Randy has a credit score of 850. According to FICO, the most popular scoring form, this is as good as it gets.
However, one line on his credit report said he could lower his utilization rate, so he immediately paid off the remainder of his auto loan in one $6,000 payment — then his score dropped 30 points. (Randy has been the target of identity theft and requested that his last name be removed for privacy reasons.)
Most people assume that erasing these automatic payments won’t hurt, but that’s wrong.
When it comes to credit scores, there are a few things many borrowers get wrong, experts say. Here are the biggest misconceptions and why it’s so hard to get things right.
Myth #1: Debt is bad
Your credit score — the three-digit number that determines the interest rate you’ll pay for credit cards, auto loans, and mortgages — depends on a number of factors but most importantly, it’s a measure of how much you borrow and how responsible you are when it comes to making payments.
Having an excellent score does not mean you have no debt but rather a proven track record of managing a mix of outstanding loans. In fact, the highest-scoring consumers owe an average of $150,270, including mortgages, according to the latest Lending tree analysis 100,000 credit reports.
LendingTree has found that borrowers with a credit score of 800 or higher, like Randy, pay their bills on time, every time.
To that end, taking out a four-year car loan stood in Randy’s favour.
“Lenders also want to see that you’ve been in charge for a long time,” said Matt Schulz, senior credit analyst at LendingTree.
The length of your credit history is one of the most important factors in a credit score because it gives lenders a better look at your background when it comes to repayment.
Misconception #2: All debt is the same
Since Randy had already paid off his mortgage and had no student debt, this car loan was key to showing a diverse mix of accounts.
“Your credit mix should include more than just having multiple credit cards,” Schulz said. “The ideal credit mix is a combination of installment loans, such as auto loans, student loans, and mortgages, with revolving credit, such as bank credit cards.”
“The more different types of loans you successfully demonstrate that you can handle, the better your score will be.”
The total amount of credit and loans you use compared to your total credit limit, also known as your utilization rate, is another important aspect of having a great credit score.
As a general rule, it is important to Keep revolving debt below 30% of available credit To reduce the impact that high balances can have.
Misconception #3: You need a perfect score
Only about 1.6% of 232 million American consumers with a perfect credit score of 850, according to the latest FICO statistics.
Bragging rights aside, you won’t gain much in the way of being in this elite group.
“Normally, lenders do not require individuals to have the highest possible credit score to secure the best loan features,” said Tom Quinn, vice president of FICO Scores. “Instead, they set a super cut-off limit, usually in the high 700, where applicants who score above that limit qualify as having a good credit score and get the best terms.”
Each lender sets its own credit score thresholds for those they deem most creditworthy. As long as you fall within these ranges, Schulz added, you are likely to be approved for a loan and qualify for the best rates the issuer has to offer.
“Anything over 800 is broth, and in some cases, the difference between 760 and 800 may not be that significant,” Schulz said.
Most credit card issuers now offer them for free Balance level Access to their cardholders making it easier than ever to check and monitor your score.