Thursday, February 2, 2017

Thrifty Thinking: Credit Score Tips

I recently had a chance to interview Rod Griffin, Director of Public Education for Experian about credit scores.

1.Why do different age groups tend to have different credit scores? 
Life experience and time are two factors that may play a role in the differences in credit scores among generations. Young people typically have shorter credit histories, may have larger debts such as student loans, and generally lower limit credit cards with higher balance-to-limit ratios. Older adults, particularly as they near retirement tend to have longer credit histories, debts usually decrease,  and utilization rates slip down. Scores historically increase as people age because their life circumstances change and time shows that they are reliable credit risks. That doesn’t mean a younger person cannot have very good credit scores if they use credit wisely, or that older adults can have very poor credit scores. But on average time and experience lead to better scores.

2.What are some tips for younger consumers to use credit responsibly? 
There are just a few things that a person of any age needs to do to ensure they have good credit scores. First, open a credit account. You won’t have a credit history until you have an open account. Having one or two credit cards is helpful. You don’t need more than that. Second, pay the bill on time every month and at least the minimum due. Ideally, though you should pay the balance in full each month. That leads to the third thing you must do. In order to have good credit scores you must keep your credit card balances as low as possible. To build good credit scores, make a small purchase periodically and then pay it in full. That will show activity in your credit account and credit report, and maintain a low utilization rate.

3.What are some key factors that negatively affect credit scores, besides missed payments? 
Missed payments are the obvious and most important factor in credit scores. The second most important factor is the utilization rate on revolving accounts. That simply means you need to keep your credit card balances as low as possible. The lower your credit card balances, the better. Together, late payments and utilization account for more than 60 percent of a credit score. All other factors build on those two items. Your length of credit history, recent credit activity (such as paying off a debt, opening a new account, closing an account, and so on), and balances remaining on installment loans and other debts all play a less significant role. If you are paying your bills on time and keeping your credit card balance low, all of the other elements will be positive, too.  

4.If someone wants to raise their credit score, how can they do that? 
There are two things that everyone can do to help their credit scores. First, if you have late payments, catch up and then make all of your payments on time, every time. Second, reduce your credit card balances. Payment history and revolving account utilization are the two most important factors in credit scores. Beyond those two things, every credit history is different, and the things that each person should do differ, as well. To find out what you need to do, get your credit report, a credit score, and the risk factors that go with that score. The risk factors tell you what, from your personal credit history, are most affecting your credit score. Address those risk factors and all of your scores will get better. The numbers can be different from one scoring system to another, but the risk factors are very consistent. You can purchase a VantageScore from Experian when you request your free annual credit report at www.annualcreditreport.com. You also can get a free credit report and free FICO credit score at www.freecreditscore.com In both cases you get the number, an explanation of what it means in terms of risk and the list of risk factors that most affected the score. The risk factors are empowering because they tell you what you can do to make your scores better.

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