Why Isn’t My Credit Score Higher?

June 15, 2020

 

 

How many times has the topic of credit score been on your mind?  For many of us, this topic doesn’t get brought to the forefront of our minds until we need to apply for credit. A lot of people adhere to the many programs out there about financial peace.  The big take away from those programs, to me, is living within your means. We will tackle that topic later.

Using credit responsibly is paramount to credit score.  You might say, well no duh Keith…. Let me tell you a little bit about why. I always encourage prospects to utilize a free or inexpensive credit monitoring service, but that’s not the end of the story. Those services are great for tracking credit, and balances, but the scores are based on a different model, so there can be variances between creditors. However, I think those services are fantastic ways to educate yourself on credit and how it works.

How many folks understand what’s in a credit score?

I use the analogy of making a pot of chili. The more stuff you put into it, the more blended and balanced the “flavor” becomes. Same with a credit history. The more accounts and timely payments, the more “balanced” the credit report should be. Minor derogatory events, such as 30 day late payment on a credit card or auto loan, by itself, shouldn’t destroy your score, if its “balanced” out by other events. A major derogatory event, such as a 30 day late mortgage payment or worse, like a repo, foreclosure or bankruptcy, will have a huge impact regardless of the other history. Though it may seem counter intuitive, often people are suffering from lack of revolving credit usage. I’m speaking in general terms, and everybody’s situation is different, but these are trends I’ve seen over a 23 year career.

Why would more revolving credit help a score?

It has to do with the revolving credit utilization percentage. It’s right there on your credit monitoring service. It will tell you that you are “some percentage” of your revolving limit. A large part of a score, or major ingredient using my chili analogy, is this percentage of revolving utilization. The magic number is 30%. If your revolving limit is $10,000, you want to have balances less than $3,000.  More often than not, when I see scores that seem depressed, it’s because of this fact.  If you don’t have a credit card, it’s like being 100% utilized, so it sometimes helps if you go and get a higher limit or new card.

Why would the bureaus want you to have more credit available?

This is the somewhat counter intuitive part. The risk models want you to have available credit in the event of an emergency. If your car needs a $750 repair, and you are maxed out on credit cards, the credit models have to assume that the risk of something else not getting paid in a timely manner goes up. Due to this added layer of risk, it will typically cause scores to drop. It warns future creditors that there is a risk. It makes more sense when presented in this manner.

In summary, I want to reiterate that I am speaking in general terms. I’m not a credit repair attorney, but have 1000’s of credit reports, and have noticed some trends. These thoughts and suggestions are based on these common trends. To optimize your credit score, have a mix of credit types (revolving, installment, etc.), have a payment history with little to zero 30 day late payments, and keep the revolving percentage down below 30%. Use credit monitoring to track and see if any inquiries show up unexpectedly. These best practices should allow you to maximize your score and get better terms from creditors.

Shea Shoemaker
Author: Shea Shoemaker