My husband and I recently refinanced our mortgage, and the bank sent us our credit scores during the process. Both scores were good, but my husband’s was 30 points higher than mine, which puzzled me, since we share the same spending and bill-payment practices. To find out why my score was lower — and to get a better understanding of credit scores — I decided to talk to some experts. I learned four lessons that I think you’ll want to know.First, a brief refresher on what a credit score is: It’s an algorithm designed to predict your likelihood of repaying debt. Lenders use your score to determine whether to approve you for loans and credit cards and at what interest rates. Insurers use credit scores to set premium rates, and employers use them when making hiring decisions.
Your credit score is based on your credit report, which is a record of your borrowing and repayment history, typically compiled by one of the three major credit bureaus: Equifax, Experian or TransUnion. (You can get your credit report — not your credit score — free at annualcreditreport.com. But watch out for sites offering phony “free” scores, as another Next Avenue article explains.)
So here are the four lessons I learned that could help you improve your credit score:
Lesson 1: Don’t sign up for new credit cards you don’t need — even if you’re offered attractive deals for doing so. This mistake, it turns out, probably cost me several points on my credit score.
Shortly before I refinanced my mortgage, a retail clerk persuaded me to open a store credit card to save $40 on a purchase. It seemed like a good idea at the time. But, as I’ve since learned, opening a new line of credit negatively affects your score at first because you have no history with the new creditor. At the same time, a new account lowers the average age of all your credit accounts, which also dings your score. And closing the account quickly won’t help.
“Be strategic in deciding which credit card offers to accept,” says Gerri Detweiler, director of consumer education for Credit.com. “Only sign up for them if you’ll really save money over time.” For example, if the department store’s card has an interest rate that’s much lower than the rate on the card you’d otherwise use, you might want to consider it despite the impact it will have on your score.
Lesson 2: Make sure all your medical bills have been paid, either by you or your health insurer (or both of you). “It’s very easy for a payment to fall through the cracks and end up in collections,” says Detweiler. A 2003 Federal Reserve study found that more than half of all collection accounts noted on credit reports involve unpaid medical bills. “This is a huge problem,” Detweiler says.
It could be that you assumed your health insurer paid a bill when it didn’t. Or perhaps you thought you received all the bills for a recent surgery, but the anesthesiologist’s went to the wrong address. With that in mind, go through all your medical bills periodically to double-check that none is outstanding.
Lesson 3: You won’t have a good credit score if you don’t have any credit cards or loans. This is the downside to becoming debt-free just before you retire.
Here’s how Anthony A. Sprauve, public relations director of FICO — the most widely known credit scoring firm — explains it: “Some people may move to a cash-only existence when they retire. This can result in a ‘thin’ credit file, which could make getting new credit tough if they find they need it — to replace an aging car, for example, or downsize to a smaller home.”
So even if you don’t need credit now and don’t think you will anytime soon, consider keeping a couple of credit lines open and use them wisely. Using the card occasionally and paying it off in full won’t lower your score. But if you never use a credit card, sooner or later the issuer will cancel it.
Lesson 4: Think twice before closing credit card accounts and credit lines just because you don’t use them. Closing them may reduce your credit history and the total available credit on your credit reports, which in turn could lower your score.
By the way, closing an account because you had a bad payment history won’t make that black mark disappear from your credit report — it will continue to appear for seven years. But take heart: The negative impact lessens over time. If you’ve been late on payments, bring them up to date as soon as you can. The longer you wait, the more your credit score will be nicked.
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