We read an online article recently about credit and credit scores. The writer was complaining about how they couldn’t get approved for credit for a major purchase. He was denied due to a credit score of 575. In the article, he complained how this credit score is wrong, how the creditor who denied him must be committing fraud, and on and on.
This article writer referenced a consumer-credit app that all too many people use, some “karmic” thing that purports to guide people on improving their credit histories.
Based on 30 years’ experience in mortgage banking and having read thousands of credit reports, my response to the author of the article and a commenter is below. We promise you, as you will see, credit ain’t a rocket science.
People in the world spend too much time focused on their credit scores, only to lead to the kind of frustrations experienced by the article writer referenced above. I’ve been giving this kind of credit advice for decades because we know it WORKS.
Our opinion is that consumers have been trained to spend entirely too much time focusing on credit scores. If you want a good credit report and good scores there are several basics to follow.
- Longevity counts. The longer your credit history (assuming on-time payments, no derogatory accounts, good utilization), the better your scores.
- You have 3-5 accounts open and ACTIVE at all times. Active means using that account every month: a car loan you’re paying, a credit card you use for groceries, a student loan (or more), a mortgage. Even if it’s only credit cards, 3-5 accounts is the standard for good scores in my experience.
- STOP paying off your balances to zero permanently and STOP paying off your credit card balances at the end of the month. Credit scoring relies on you actually USING credit. If your complaint is that you don’t want to pay the interest, fine, but don’t complain that your credit scores aren’t higher. It’s a scoring system based on USING credit over time. FYI: “time” does not mean monthly, rather over long periods of time, consistently. (See #1 above)
- Utilization. I know all the online “experts” say “Don’t use more than 30% of your available revolving balance.” What a bunch of scaredy-cats! We’ve seen thousands of credit reports thanks to Trevor’s financing career. He’s seen folks with up to 50% utilization of their available revolving balances with excellent credit scores. When you go above 50%, then it can get interesting. Depends on your overall credit history. Is it one account above 50%? Is it several? Did you just get a new house and mortgage? Did you trade in your leased-car last month? Yeah…interesting. (See #5 below)
- Credit is a “living breathing thing.” Not like as in a “monster” but certainly there’s an organic aspect to your credit history. There’s a lot going on there. That’s why it’s nearly impossible to control your credit scores no matter what all those “karma” websites will tell you. I have had many people I’ve worked with (including one right now) who are tweaking their credit based on what “karma” tells them to do with the flick of a finger on the screen of their smartphones. I just shake my head as I watch their frustration as to why in the longer term they’re not hitting the desired scores. There are no short cuts. A credit history determines your credit score. And a credit “history” is exactly that: a long-term project. (See #1 above)
- Yes, pay your bills on time. Duh. Note, a “late” payment reported to a credit report is for a payment 30 days late or more. If you pay two days after the due date, but within 30 days, you’ll incur a late charge, but not a derogatory “30 day late” mark on your credit report.
- If you’re planning on big purchases in the next few months, don’t close any accounts and don’t pay them down to zero. (See #3 above). If you’re not planning on big purchases, close those accounts you’ll never use again. But remember to keep open 3 to 5 accounts current and active, keep your utilization of revolving credit below 50% of available balance. Don’t zero out your accounts. Pay your bills on time.
You now have your open source access to how your credit scores are calculated. Now, with all that extra time on your hands from NOT monitoring your credit scores, order a pizza, pay for it with a credit card, give the delivery person a generous tip, and kick back and watch “The Queen’s Gambit” on Netflix (it’s AWESOME).
If you want to rebuild your credit, we’ve written an EBOOK with tactics and strategies to begin rebuilding your credit.
Here is my response to the author of this article:
I’ve [Trevor] been in finance for over three decades and I’ve read thousands of credit reports.
Here are my observations and advice:
STOP wasting your time with that karma nonsense. It’s a rabbit hole that, in my professional experience, does very little to assist consumers with valid credit guidance.
Credit scoring and credit reports are “organic” to a certain extent: many moving parts shifting each month. That’s why the “karma” advice and others like it can’t work correctly all the time, or in the long term.
Credit scores update once a month. Period. Not daily, not weekly, not based on activity. Creditors choose to provide reporting information to the THREE credit bureaus (Trans-Union, Equifax and Experian). The accuracy of that information can often be questionable.
No consumer anywhere can obtain the same credit scores that we use in the financial services field. We use “CLASSIC” FICO scores. Even should you obtain your score from the FICO website, it’s not a CLASSIC score.
I’ve seen differences of as much as 100 points in either direction between the consumer-access credit scores and CLASSIC scores.
Financing decisions are made using CLASSIC FICO scores by pretty much every credit-decision maker everywhere.
Creditors of all sorts (mortgages, car loans, credit cards, etc.) have varying criteria from one creditor to the next to determine creditworthiness.
Visit www.consumer-action.org for great, legitimate, free advice on all things credit related.
NEVER ever, ever, ever, ever, ever, ever, EVER pay anyone to repair/restore/add trades to your credit report. I’ve met too many people over my career who have done that only for me to tell them months later how terrible their credit is and, no, I cannot approve them for a mortgage to buy a house.
They respond with the kind of outrage you express in the article. Those credit “repair” people are scams, IMHO. I don’t care if they now appear as “legitimate” on the FTC website: I haven’t seen a single case where those types of services assisted a consumer in the long term.
And credit is LONG TERM.
As for people offering to add trades to your report: dunno, but that sounds incredibly fraudulent to me.