Do you know the score? No, not your Uber rating or your favorite baseball player’s on-base percentage. We’re talking about your credit score.
Chances are good you don’t, and don’t know how to repair a less-than-stellar one, either. Only about half of millennials have checked their score within the past year, and an Experian survey found that 67 percent don’t have a good understanding of how their credit scores are computed.
But what you don’t know could be costing you—big time. A low score or blemished report can prevent you from getting the best rates on a mortgage, car loan or credit card, and can even affect your ability to qualify for a new apartment or land your dream job.
That’s why we’re clearing the air on some of the most common misconceptions that can wreak havoc on your credit.
Joseph Wehr, a financial educator at credit counseling service Clarifi, says many people mistakenly believe that revolving credit card debt from month to month—and making sure to pay the minimums on time—is a good way to build credit.
While it’s true that on-time payments are a key factor in your FICO score—they account for 35 percent—“the only way to use credit cards wisely is to pay the balance in full when it’s due,” Wehr says. Otherwise, you risk handing creditors free money in the form of interest payments.
Another little-known fact: In some cases, a zero balance is actually reported to credit bureaus as an on-time payment. That said, it’s still smart to use your cards every once in awhile—at least every two or three months, Wehr says—to prevent your creditor from closing your account due to inactivity.
Credit coach Jeanne Kelly, author of “The 90-Day Credit Challenge,” suggests keeping your accounts active by charging needs, not wants—as in bills you need to pay anyway like electricity, insurance or gym dues. You’re not overextending yourself, and you know you’ll have the cash on hand to pay it off.
Our mailboxes are often overflowing with creditors’ solicitations, and eager cashiers don’t always make it easy to turn down their offers to “save 15 percent on your entire purchase today!” While the amount of credit available to you is important because it affects your credit-utilization ratio—that’s the percentage of debt owed in relation to your limits, and the lower the better—it’s not necessary to sign up for more than one card at first, says Keola Harrington, another financial counselor at Clarifi. She only used one for three years, consistently charging small monthly balances and paying them off, before she felt ready to add another card to the mix.
When a little variety can help? Credit cards, as well as home equity lines of credit (HELOCs) and personal lines of credit, are considered “revolving credit.” Another type of credit is what’s known as “installment loans,” and includes student loans, auto loans and mortgages. It’s not imperative to have both, but lenders do like to see that you are able to manage different types of loans, says Tasha Bishop of Apprisen, a credit and debt counseling service.
“Your credit mix has a relatively low impact on your score [just 10 percent], but if you are shooting for that perfect score, it’s best to have a mix of installment and revolving credit,” Bishop says.
Well, yes and no. Of course you should only charge as much as you can comfortably pay off—but don’t go nuts, Harrington says, because FICO anchors 30 percent of your score to your credit-utilization ratio. In the ratings game, the higher your ratio, the greater the risk—at least in appearance—that you won’t be able to pay your bills.
“When consumers use the maximum amount allowed on their credit cards, it damages their credit score and is considered unhealthy,” Harrington says. (In fact, a card at 90 percent of its limit is considered to be “maxed out,” Wehr notes.)
Wehr recommends sticking to a utilization ratio of 30 percent or less to prevent your score from dropping. But if you routinely find yourself using more than that, you can either ask your lender for a limit increase or make two monthly payments, so that the balance is lower when your bank reports activity to the credit bureaus.
Are you a stickler for paying rent, utility and cell phone bills on time? Good for you—you’re avoiding late charges and, likely, an angry landlord! Unfortunately, rent payments and utility bills aren’t generally reported to credit bureaus, so your score won’t be affected by your timely payments. Only credit cards and loan payments—think: those for mortgage, car, school or home equity—are generally reported, and factored into your score.
“These types of accounts will not appear on your credit report unless they are delinquent and in collections,” says Harrington. “It almost isn’t fair that paying these bills on time can’t help your credit score, but one late payment can significantly hurt it.”
Fortunately, Bishop says there may be a way to get some props for timely rental payments in the form of a portal from Experian called RentBureau, which makes it easier for property management companies to report positive data. If yours doesn’t participate, individual renters can also sign up through a rent payment service that works with RentBureau. Just note that the service only affects your VantageScore, a less-popular alternative to the FICO score.
Whether it’s a doctor’s visit for an upset stomach or treatment for a more serious diagnosis, medical bills have historically had the ability to quickly transform into outstanding debt that mars your credit. However, new actions will ensure that medical collections have a lower impact on your credit score, thanks to the National Consumer Assistance Plan, developed by Experian, Equifax and TransUnion. The biggest change is that medical debts won’t be reported until after a 180-day “waiting period,” which gives time for insurance payments to be applied.
Another development is the FICO 9 score, rolled out in 2014, which assigns less weight to unpaid medical debt—thereby lessening the negative impact on your credit score. However, Bishop says, “Not all lenders will transition to FICO 9, and the debt will still remain on your report for seven years.” If there’s lingering debt on your report, she recommends contacting your lender to see if they are willing to work out an extended repayment plan.