consumer debt).

I entered the military with about $4,500 in credit card debt and a credit score of about 580.  The debt was not, as you might think, from stupid purchases.  In fact, most of it was from necessities, such as gas and groceries.  I was just not making enough to get by, and racked up debt just to survive.  Of course, at the time, my money management skills were pretty bad.  

When I finally got a steady paycheck, one of my first priorities was paying off my debt, and I was surprised to see my score jump to 630 within a few months.  I was still in debt, but no longer maxed out, and making regular payments that were more than the minimums required.

For the past few years, my credit score has been around 750, which I thought was pretty good, but I was kind of disappointed it never went higher.  However, a few months ago, I was astounded to see it hit 810, presumably because I had crossed some mythical length of credit history. In fact, this is probably the highest my credit score can possibly go without a mortgage.  The highest is 850, in case you were wondering.

In case you thought I was lying

Here are the factors that play a role in your credit score:

1) Percentage of the limit used: 10% or less in generally best.  So if your credit cards have a $10,000 total limit, you want to have no more than $1,000 on there at any one time.  Higher is ok, but I wouldn't recommend having more than 50% of your limit in use.  I'm usually at 1-3%, because I spend very little, and pay it off in full every month.

2) Payment history: they want to know if you make your payments on time.  Never, EVER pay stuff late.  I never have, so my payment history is 100%.

These two are the most important things that go into your credit score.  There are people who are millions of dollars in debt, but still have great credit scores because their debt doesn't exceed a certain portion of their limit, and they always pay at least the minimums on time.

3) Derogatory marks: basically, if you have accounts in collections (if you haven't paid for a few months, it tends to go to collections), bankruptcies, etc.  If you pay on time, this one is irrelevant.

4) Age of credit history.  Never close the first card you ever got.

5) Total accounts: they want to see you make good on paying loans back on several accounts.  This includes accounts that have been closed.  I have 16, including old car loans, closed credit cards, and three cards that I still have open.  It's recommended you have at least 2 credit cards open.

6) Credit inquiries: every time you apply for a loan, they make what's called a "hard inquiry."

So in summary, for good credit, keep your debt to under 50% (preferably 10%) of your limit, and always make your payments on time.