Giving yourself some credit

Something that comes up all the time (all.the.time.) as a financial coach: credit scores.

I wish we didn’t all care so much about them, but most of us do. Even I get excited when I see that my score is healthy!

Despite the conventional wisdom, your credit score isn’t a verdict on your total financial fitness. It doesn’t reflect your assets, net worth, or income. It doesn’t mean you’re rich or broke. It doesn’t even mean that it’s a good idea for you to borrow money right now. It just tells prospective lenders how much of a risk it may be to lend to you.

A low score means that the credit bureau thinks you’re at high risk of not paying the money back on time, which is why low scorers can be penalized with high rates or limited access to lending. A high score means that the bureau thinks you’re a low risk and probably “safe” to lend money to. But beyond that, what it says about you is actually pretty limited.

And yet… everyone just wants a better credit score!

We should arguably care more about our credit reports — a list of all the accounts, inquiries, and payments tied to us — than we do about our credit scores. The credit report is what feeds into the credit bureaus’ algorithms to create your score. Your report also shows you where you might have old debts to clean up, and erroneous or fraudulent accounts/inquiries that you can dispute.

Credit scores and reports are most relevant when you’re looking to borrow money — like buying a car or a house, or getting a new credit card. But they can also impact car insurance rates, home or apartment rental options, and security deposits for utilities to inform insurers, landlords, and utility companies about the likelihood of you paying your bills. If your credit report starts to show serious issues, your creditors can even raise interest rates on your existing balances.

  • Some employers also check your credit report (not your credit score) to identify potential risks. For example, if you’re going to work in banking or for the military/government, a history of financial mismanagement would be a red flag for someone entrusted with piles of money or state secrets. This type of inquiry is considered a “soft look,” and should not occur without your knowledge and written permission.

The good news here is that there are a few legitimately smart things you can do in your financial life that will also help your credit score. I’m going to share a few of these here, as well as some FAQs and common traps that can ding up a nice shiny score.

Financially healthy ways to boost your score

  • Use less than 30% – or even better, less than 10% – of your available “revolving credit.” I have only ONE single sneaky “life hack” for credit scores, but it’s a good one: always pay your credit card off before the billing cycle closes. Most of us wait until we get our statement — but the number on your statement is the thing that the bureaus use to calculate your utilization ratio. Let’s say you have a $2,000 credit limit, and you charged $1,000 this month — the bureaus will see that as a 50% utilization, which is not great for your score. Try to pay off that balance in full before the billing cycle closes. To the bureaus, it then looks like you used 0% of your “revolving credit.” This factor counts for up to 30% of your score, so it can really make a difference.
  • Pay your bills on time. All of them. Payment history is 35% of your credit score — the biggest component. Credit accounts can legally be reported as late as soon as your account is 30 days past due. You typically have a bit longer with other bills like utility, medical, or rent, but late payments to those can still show up if your account is sent to collections.
    • A relatively new free program called Experian Boost allows you to add a history of on-time non-credit bill payments to your record. This is likeliest to help you if you have a “thin” credit file (few accounts or a short account history). Average users only see a boost of about 13 points, and not all lenders use the “boosted” credit score to vet you, so it may not help as much as you hope.
  • If you have a good track record as a responsible borrower but your credit report is haunted by that brief window of time where life happened and your payment was late, you may be able to submit a goodwill letter to your lender(s). This isn’t a dispute — it’s just you asking nicely for forgiveness because your record otherwise shows you to be a low risk to your creditor.
    • If life JUST happened and you’re less than 30 days late, a kind, apologetic phone call within the first 30 days and accompanied by payment can also sometimes lead creditors to forgive late fees (ask me how I know).
  • Keep track of your oldest credit cards, but don’t close them — let them lie dormant, or set up a small recurring charge and put it on auto-pay. Age of credit history counts for 15% of your total score.
  • Regularly review your credit reports for disputable items — I recommend doing it three times a year at a minimum. If you have reason to believe that an account, inquiry, or late payment information is inaccurate, dispute away!
    • Run your credit report here with at least one of the credit bureaus. Normally you can only get one from each bureau each year. Because of the COVID-19 pandemic, at the time of this writing (Feb 2022) the bureaus continue offering free weekly credit reports to consumers. This is also an important part of protecting yourself from fraudulent activity – read more of what Fortuna has to say about this here.

