Good morning friends! If you think credit is sexy, you’re gonna love today’s post. And if you don’t, well, you’re going to be convinced by the end of it ;) And hopefully learn how to increase your credit score too since the better it gets, the less you pay over time! Which can literally save you thousands!
We’ll start with a handful of myths that Experian recently dispelled (they’re one of the largest credit reporting agencies), and then I’ll spill the tricks my wife and I personally used to get our own scores pretty high too – currently at 821 and 806 respectively. Which I now see for free every time I log onto USAA – Woo! Thanks guys.
(I also hear other places are starting to offer this for free to their customers too, like Discover Card, Ally Financial, Bank of America, JPMorgan Chase, the State Employees’ Credit Union, and hopefully more as time goes on. We’re definitely headed in the right direction!)
Let’s get started…
Myth #1: All debt is equal
Technically true, but credit card debt hurts your credit much more than a mortgage. It tells future lenders that you’re at larger risk than a “responsible” homeowner, even though you don’t actually own your home until you pay it off – hah. The bank does ;)
Myth #2: Checking your report will hurt your score
“A notation called an “inquiry” goes on your credit report every time someone (including you) looks at your file, and rumor has it that inquiries can hurt your score. Well, yes and no. An inquiry affects your score only if it’s related to a credit application that you have submitted. If you apply for a loan or a credit card, your score might fall, because that application suggests you’ll be adding debt. But if you simply look at your own credit report, the resulting inquiry won’t affect your score. If anything, checking your report is a sign of responsible credit management, though you don’t get points for doing it.”
Myth #3: Closing a credit card will help your score
It’s actually much better to KEEP THE CARD OPEN than to close it – which can actually hurt your score. Credit scoring models don’t measure risk by how much credit you have available, but rather by how much of that credit you’re using. AKA “credit utilization.” When you close a card with $0 balance, you reduce your total available credit you had and thus your credit utilization goes up.
For example – if you have a balance of $500 on one card with a limit of $1,000 and a balance of $0 on another card with a $1,000 limit, you’re “utilizing” 25% of your $2,000 available credit. However, if you nix that second card w/ $0 balance, you’re now at $500 for just the one $1,000 limit card effectively jacking up your utilization to 50% – even though it’s the exact same debt.
So in a nutshell you always want your ratio to be super low. Though of course if there’s a chance you’ll be tempted to rack up more debt keeping it open, then it’s MUCH better to just kill the thing and move on. Your finances always come first!
Myth #4: There is only a single credit score
Nope. There’s like a billion. Awesome, isn’t it? ;) According to Experian, “There are more than a thousand scoring models in use in the credit marketplace. A consumer could therefore have dozens or even hundreds of different credit scores.” So really what you want to do is just stay consistent with the model/score you’re checking over time so you can track progress. It’s not so important which one you’re using, but more so making sure you’re aware of where you stand and what – if anything- you can do to raise it more. The score I listed for myself up above is a VantageScore, with 821 being on a scale from 330 to 850.
Here are some examples of popular ones taken off USAA’s FAQs when I was poking around:
- VantageScore 3.0: Scores range from 300-850. Created by the nation’s three major Credit Bureaus and used by some lenders to approve loans. Most influential factors include: payment history, age and type of credit, percentage of credit limit used and total debt.
- FICO Score: Scores range from 300-850. Created by Fair Isaac Corporation and used by some lenders to approve loans. Most influential factors include: payment history, amounts owed and length of credit history.
- PLUS Score: Scores range from 330-830. Educational score developed by Experian for consumers to gauge their credit worthiness and not used by lenders.
Myth #5: Credit bureaus give “good” and “bad” scores
Nope! They just give out your score. It’s up to the lender to determine if they think your score is “good” or “bad” (i.e. “Do we need to worry they’re going to pay us back and need to hit them with a super high interest rate?” or “Are they totally responsible, so let’s just charge them 1% for that new home mortgage” – that would be dreamy ;)) Also, keep in mind that scores are usually just one factor in their decision. A great score might not mean much if you don’t have a job or any assets, just like having a high income and stack of gold bars might outweigh a bad score!
Myth #6: If you get a better job you’ll get a better score
I’ve never heard of this one before, but no – it doesn’t matter what your job is. It matters how good you are with your money! I like what Experian says about this mid-way down, haha… “Your report includes a lot of information about your use of credit and your management of debt. But, it doesn’t include your income. In fact, it may not even indicate whether you have a job (nor will it tell you to get off the couch and get one). That said, your employment situation can affect your score indirectly, in terms of your ability to pay your debts. And when you apply for credit, lenders will probably ask about your income.”
