A reader sent us a question about their credit score, wanting to know why it was lower than they thought it should be and what they could do to bring it up, so we thought we’d answer this reader’s question here for anyone else who may have the same question about their credit score.
There are some myths about credit scores.
Myth No. 1: You have to be in debt to have a good credit score. This is a big misunderstanding.
People with scores above 800 have less debt than those with credit scores of 600 and 700. To get those perfect scores, they did everything right. Credit card bills were paid on time 99.9 percent of the time, their credit cards were older and they had a lot of cards but not a lot of outstanding debt on those cards. That last factor is called a credit utilization ratio. You look at how much money you have access to versus how much of that money you are using.
Ideally, you should never use more than 30 percent of the credit you have available to you. People with perfect scores have an average of 6.7 credit cards, but they obviously weren’t maxed out or even close. The average age of those cards is 10.24 years.
Suggestion: Get several cards and use them for the things you would normally buy, then pay each card off monthly. By doing it this way, you don’t overspend, you don’t get in debt, and you make yourself a valuable credit card customer. You’re showing that you have an active account that you can manage responsibly.
Myth No. 2: Wealthy people have better credit scores.
Income is not a factor in credit scores. Rich people don’t always pay their bills on time.
Myth No. 3: If you don’t have a credit history, your credit score will be poor.
Actually, no credit history means no negatives that can affect your score. You’re given the benefit of the doubt, and you’ll most likely start with a score in the 600s. After that, your score will go up or down depending on how you treat credit. Those whose scores are in the 400 and 500 range are not paying their bills and have otherwise shown a history of not handling debt responsibly.
If you do have a low score, it’s possible to raise it by 100 points or more in just a year if you:
- Clear up any outstanding debt and get current on your payments.
- Make sure all future bills are paid on time.
- Start establishing a new, better credit history by getting a secured credit card, which requires a cash deposit. That deposit acts as the credit line for your account. For example, if you put $500 in the account, you can charge up to $500.
Myth No. 4: It’s better to have no debt at all.
Sounds great, doesn’t it? Unfortunately, we live in a world where people need proof they can pay their bills and handle money wisely. Your credit score is used for many things by many people. In most states, auto insurers can use your credit score when figuring out how much insurance you should pay. Potential employers look at it to see if you’re under financial stress, which could affect job performance.
At some point, you’ll want to buy a house, and a good mortgage loan depends on a good credit score.
You say, you’ll rent all your life? Landlords look at your score as well. So do mobile phone companies.
Get a few cards, use them and pay them as suggested above, and then pay cash the rest of the time. Then, when the time comes and you want to buy that house of your dreams, you’ll have the good credit you need to obtain a favorable mortgage.