Why You Should Only Believe Certain Credit Score Truths

A financial stability and outlook question that looms large for most centers on your credit score, what that number is and exactly what it means to you.

Your credit score gets plenty of attention these days, what with various outfits allowing you to check the score, devoid of any charge or penalty, and determine exactly how your score stacks up when it comes time to buy a home, car or any sort of financial flexibility one might want.

But how much attention are you giving your score, personally? While some understand what a good score means to your finances, others are oblivious to exactly how important the score is, and how imperative it is to maintain one that is looked upon favorably by creditors, lenders and anyone ready to trust you with borrowed money.

Scores described as “good” or the overall average typically settle into the high 600 range, with the United States average at 687 with ranges between 330 and 830, the latter considered a “perfect” score.^[1]

The good news as far as credit scores go is they seem to be on the upswing, with the 2016 final average score hitting nearly 700 (699), an increase from the previous year.^[2]

This would suggest that borrowers understand the importance of maintaining a good score, which is comprised of several factors, including income, debt and how that ratio should conceivably and realistically balance out from one month and year to the next.

Your credit score is comprised also of your payment history, whether or not you’ve done your due diligence in paying on time, or if you’re allowing yourself to make payments later than the due date or beyond 30 days, which in almost every case gets reported to a credit agency for collections.

Roughly 35 percent of your credit score comes rom payment history, with second only to credit utilization, which is the balance of your credit to the limit, which should be at 30 percent and also accounts for 30 percent of your score.^[3]

In addition, credit is monitored also by how long the accounts have been active, the variety involved and if you’ve applied for credit or loans in the last six months, a statistic that often weighs down your score until those hard inquiries (typically a car loan, house, etc.) fall off, which is typically in 24 months, although those inquiries stop affecting your score after one year.^[4]

Trying to avoid a negative credit impact or report is paramount if for no other reason than as stated above: you want to be able to own a home, buy a car with as little resistance and difficultly as possible.

A poor credit score isn’t necessarily the death nell on being approved versus denied but can give you higher interest rates, causing you to end up spending more money than you’d originally plan, especially when you consider the length and duration of a mortgage, for example.

One example illustrates a $300,000 refinance on a 30 year mortgage that outlines a 750 credit score versus a 620. The 750 person gets a 4.25 rate, versus a 4.75 rate that equates to an extra $100 per month for the 620 neighbor, which over the course of the 30 years is $32,040 more.^[5]

One of the main concerns, however, is regard to credit scores and reporting in general is a slew of disinformation about what you should and shouldn’t be doing with your score, and how certain actions cause reactions that ultimately lower it or raise it, but not sure exactly what does what.

The general thought is that the consumer understands the ramifications of a good score and how that can positively affect a purchase or loan, but often is misled on how to get from point A to point B successfully, minus the misinformation, bad advice or myths that run rampant as it pertains to raising the score.

Here are credit score truths, the ones you can proverbially take to the bank as what you should be doing to raise the score or, at the very least, help it get a little stronger as you more toward financial freedom and independence.

Timing Play: Paying on time is non-negotiable

The laughable comment from someone who believe that paying on time is more suggestive than certainty isn’t a credible source financially for you to believe or follow.

As discussed, credit history is 35 percent of your score, and thus can’t be trifled with on any level.

And if you’re of the opinion that one late payment isn’t going to do much, you’d be highly mistaken.

Just one late payment could drop your score between 90 and 110 points, a huge chunk missing from an otherwise good score.^[6]

Consider a 700 credit score suddenly being in the “bad” or “poor” range at 580 or 590, and thus a 100 plus point swing that changes how much you’ll pay in interest or if you’re even going to be eligible for a loan whatsoever.

Keep in mind that a creditor considers late to be beyond 30 days as far as reporting purposes and negatively affecting your score.^[7]

That said, you don’t want to make it a point to pay late, but even using that grace period and paying on day 29 is better than letting it lapse altogether. The other piece of late payments is if you have to pay the minimum payment versus not paying at all, so be it. In most cases, too, if you contact a creditor and explain the situation, perhaps you can find some leniency, although that isn’t guaranteed.