Myth #7: Your credit score accounts for demographics
Nope. It doesn’t include anything on race, national origin, religion, profession, disabilities, sexual orientation or even military veteran status.
Myth #8: Married people have joint credit reports
That would be awesome or scary depending on who you’re marrying :) But nah – each human has their own specific score. I encourage all y’all to ask about it on your first date ;)
Myth #9: Paying off debt erases them from your report
It erases the debt, yes, but not the info on your report. Most negative stuff can remain for up to seven years, and even longer if you file bankruptcy (sometimes up to 10 years). However, you typically want those debt pay offs on your report as it’ll help make you look good and pump up your score! And regardless, it means you’re now DEBT FREE – woohoo!
Myth #10: Companies can ‘fix’ your credit
“There’s nothing that a “credit repair” company can do for you that you can’t do yourself. No one can remove accurate information from your credit report. Reputable credit reestablishing services can help you come up with a plan to repay your debts, but the only legitimate way to enhance your credit score is to practice good credit management.”
Myth #11: Your credit score measures your value as a person.
Hah! It may seem like that in the world of personal finance blogs, but thankfully this is not the case ;) Credit scores are designed to do one thing, and one thing only – evaluate how big of a risk it would be to lend you money. It doesn’t show how awesome and generous you are as a human being. Your actions do that!
So that’s it for the myths… Any catch you off guard? Did you already know most of these? I love what they said about credit overall too – the same can be said about money!
“Credit is a tool. Like any tool, it’s neither good nor bad in itself. What matters is how you use it.”
Some things I’ve done to increase my own credit score:
(FYI not so long ago I SUCKED with credit stuff. I was always paying my bills late and never cared if I had any balances on them or not (though they were thankfully always small). These were the main things I did over time that dramatically improved my score/report.)
- I started paying all my bills on time.
- I stopped keeping balances! (Even though I now charge everything to my cards for the rewards)
- I increased the limits on all my cards as high as possible to improve that gap between debt and available credit (similar to the story with Myth #3). I literally went from $15,000 in credit lines to $55,000 within a 5 minute phone call! Though I only did this AFTER I got a better grip on my finances… You obviously don’t want to try this route if you’re just going to get into more debt – it’s not worth the risk.
- And lastly, I left my longest cards open even though I stopped using them
We also did the following when I first met Mrs. BudgetsAreSexy and she barely had a score. She wasn’t bad with money, she just didn’t have anything in her name and thus no history on the books to tell lenders whether she was responsible or not. So we did the following:
- I had her open up two store cards under her name to start establishing history (Target and TJ Maxx)
- I advised her to then buy something every few months on the cards and then pay it off right away to show “good” history (or else NO history would have been better – hah!)
- And then when we started living together we made sure to put all the bills in her own name to continue establishing the trail. Which I’d only do if you really trusted and loved the other person ;) You don’t want to put your own name on stuff if there’s a chance the other person will screw you in the end! And I mean that figuratively! (Bah dum ching)
Doing these few things, along with the ultimate rule – being smart with your money! – got her score up to 806 over time. Though she likes to put it in my face that she beats me from time to time, haha…. Now how that happens I have no idea ;)
But here’s the most beautiful part: once you figure out this stuff (just like with money), you don’t have to worry about it anymore! You just keep letting time do it’s thing and compound how good you look.
And speaking of good looks, according to a poll a while back by freecreditscore.com, the way you handle your money is apparently hotter than the # of your abs:
- 96% of women find financial responsibility more important than physical attractiveness (same with 91% of men)
- 88% of women find “spending beyond your means” and “having debt” the least attractive (as do 52% of men)
- 75% of women find credit scores important vs 57% of men
- 48% of respondents discuss their credit score with their partner, and 39% within the first year
- 30% of women indicated they wouldn’t marry someone with a poor credit score vs 20% of men
So there you have it. Credit scores are proven to be sexy!
And while there is a lot of factors that go into them (payment history, age and type of credit, percentage of credit limit used, total debt, etc), it really does comes down to paying attention overall and limiting the mistakes. Something I now y’all are already working on or else you’ve landed on the wrong blog! (You Googled “sexy” didn’t you?? Tisk Tisk…)
Hope this helps :) As my dear friend Brad likes to say, none of this even matters if you’re never taking out debt again anyways – Hah! Something good to strive for, eh?
PS: The best place to grab your credit report is from AnnualCreditReport.com – Authorized by the federal gov’t, and free to grab one time each year.
This post was written as part of a sponsored program for ConsumerInfo.com, Inc., an Experian Company. As always, all views expressed here are entirely my own and were not influenced or directed by Experian. This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!