Questions and Answers About Credit Scores

I was recently a panelist for an Experian #creditchat titled Credit Confidence: Understanding Credit Reports, Scores, and How to Improve Them. Its purpose was to take a deep dive into credit history metrics and actionable strategies to build credit confidence and strengthen a credit profile.

Below are six questions that were asked and my responses:

What does “credit confidence” mean and why is it important for overall financial well-being?

Credit confidence is how comfortable and knowledgeable someone feels about using credit. A person with high credit confidence knows basic credit terminology, keeps credit card balances low, pays bills on time, and builds a strong credit history.

 

Why should people regularly check their credit reports, and what should they look for?

First, to catch errors. Credit reports can contain errors such as accounts that aren’t yours or incorrect balances. Second, to detect identity theft. Errors will show up if someone opens fraudulent credit accounts in your name. Also, before making major purchases, such as a home or car. so there are no surprises where credit could be denied.

 

What factors have the biggest impact on your credit score, and what systems or habits can you put in place to avoid negative impacts over time?

Payment history is the #1 factor in a credit score (weighted 35%) followed by credit utilization ratio (weighted 30%). The latter is the amount of outstanding credit someone has divided by their total available credit. Example: $2,000 ÷ $10,000 = 20%. Systems and habits can include automated payments, text alerts, and personal decision rules regarding spending.

 

What is some bad advice about credit scores that can be harmful to someone?

“Carry a balance to build credit”- You do not need to carry a balance or pay interest to build a strong score. Simply pay at least the minimum due by the due date.

“Close all old credit cards that you don’t use”- Doing this will shorten your credit history and reduce your available credit.

“Checking your credit score hurts it”- Checking your own credit is a soft inquiry and does not affect someone’s credit score

 

What are some tips that can help someone who is trying to build credit for the first time?

Use your credit card regularly for small purchases that you pay for in full on time the following month. Also, keep your balances low and stay under 30% of your available credit (i.e., credit utilization ratio) and 10% is even better. Finally, think of your credit card like a debit card and only spend money that you already have.

 

What is a credit mistake people make that can be hard to recover from, and how to avoid it?

Missing payments (30+days late). Late payments can stay on a credit report for up to 7 years and drop someone’s credit score significantly. Avoid this error with automatic payments, e-mail and calendar reminders, and text alerts.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.