A phone call is still worth the effort to avoid having a late payment drop your score significantly.

Closing ill-timed: Closing credit cards in mass won’t help your score

A huge misstep for most is the notion that the more credit cards you have on the books or “open,” the worse your score is going to be, and that simply isn’t true.

This credit myth has already bit more than its fair share of consumers when it comes to trying to improve your score and doing the exact opposite.

If you have multiple credit cards, in this example, with $1,000 credit limit on each, with no charges on one and a $300 balance on the other card; that’s a 300 to $2,000 ratio of 15 percent, which is stellar.^[8]

Consider that if you close those one card with the $1,000 limit on it that leaves you with $1,000 of “open” credit against the $300, doubling that utilization to 30 percent, which is only 5 percent below where you should be, on average.

This is particularly bad if the cards you have balances on are high, and are up against the total limit on the card. Another example of a $5,000 balance on a card with a $5,000 limit and two other cards with zero dollars on them with equal $5,000 limits each puts you at a $5,000 versus $15,000 utilization, right at 33 percent versus the 100 percent you’d be dealing with if the first card was your only one.

And if you’re someone whose utilization is above 35 percent, don’t scoff or turn a blind eye toward credit increases. Those actually can help your score immensely by adding to the limit and thus putting more of a gap and space between what you owe and what you can spend.

The idea that credit cards or open lines of credit that have a zero balance are bad is ludicrous when you consider how utilization is calculated: essentially how much you owe versus what’s available.

Checks and imbalances: Checking score isn’t a deal breaker, neither is income

Credit Karma, just due to their marketing and advertising presence, shows quite humorously that checking your credit score isn’t all that bad.

They’re right, too, generally speaking.

Checking your own credit score, no matter what medium or service you’re using, won’t hurt your credit score overall. That’s referred to as a soft inquiry, so no harm done. The hard inquiries can be a little more taxing but still will fall off or cause just a temporary reduction in the overall score.

Hard inquiries are for opening a new line of credit, credit cards or any sort of loan for a vehicle, home, etc. Soft inquiries can take place if you check your own score or if an employer checks it for employment purposes or some other non-purchase or borrowing factor is put into play.

As far as income, it’s one of the factors that people who have bad credit fall back on if they’re making high five or six-figure incomes, but that really doesn’t pertain or affect your score whatsoever.

That said, your income can affect your ability to pay back a loan, so debt to income ratio is taken into consideration, but not when it comes to scoring, but for approval purposes, the answer is a hard “yes.”

Debt to income ratios should be in the 30 percent neighborhood with a range of 28 to 31 percent considered “decent.”^[9] As noted, if your income isn’t substantial enough to pay back the loan, you can only increases the debt to income ratio in three ways: bigger payment up front (think car and home versus what the monthly payment would be), or adding to your income or paying off debt you have at the moment, thus showing a better ratio as a result.

Being labeled with a poor or unimpressive credit score is embarrassing at best and a huge hinderance at worst when it comes to all that you want to accomplish financially.

With Americans already living beyond their means based on factual, hard statistics of an average of $137,063 in debt versus a median income of under $60,000, you’d be even more well advised to be cognizant of debt and income, and by default your credit score and how you’re perceived financially.^[10]

That said, debt and credit scores don’t have to define you, and while the first thought is always how can I raise it quickly, this is more of a marathon than sprint.

The most important factor is really paying on time, when you consider that it would take nine months for a late, beyond 30 day payment, to fall off your report if your score is 680, two and a half years if your score is 720 and more than three years if you were at 780 and want to get back to that point.^[11]

The point is paying late, closing accounts on a whim and acquiring more debt if your utilization is already above 30 percent are bad missteps and reasons you’ll really never crawl back to respectability when it comes to your credit score and overall report and financial wellness.

You’ll have to determine if your score means enough to you to be more than just three numbers sandwiched together and instead start looking at it as the benchmark that will bestow upon you financial security for years to come.