Randy has an 850 credit score. According to FICO, the most popular scoring model, it’s as good as it gets.
However, a line on his credit report said he could lower his utilization rate, so he quickly paid off the rest of his car loan with one payment of $6,000 — then his score dropped 30 score. (Randy has been the target of identity theft and was asked to remove his last name for privacy concerns.)
Most people believe that wiping out car payments is harmless, but that is a mistake.
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When it comes to credit scores, there are a few things that many borrowers often get wrong, experts say. Here are the top misconceptions and why it’s so hard to set the record straight.
Misunderstanding No. 1: Debt is bad
Your credit score — the three-digit number that determines the interest rate you’ll pay for credit cards, car loans and mortgages — is based on many factors but most importantly, it’s a measure of whether how much you borrow and how responsible you are. you when it comes to paying.
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, consumers with the highest scores owe an average of $150,270, including mortgages, according to a recent LendingTree analysis of 100,000 credit reports.
Borrowers with a credit score of 800 or higher, like Randy, pay their bills on time, every time, LendingTree found.
To that end, having a four-year car loan in good standing works to Randy’s advantage.
“Lenders also want to see that you’ve been responsible for a long time,” says Matt Schulz, LendingTree’s chief credit analyst.
The length of your credit history is another one of the most important factors in a credit score because it gives lenders a better view of your background when it comes to payments.
Misconception No. 2: All debts are equal
Since Randy has paid off his mortgage and has no student debt, that car loan is key to showing a different mix of accounts.
“Your credit mix should involve more than just multiple credit cards,” says Schulz. “The ideal credit mix is a blend 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 can prove you can handle successfully, 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 a good credit score.
As a general rule, it’s important to keep revolving debt under 30% of available credit to limit the impact a high balance can have.
Misconception No. 3: You need a perfect score
Only about 1.6% of the 232 million U.S. consumers with a credit score have a perfect 850, according to the latest FICO statistics.
Other than bragging rights, you don’t get much advantage from being in this elite group.
“Typically, lenders don’t require individuals to have the highest credit scores possible to get the best loan features,” said Tom Quinn, vice president of FICO Scores. “Instead, they set a high-end cutoff, which is usually in the high 700’s, where applicants who score above that cutoff qualify as having a good credit score and get the most favorable terms. “
Each lender sets their own credit score criteria for who they consider the most trustworthy. As long as you fall within these ranges, you’re likely to be approved for a loan and qualify for the best rates offered by the issuer, added Schulz.
“Anything above 800 is gravy,” Schulz said, and “in some cases, the difference between 760 and 800 may not be that significant.”
Most credit card issuers now provide free credit score access to their cardholders making it easier than ever to check and monitor your score.
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