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Consumers need to be careful how they use, and don't use, their credit cards to avoid doing harm to their credit scores, experts say.
My husband and I recently refinanced our mortgage, and the bank sent us our credit scores during the process. Both scores were good, but my husband’s was 30 points higher than mine. This puzzled me, because we share the same spending and bill-payment practices. To find out why my score was lower — and to get a better understanding of credit scores — I decided to talk to some experts. I learned four lessons that I think you’ll want to know.
First, a brief refresher on what a credit score is: It’s an algorithm designed to predict your likelihood of repaying debt Lenders use your score to determine whether to approve you for loans and credit cards and at what interest rates. Insurers use credit scores to set premium rates, and employers use them when making hiring decisions.
Forbes.com: 10 ways a bad credit score can hurt you
Your credit score is based on your credit report, which is a record of your borrowing and repayment history, typically compiled by one of the three major credit bureaus: Equifax, Experian or TransUnion. (You can get your credit report — not your credit score — free at annualcreditreport.com. But watch out for sites offering phony “free” scores, as another Next Avenue article explains.)
Here are the four lessons I learned that could help you improve your credit score:
Lesson 1
Don’t sign up for new credit cards you don’t need — even if you’re offered attractive deals for doing so. This mistake, it turns out, probably cost me several points on my credit score.
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Shortly before I refinanced my mortgage, a retail clerk persuaded me to open a store credit card to save $40 on a purchase. It seemed like a good idea at the time. But, as I’ve since learned, opening a new line of credit negatively affects your score at first because you have no history with the new creditor. At the same time, a new account lowers the average age of all your credit accounts, which also dings your score. And closing the account quickly won’t help.
“Be strategic in deciding which credit card offers to accept,” said Gerri Detweiler, director of consumer education for Credit.com. “Only sign up for them if you’ll really save money over time.” For example, if the department store’s card has an interest rate that’s much lower than the rate on the card you’d otherwise use, you might want to consider it despite the impact it will have on your score.
Lesson 2
Make sure all your medical bills have been paid, either by you or your health insurer (or both of you). “It’s very easy for a payment to fall through the cracks and end up in collections,” said Detweiler. A 2003 Federal Reserve study found that more than half of all collection accounts noted on credit reports involve unpaid medical bills. “This is a huge problem,” Detweiler said.
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It could be that you assumed that your health insurer paid a bill when it didn’t. Or perhaps you thought you received all the bills for a recent surgery, but the anesthesiologist’s went to the wrong address. With that in mind, go through all your medical bills periodically to double-check that none is outstanding.
Lesson 3
You won’t have a good credit score if you don’t have any credit cards or loans. This is the downside to becoming debt-free just before you retire.
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Here’s how Anthony A. Sprauve, public relations director of FICO — the most widely known credit scoring firm — explained it: “Some people may move to a cash-only existence when they retire. This can result in a ‘thin’ credit file, which could make getting new credit tough if they find they need it — to replace an aging car, for example, or downsize to a smaller home.”
So even if you don’t need credit now and don’t think you will anytime soon, consider keeping a couple of credit lines open and use them wisely. Using the card occasionally and paying it off in full won’t lower your score. But if you never use a credit card, sooner or later the issuer will cancel it.
Lesson 4
Think twice before closing credit card accounts and credit lines just because you don’t use them. Closing them may reduce your credit history and the total available credit on your credit reports, which in turn could lower your score.
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By the way, closing an account because you had a bad payment history won’t make that black mark disappear from your credit report — it will continue to appear for seven years. But take heart: The negative impact lessens over time. If you’ve been late on payments, bring them up to date as soon as you can. The longer you wait, the more your credit score will be nicked.
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If people were paid a fair wage they would not need credit! But if they were paid a fair wage the people who control the money could not enslave them.
Look, in fact, at the way your credit is 'SCORED' The fact that you get a higher score because you regularly have debt is meant only to feed credit card companies the ultimate justification for tempting you with credit. And they know people will capitulate, which is why it is scored that way.
If you have tons of assets and cash, and have always paid every debt in full, there is absolutely no reason why you should have a lower score than someone with the same assets and cash, but who has a credit card and misses one payment a year. But guess what...that is what happens.
Your credit score is just another tool to ream you with, and it is a false reading of your ability to pay someone back.
Paul I don't think fair wages has anything to do with this. Credit is simple a way to get big ticket items quicker. If you wanted to buy a house and not get a mortgage it might take 30 years to save enough money to buy one outright.
My husband and I both make over $20.00 an hour and we have to finance when we purshase a new car because we don't have $40,000 in disposable income.
I don't think we can live a cash only existance.
Isn't it about time being debt-free or mostly debt-free is not held against people. Credit rating agencies have been doing this to people long enough - it should be illegal. Also, taking someone's age into account in the credit score should be mandatory. An 18 year old without a credit history? What a surprise! A 75 year old with few loans and credit cards? What a surprise! This needs to be fixed!
