Anyone who’s ever struggled with credit issues can attest to importance of obtaining – and maintaining – good credit in this consumer-driven culture. Without a positive rating, you can kiss all hopes of getting a loan for a new house, car, business venture or even the capital to finance a higher education goodbye. In some instances, crappy credit scores can even keep you from renting the apartment of your dreams.
A l’il refresher: a credit score is that 3-digit number that tells lenders and creditors how likely you are to pay back your debts, based on your payment history. The FICO, which is the most common brand of score, ranges from 300-850, with the higher score indicating an “excellent” & consistent history of payments – among other things. It’s important to note that although the FICO (short for Fair Isaac Corporation) may be the most widely used, the exact formulas for calculating credit scores remain a secret. Moving on, the range is as follows:
Excellent credit = 720 and above
Good credit = 660 to 719
Fair credit = 620 to 659
Poor/bad credit = 619 and below
A further look at the mysterious calculations of the Fair Isaac Corp. illustrate the breakdown of which factors make or break a credit score:
1) Timeliness of payments = 35%
2) The amount of revolving debt in relation to the amount of your total revolving credit = 30%
3) Length of credit history = 15%
4) Type of credit used (installment, revolving, consumer finance) = 10%
5) Amount of credit recently obtained and recent searches for credit = 10%
At the end of the day, credit scores are a vital tool for those concerned with maintaining, or improving their quality of life. Taking steps to keep it on track is a pretty straightforward but as classic Clutch favorite, ‘Money Coach’ Lynnette Khalfani-Cox warns us, FICO score pitfalls loom in some of the most unlikely places. The financial guru illuminates the path to better credit by putting us down with 10 “seemingly innocent actions” that can mess up your credit score:
1) Disputing a credit card bill: Surprised? It’s true that under the Fair Credit Reporting Act you are well within your rights to dispute info regarding your credit. However, if you’re planning on applying for a loan, you may want to put that dispute on the backburner for a minute. The reason being that when a dispute is processed by a credit-reporting agency, credit-scoring companies, like FICO, exclude the account in question. This could make an unfavorable impact if it’s one of the more desirable accounts on your credit record.
2) Paying off an old debt or an account in collection: It seems really odd that paying off an old debt could actually make matters worse FICO-wise, but the Money Coach explains why it could lead to trouble:
“In reality, paying off some debts can be detrimental from a credit perspective. Almost anything can happen when you pay off an old debt from the past. The debt may suddenly re-appear on a credit report — even if it wasn’t there before. The “payment status” of the obligation can change and be listed in such a way that it triggers a drop in your credit score. Or paying the debt may reactivate the legal statute of limitations on that obligation. None of this bodes well for your credit rating or your finances.”
Khalfani-Cox adds that it may be best to avoid paying off old debts before applying for a loan – it’s better to be safe than sorry.
3) Renting a car with your debit card: Experience was the best teacher in this instance for Lynette Khalfani-Cox. As part of her commitment to living a debt-free life, she decided to use her debit card as payment to rent a car back in ’09. Sadly, she didn’t heed the fine print of the rental agreement that says the company has a right to pull ones credit report if s/he decides to use a debit rather than a credit card. Long story, short: The next day she received an email alert from her credit monitoring service that notified her that an “inquiry” on her report from the rental car company (Avis) had resulted in a 14 point drop in her credit score.
4) Opening a department store credit card: This one may be a tough pill to swallow for shopaholics. It’s so tempting to take up the offer presented by Macy’s Target, Victoria’s Secret (insert your haunt of choice), especially when the salesperson, or store site outlines all the benefits to opening a new account.
Don’t be fooled, Lynette warns – there’s a really good chance this could damage your score. First off, store cards carry much higher interest rates than Visa or MasterCard – usually in the neighborhood of 20% or higher. Also, applying for the card triggers a “hard inquiry” on your credit report which she states can drop your FICO score by anywhere from 5 to 35 points, depending on your current standing.
5) Having a credit card company not report your credit limits: You can count on major credit card companies reporting your payment history and card balances to the “Big 3” credit reporting firms, Equifax, TransUnion & Experian, but you can’t always rely on them to report your credit limits. The reason this can eff things up is because most credit scoring models, like the shadowy FICO system, need a limit to calculate your credit utilization rate, and therefore, your overall score.