Building the Perfect Credit Profile

There’s a lot of advice available online about building the perfect credit profile.  Every financial advisor, weekend blogger, and credit repair service seems to have the one solution that’s guaranteed to work for your credit report.  How many credit cards you need, what types of accounts are best for your score, how many inquiries you should have – the list goes on and almost always looks different.

Here’s one more ingredient to the massive stew of credit advice available online, while at the same time diluting out all of the unnecessary “tips” to help you build the perfect credit profile.  Hope you brought a bib, things could get messy.

Take a breath

The first piece of advice might seem a little unconventional, but hear me out: Don’t worry so much about your credit profile.

If you’re fretting over your credit scores to the point that you are eyeing your credit score through a microscope every other Friday, do yourself a favor and stop.  Generally speaking, consumers who obsess too much over their credit profiles could only be harming themselves – especially if they’re prone to opening credit accounts one day and closing them the next if they don’t see an improvement in their scores.

They could also be the type of consumer who reads all those finance articles that offer conflicting opinions on managing credit (seriously, ask any 5 of them what the best way to get out of debt is, and you’ll somehow wind up with 6 different answers, but I digress), and so wind up following all their differing tips and screwing themselves over.

What your credit report needs

Folks, here’s exactly what your credit profile needs to be the best it can be:

  • A mortgage.
  • A car loan.
  • No more than 4 open, good credit cards.

Your creditors and lenders are looking for more than just a high score when they pull your report; they’re looking to see how good you are at handling money.  That doesn’t stop with paying your credit card bills on time (although you certainly want to keep paying them) – it also extends to how well you handle various types of accounts.

Your credit report should include a mixture of both revolving credit accounts (the credit cards) and installment accounts (a home loan, car loan, or even your student loans), all in good standing.  This shows lenders you’re good at handling different types of financial accounts, and makes them more likely to agree to a loan application.

Credit cards and your credit report

How many credit cards you should have for your credit report to look its best is a tricky subject.  Opinions vary wildly on how many cards you should actually have, as well as what types of cards they should be, what your balances on each of them should be, etc.

For my part, I recommend you always keep at least 4 good credit cards open.  If you’re unsure what types of cards to get, I recommend you stick with Visa and/or MasterCard – preferably through your bank.  If you don’t have any cards open in your name, look into opening secured credit cards with your bank.  They work just like regular credit cards, but require a deposit to activate and are available to just about anyone.

Once you’ve got your 4 cards, my advice for making the most of them is to use 2 cards sparingly, and to carry no balance at all on the other 2 cards.  Charge a tank of gas or a trip to the grocery store to the latter 2 cards every once in a while to keep them from closing due to inactivity.  This helps keep your credit utilization down – something creditors love to see on your report.

I recommend using your 4 credit cards like this because FICO – the firm who assigns you the credit score most used by creditors – looks at not only your individual credit accounts, but your cumulative profile as well when determining your credit score.