Debbie-1144654 Any moron knows that if you earn $20 an hour you shouldn't be purchasing a $40K car.
Better yet, live credit-free as some radio show hosts argue. That way, it doesn't matter what you credit score is. And yes, that includes a home. Having enough savings to pay for a year lease up-front usually means it doesn't matter what my score is or isn't. I do have a cash-back debit, another debit/prepaid, and one personal charge card (charge means has to be paid every statement period). I don't care about my credit score. The charge lets me travel for work when I have to get reimbursed for items I'm not allowed to use my corporate card. Our firm doesn't allow per-diem items to be put on our corporate cards, for instance. I learned to save to buy my car, pay my two-year lease at once on my apartment, and find a job that paid my student loans as part of my employment contract several years ago (it was worth the lower salary to save on the interest). I know most people can't find a position with the last item, but most can save the rest if they are employed. If not, that's another story. That said, my best friend works three part-time jobs and he paid off $40k in credit card debt in two years. It's great not to care about my credit report!
The truth is that the current Credit Rating System is used by Lenders, Retailers, and Credit Card Companies as profit centers whose mission is to manipulate interest rates (IR's) in their favor...irregardless of what the market rate is doing on IR's in the real world.
When it was first designed, the Credit Rating System was...on paper...a logical idea.
It has adversely evolved over the last few decades and manipulated by Lenders, Collection Agencies, and Retailers...or anyone who can post negative information to your account file...with the Credit Agencies and is deplorable at best.
They can post detrimental information to your account that may adversely impact your rating whether the information is true, factual, accurate, inaccurate, false, or whatever. You can ask to have something posted to your account explaining, denying, or correcting the inaccurate or false information... BUT the credit agencies are not required to give allowances or adjustments, or increase your rating for that.
Everyone needs to remember that what we all know as the "FICO" system (originally known as Fair, Isaacs and Company) is not a system but a "For Profit" company. They trade under the symbol FICO on the New York stock exchange and their stocks have risen from $20.05 to $45.37 per share over the past 52 weeks.
They are in the position to have their name associated with each of our Credit Ratings and we all say something to the effect of "My FICO score is ..." ... when in reality it is a combination of many different credit scores from many companies and we should be saying "My Credit score is...".
While there is some good information in this article, it does not really help those who already have issues with their Credit Score...
Folks already having issues coupled with the misuse and mistakes that we see time and time again within the system has devastated many lives, businesses, industries, and communities.
I do not believe the Credit agencies care a lot about what anyone's Credit Score is because they control the rules and the entire system...and they have the Lenders and retailers believing it is the best thing available for determining who will or won't repay what they borrowed PLUS the Credit agencies get paid for doing it.
You can have 5 or 10 or 15 years of never missing or having a late payment with a lender, credit card company, or retailer...and yet that company will use the Credit Rating over your own history with them. That is absurd to take someone else's opinion over their own internal historical Data...and yet companies do it every single day. Then it becomes an avalanche effect as all the other credtors jump on board.
Virtually all have their systems tied to a central computer system and the logarithms make the changes in a matter of seconds whenever a human being types in the negative info...again whether it is accurate or not. Then you are stuck.
My one sentence feeling on the Credit Rating system in the United States would be: An unjust and unfair one sided system that is broken and needs immediate restructuring that will not happen as long as a few control the system and are making huge sums of money doing it.
The truth is the truth...and the truth is...the system stinks for all of us...even those of us who do not need to use it or care about it...it still impacts us.
This is exactly why credit agencies need to go away, and die a painful death. They do no one any good, they only destroy lives.
I let a credit card expire and never used it again after it was taken to court by a multiple of people for charging late fees by keeping their checks past the due date and then charging them when they could. They had to pay back $Ms. I had no intention of keeping a credit card with a company like that. Who needs to deal with a credit card crook! And, it was a supposedly a "reputable" master card. Anyway, I let it go, knowing it might affect my score but I didn't care. They cancelled the card due to "no use" and I was "tickled pink about it". I didn't want to deal with them knowing what they did to so many of their customers, including me, so I decided to bite the credit score bullet and I have never looked back. As far as I can tell it never changed my score (which is high) that much and I am glad of it (or fortunate) whichever the case.
Actually, some wise uses of credit cards lower your score. For example, I get 1% to 20% back, averaging about 2%, every time I used my cash-back credit cards. So I charge everything I can: groceries (1%), gasoline(2%-5%), college tuition (1%), flowers (20%), prescriptions (2%), etc. And I don't pay off the entire balance, I only pay off the entire STATEMENT balance. So I don't pay any interest at all. But sometimes there's a few thousand dollars (fall and spring tuition payments) that take a month and half to reach the statement on its due date and I'm going to get that little bit of bank interest I get before paying it. And that counts against me. The credit agencies think I'm wiser to pay off the entire balance and cheat myself out that extra interest, than to let the balance wait until it appears on the statement, because the average balance counts against me! Ridiculous!