Navigating the online landscape, you'll come across countless tales on shaping your credit history and score to make a lasting impression on lenders.
While these narratives can be valuable, achieving a flawless credit score doesn't necessarily hinge on them.
As a CPA with licenses in various financial domains like stocks, commodities, options principal, mutual funds, life insurance, securities supervisor, and real estate, I've been immersed in personal finance news for decades. My journey includes numerous articles and TV stories on credit management, improvement, and restoration.
Here's the twist: Despite sharing tips over the years, I've seldom applied them myself. Surprisingly, my FICO credit score stands at a perfect 850.
Curious how I veered from common advice and still secured a perfect score? Continue reading for the principles I followed.
1. Without Income, No Borrowing
Some individuals facing credit challenges today encountered these issues early on, a situation attributable partly to their actions and partly to the lending industry.
In my college years during the 1970s, the credit landscape was straightforward: If you were a student with no income, obtaining a credit card or any form of borrowing was out of the question.
This made sense—why lend money to someone without the means to repay it? Conversely, who would willingly borrow money, especially at high interest rates, knowing they couldn't realistically pay it back?
Fast-forward a few decades, and the rules of lending and borrowing have shifted. Banks have been eagerly offering credit cards to practically any college student, leading to a trend of students readily accepting these offers.
The predictable outcome is unfortunate: for banks, uncollectible accounts, substantial write-offs, and significant losses; for students, credit damage that takes weeks to create and years to rectify.
I received my first credit card at 21, shortly after starting my first job. Throughout the years, I've rarely carried a balance and never missed a payment.
Not because I possess extraordinary responsibility, but because I was raised to view credit as potentially risky and something to be used sparingly.
Contrastingly, many young people today seem to be raised with the belief that credit is not just harmless but a rite of passage, akin to learning to drive. It's portrayed as an essential part of growing up, an American birthright.
This shift in attitude didn't occur by chance. Lenders adopted strategies reminiscent of tobacco marketers, using advertising and various tools to meticulously convey the message that credit is your ally, something you're supposed to use—and the sooner, the better.
Similar to the tobacco industry, the objective was to create a generation of credit users. And, much like tobacco, it was remarkably successful.
If you aim for a perfect credit score, avoid using credit to inflate your lifestyle or borrowing beyond your means. If you want your children to have an excellent credit score, encourage them to venture out without their American Express card, but ensure they leave home with the invaluable lesson that credit requires careful consideration.
2. Live Within Your Means
As mentioned earlier, I've never missed a payment. This isn't because I've always had ample wealth, and it's not because I haven't faced setbacks like job loss, divorce, or other financial challenges.
The key? Spending less than you earn. By doing so, you automatically build a financial buffer that proves invaluable when tough times inevitably arise. Neglecting this principle means that, when faced with adversity, you might resort to borrowing money that you can't promptly repay, putting your credit score at risk.
Certainly, there are circumstances that can throw off even the most well-thought-out plans—that's just a part of life. However, the larger the financial cushion you accumulate and the earlier you establish it, the greater your chances of attaining and sustaining a perfect credit score.
3. Avoid Financing Depreciating Assets
Maintaining a flawless credit score doesn't mean abstaining from credit use. As I mentioned, I acquired my first credit card at 21 and still regularly use credit cards. Additionally, I've borrowed over $1 million over the years, primarily through mortgages.
However, what I've largely avoided is taking loans to finance depreciating assets, such as vacations, cars, and clothing.
Upon college graduation, my parents gifted me a used Toyota. Shortly after, I sold it and used the proceeds for the down payment on my initial home.
I then obtained a loan from a credit union to purchase a classic 1958 Triumph TR3. This marked my first and only car loan. After driving it for a few years, I sold it for more than its purchase price and bought a used car with cash.
From that point onward, I've exclusively used cash to buy cars. Wondering how I could afford vehicles without resorting to new ones? It's straightforward—I've never owned a new car. Presently, I drive a Mercedes that initially cost its first owner over $100,000. After driving it for 30,000 miles, they sold it to me for $45,000.
The principle is simple: when you borrow, you're essentially paying to temporarily use someone else's money. If the value of what you purchase with that money increases more than what you paid to use it, you accumulate wealth. If not, you incur losses. And if you can't repay it promptly, your credit score takes a hit.
4. Avoid Excessive Micromanagement
The internet is flooded with websites and costly services pushing you to constantly monitor your credit score. Well, here's a tip: If you find yourself regularly micromanaging your credit score, you might be approaching it the wrong way.
This doesn't mean you shouldn't keep an eye on your credit, especially when a lender, landlord, insurance company, or potential employer is set to check it. However, if you stick to straightforward guidelines, you won't need to micromanage your score or rely on credit websites, services, or tales of credit shortcuts.
Seeking a perfect credit score? Here's the only advice you require: Don't mess up. Ensure you pay your bills on time, every time, for extended periods. Follow this, and eventually, you'll naturally achieve a perfect score.
