The Truth About how You Could be Hurting Your Credit

The Truth About how you Could be Hurting Your Credit

Credit scores and credit reports are a very important part of our financial success:

But they are also kind of confusing; and the lack of education on credit scores and reports in our society has led to a lot of misconceptions about what they reports actually are and how they relate to our finances. According to the American Banker’s Association, 44% of consumers believe their credit score and credit report to be the same thing (they are not).

So, lets start with the basics:

Your credit score is a measurement of your risk of not paying a loan and your credit report shows your financial history. When applying for a loan, your lender will look at both your score and your report to help make their decision. Your credit score and report also come into play when you are looking to rent an apartment, apply for a credit card, or get a new cell phone plan. Having an exemplary credit report and high credit score (750 or above is considered excellent) is very important to making sure you are receiving the best rates and plans. So - what’s the difference?

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You should be checking your credit report at least once a year to make sure the information on your report is correct. A whopping 20% of Americans found mistakes on their credit report that was negatively affecting their credit score. There are three major credit bureaus: Experian, Equifax, and TransUnion. You are legally allowed to get one free copy of your credit report from these three bureaus a year. If you would like to look at your credit report, we offer a trusted website to order them here. If you find a mistake on your report, you can contest the mistake with the credit bureau.

Now, let’s talk in depth about the five elements of your credit score:

  1. Payment history reflects whether or not you pay your bills on time. This includes loans, credit cards, and sometimes even rent and cell phone bills. This element is weighted the heaviest as a lender’s biggest question is whether or not you will pay back your loans on time.
  2. Available capacity reflects the amount of available credit on existing revolving accounts. Having a credit card that is at its credit limit or recently closing a credit card account will bring your score down. A good rule of thumb is to keep your credit card balance at less than 50% of the credit limit.
  3. Length of credit is exactly what it sounds like – it is how long you’ve had a credit history. Generally young people, or people who have never used credit cards or loans score low in this category simply because there is not a lot of credit history.
  4. Debt accumulated takes into account any new debt that you have acquired in the past 12 – 18 months.
  5. Mix of credit scores you on how diverse your credit lines are. Having a car loan, a mortgage note, and two credit cards are seen as a better mix than having only five credit cards and no loans. A higher weight is given to mortgage debts and auto loans than credit cards.
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In our post 7 Ways to Establish Good Credit, we talked about actions that improve your credit, so take a look at that blog post after reading about the actions that will hurt your credit:

  • Missing payments is one of the fastest ways to hurt your score as payment history is the score that is weighted the most.
  • Maxed-out credit cards is another way to seriously hurt your credit score as available capacity on revolving debt is another heavily weighted category in your credit score.
  • Closing credit lines will reduce your overall revolving credit capacity and end up hurting your score. In order to close a credit line without hurting your score, you must pay off all of your credit cards so that when your capacity ceiling lowers, your balance will not go over 50% of your credit limit.
  • Shopping for credit excessively can reflect badly on your score. Every time you apply for a new credit card or loan, your credit report is pulled, which “dings” your report and adds it to the credit report inquiries portion of your report. Applying for multiple lines of credit in a short period of time (3 – 4 months) can be worrisome to a potential lender.
  • Accumulating many debts in a short period of time will hurt the “debt accumulated” element of your score and will stay on your score for up to a year and a half.
  • Having more revolving loans (credit cards) than installment loans goes back to the “mix of credit” element of your score. Installment loans are weighted more heavily than revolving loans, so you should have a good mix of both to keep this portion high. And remember – loans stay on your report even after you pay them off, so don’t try to wipe off a completed loan as that will lower your mix of credit!

Credit scores are pretty daunting and repairing a bad credit score can be downright intimidating. That is why next Friday we will be devoting an entire post to bringing your credit score back up if you have been struggling with a low score. In the meantime, check your credit score and your credit report! Educating yourself on your financial status is one of the first steps to financial success.

If you are a POECU member and would like to receive more personalized advising on your credit history, call (504) 885-6871 and make an appointment with Kristy, our VP of lending and certified financial counselor.

Rachel Morris