Factors that ding your score

  • Paying your bills late or letting non-credit accounts go to collections = a 110-point hit.
  • Trying to open a bunch of different credit accounts at the same time. A hard inquiry (a.k.a. a “hard look” or “hard pull”) can stay on your credit report for two years. An individual hard inquiry isn’t terrible; you may see a 5-15 point hit that you might not even notice (it usually disappears within several months). Some credit scoring models will count multiple auto loan or mortgage inquiries within a specific time period as a single inquiry (some models use 14 days, some use 45), because it’s pretty reasonable to shop around and compare rates for a major purpose. You can and should do some homework ahead of time to figure out if a lender is competitive before you allow them to conduct the hard inquiry.
    • BIG CAVEAT: multiple credit card hard looks don’t get that same pass. So if you’re holiday shopping and say “ok” every time a cashier wants to know if you’re interested in getting a discount by opening a new store card, those ALSO count as hard inquiries, even if you don’t get approved.
      It’s also essential to remember that store cards are seldom worth it for you, the customer. Stores offer them all the time because they create loyalty and give stores a great way to gather data about you, and many retailers are making almost as much money off of the extra-high interest rates and fees from the credit cards as they are from profits on actual merchandise.
  • Major derogatory marks:
    • Chargeoffs: when a creditor gives up on your account, usually after 180 days, and “writes off” your debt. This doesn’t mean you are off the hook, because they usually also sell this debt at a discount to collectors, i.e. getting “sent to collections.”
    • Settlements: you negotiated with your creditor and they have agreed to take a loss, accepting less money than you owe them and closing the account. It still may ultimately be better for you and your financial well-being to negotiate a settlement, but it’s worth keeping in mind that it will typically hurt your credit if you do. You can sometimes negotiate with smaller debt collectors or lenders to remove negative information from your report at settlement through a pay-for-delete letter — it never hurts to try this, but some collectors won’t even consider it.
    • Repossessions, short sales, foreclosures, and bankruptcies. These are a big deal, and if you’re seriously considering them, you already know that. But if you’ve heard anyone refer to one of these options as an easy out, just know: these options may haunt your credit report for seven to ten years. These items are a last resort (and not just because of the damage they do to your credit score).

What about…

  • Breaking a lease? It won’t hurt your credit unless you fail to pay what you owe your landlord. Any terms and charges associated with breaking your lease early should be expressly written in the lease itself, as well as any rent, damages, or other charges for which you might be liable.
  • If you apply for a new credit card but don’t get approved? This can absolutely hurt your credit. It still counts as a “hard look.”
  • Unpaid taxes? Tax liens have been removed from credit reports, so they should not hurt your credit history or your credit score. If you see a tax lien on your credit report, you can file a dispute and it should be removed. But you are still on the hook for those taxes!
  • Paying off an old collections account? This one is tricky. It doesn’t help your credit score right away. If you let an account go unpaid long enough that it’s sent to collections, it will still show as a late-paid account on your credit report — even if you pay it off — until it falls off your report (usually at the seven-year mark). But paying off or settling old debts is still a good thing. You can get collectors off your back, avoid lawsuits, and improve the overall story told by your credit report.
  • Getting a credit card to “build my credit”? Here at Fortuna, we don’t want to see anyone go into debt. However… if you are financially in-control and have a positive monthly cash flow, are living on a spending plan, and are absolutely committed to paying off your card in full every month… a credit card can support building credit. If you are not financially in-control… if you do not have a positive monthly cash flow… or if you are pretty sure, down in your heart, that you would give yourself a “pass” on using your card to buy something that’s outside your budget once in awhile… there’s a good chance that a new credit card will ultimately hurt your score through late payments and high utilization rates.

Do you have more questions about credit scores? Drop a comment below and I’ll be happy to answer them! And if you’d like to dive into your own credit report to see where there’s room for improvement, we can cover that in your free 90-minute Big Financial Picture session.

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