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Like it or not, credit scores matter. Your credit score determines whether you can get a mortgage at a reasonable interest rate or buy a car when you need (or want one). Your credit score also can open or close the door to a job you want or a rental property. Your credit report is how lenders and creditors gauge whether you’re a risk worth taking. Understanding your credit report and score is critical. However, there are a few facts some people get wrong about their scores.
#1 It’s Best to Carry a Balance
Credit cards are a tool to help you get a higher credit score and keep it up there. However, it’s a double-edged sword. If you don’t use your credit card, the creditor won’t be happy and could cancel your account or refuse credit line increases. If you overuse or abuse your card, your score can drop.
There’s a myth floating around that you should carry a balance on your credit card and that doing so will boost your score. This is NOT true. That fact is that if you end the month with balances that exceed 15-20% of your total credit lines, your score will drop until your utilization drops back to a more appropriate range.
You never need to carry a balance to boost your score. Instead, to keep creditors happy, you need to occasionally use your card, pay in full each month, and never run late on a payment. Use your card for necessities, not luxuries and, ideally, pay off the balance before the statement cuts.
That means no interest charges, no potential to have a late payment, and no over-utilization. Avoid carrying balances to optimize your credit score.
#2 Your Age and Income Matter
When a potential creditor assesses your score, they look at the number and may examine the details behind it. How old you are, your race, where you live, where you went to college (or if you went) and other personal details are not part of the consideration. It’s simply about your credit-worthiness.
Statistically speaking, the older you are, the likelier you are to have a better credit score, but creditors don’t care how old you are. What they care about is that you handle your money wisely, don’t have negative items on your report, and can afford to pay for the credit you’re seeking.
#3 Fewer Cards is Better
Some people think having too many credit cards can hurt you. They might also think closing old accounts is a good idea. Usually, it’s not. How many cards you carry, the lines of credit you have, and how long you’ve had them all affect your credit score for utilization and credit history.
The average age of credit is one component of your score that’s simple to assess. You add up how many years you’ve had your credit cards and divide by quantity of accounts. So, if you have three credit cards and they were open one, two, and five years, you add those [(3+5+1)/3= 3 years average age].
If you closed the oldest account, your average age of credit drops to two years [(3+1)/2= 2 years average age]. Just closing that one account and making no other changes will drop your credit score. Then there’s the utilization issue.
If you have credit lines totaling $5,000 across those three cards and have a balance of $1,500, that’s utilization of 30% [(1500)/5000= 30%]. If you close an account with a $2k credit limit, your utilization would soar to 50% [(1500)/3000= 50%] with no other changes. Your score would plummet!
Understanding how your credit score works and the factors that determine your credit ranking are important so that you can optimize your financial opportunities. To find out more, check out Credit Score Keys.