How to Get an 850 Credit Score [Infographic]

December 10, 2019CreditBy toptierfinancial

People who are serious about improving their credit often wonder what it takes to get the highest possible credit score. For the FICO 8 credit scoring model, the perfect credit score is 850.

As of April 2019, only about 1.6% of scorable consumers in the United States have the elusive 850 credit score, which is actually an increase from 0.98% in April 2014 and 0.85% in April 2009.

There are many other credit scoring models that are used for different purposes and may have different credit scoring ranges. However, since FICO 8 is the most commonly used credit score, we will use the number 850 as the benchmark for the ideal credit score.

Check out the infographic below for some fast facts on how to get the highest credit score possible, then keep reading the article for even more tips on getting the coveted 850 credit score.

How to Get an 850 Credit Score - Infographic

Payment History — 35%
Most people who have an 850 credit score have seven years of on-time payment history with no lates.

Most people who have an 850 credit score have seven years of perfect payment history.

Your payment history is the biggest slice of the credit score pie, so even one late payment or missed payment can significantly affect your score. Negative items can stay on your credit report for up to seven years, so if you miss a payment, you may not be able to achieve a perfect 850 credit score until at least seven years have passed!

To safeguard against the possibility of forgetting to make a payment, consider setting up automatic bill pay for all of your accounts. Be sure to continue to check your accounts regularly in case of any system errors.

If you do miss a deadline once in a blue moon but have otherwise been an upstanding customer, try negotiating with your creditor to see if they will forgive the late payment and wipe it from your record.

FICO says that 96% of “high achievers,” or those with FICO scores above 785, have no missed payments on their credit report.

Essentially, to get an 850 credit score, you just need to follow one simple strategy: make all of your payments on time for a long time. We will further discuss the connection between payment history and time in the “Length of Credit History” section below.

Credit Utilization/How Much You Owe — 30%

The amount of debt you owe compared to your total credit limit is your credit utilization ratio. To get a perfect credit score, you’ll want to keep this ratio as low as possible, both overall and on each of your individual tradelines.

A study by VantageScore and MagnifyMoney found that people with the best credit scores and people with the worst credit scores actually had similar amounts of outstanding debt. However, those with the best scores had an average total credit limit of $46,700—16 times the credit limit of those with the worst scores!

Therefore, for the high scorers, that outstanding debt made up a much smaller percentage of their total available credit than those with low credit limits and poor scores, which highlights the importance of the overall utilization ratio.

This study reported that the average credit card user has an overall utilization ratio of 20%, which is generally considered to be a safe number for maintaining decent credit. To become someone who has an 850 credit score, however, you’ll need to keep it around 5% or lower. As of 2019, FICO says that the average revolving utilization for those with the “850 profile” is 4.1%.

While consumers with 850 credit scores do use credit cards, they tend to keep their utilization ratios around 5% or lower.

While consumers with 850 credit scores do use credit cards, they tend to keep their utilization ratios around 5% or lower. Photo by Ellen Johnson.

In addition, keep in mind that even if you have a low overall utilization ratio, individual cards with high utilization could still bring down your score. You can read more about this in our article on individual vs. overall credit utilization ratios.

As a hypothetical example, let’s say you have two cards: one with a $10,000 limit and a $0 balance and the other with a $1,000 limit and a $900 balance. Your total available credit is $10,000 + $1,000 = $11,000 and your total debt is $900. Therefore, your overall utilization ratio is $900 / $11,000 = 8% utilization, which is a very good number.

However, your account with the $1,000 limit has a 90% individual utilization ratio! Since you only have two accounts, that means 50% of your accounts have high utilization, and that could negatively affect your credit. According to creditcards.com, maxing out just one credit card can reduce your score by as many as 45 points.

To get around this problem, if you have any individual cards with high utilization, consider transferring the balance to other accounts to keep the utilization ratio on each account as low as possible.

You could also request credit line increases from your creditors, which can lower your utilization ratios and benefit your score. Try using the tips we provide in “How to Increase Your Credit Limit.”

Another way to help with overall utilization is to add low-utilization tradelines to your credit file.

Optimizing this factor also means not closing old accounts even if you don’t use them very often, because their credit limits could be helping your score. To ensure old accounts don’t get automatically closed by the banks for inactivity, try to use them every 1-2 months, perhaps for small, recurring bills.

Length of Credit History (Age) — 15%

This category takes into account age-related factors such as the average age of your accounts, the age of your oldest account, and the ratio of seasoned to non-seasoned tradelines. (A seasoned tradeline is an account that is at least two years old, which is when the account is believed to have a more positive impact on your credit.)

The more age your accounts have, the more they will help your credit score.

Age goes hand-in-hand with payment history, because the more age an account has, the more time it has had to build up a positive or negative payment history. Together, age (15%) and payment history (35%) make up 50% of your credit score, which shows how important it is to open accounts early and make every single payment on time.

This is also why we always say that focusing on age is the #1 secret to unlocking the power of tradelines.

According to FICO, the age of the oldest account of people who have 650 credit scores is only 12 years, compared to 25 years for people who have credit scores above 800. In addition, individuals with fair credit have an average age of accounts of 7 years, compared to 11 years for those with excellent credit.

Cultivating an 850 credit score takes years of maintaining a positive credit history.

Cultivating an 850 credit score takes years of maintaining a positive credit history.

FICO reports that the average age of the oldest account of consumers who have 850 credit scores is 30 years old.

We have an in-depth discussion of which age tiers are most significant in our article, “Why Age Is the Most Valuable Factor of a Tradeline,” but the bottom line for getting the best credit score is simply to get as much age as possible. Seasoned tradelines can help by extending the age of the oldest account and the average age of accounts.

Also, keep in mind that it may be impossible to achieve an 850 credit score without a certain amount of age, even if you do everything else perfectly. So if you have stellar credit habits but haven’t yet been able to join the 850 credit club, you may just need to wait patiently for your accounts to age.

Credit Mix — 10%

While the mix of credit is one of the least important factors in a credit score, to get a perfect credit score of 850, you will still need to consider this factor.

In this category, credit scores reward having a balanced mix of several different accounts, including both revolving credit and installment loans. This is because creditors want to see that you can successfully manage a variety of different types of credit.

As an example, a credit file that includes an auto loan, a mortgage, and two credit cards has a better credit mix than a credit file that has four accounts that are all credit cards.

About the “credit mix” credit score factor, FICO says, “Having credit cards and installment loans with a good credit history will raise your FICO Scores. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.”

The total number of accounts is also considered, with more accounts generally being better, up to a certain point.

FICO also states that high score achievers have an average of seven credit card accounts in their credit files, whether open or closed.

Auto loans are common among people who have 850 credit scores.

Auto loans are common among people who have 850 credit scores.

If you are looking to improve your credit mix statistics, adding authorized user tradelines can increase the total number of accounts and help diversify one’s credit file.

850 scorers also have installment loans in their credit files. According to Experian, the average mortgage debt for consumers with exceptional credit scores (800 or above) is $208,617. In addition, people who have FICO scores of 850 have an average auto-loan debt of $17,030.

Experian says, “In every other debt category except mortgage and personal loan, people with perfect scores had more open tradelines but less debt than their counterparts with average scores—underscoring the value of being able to manage debt while having numerous credit accounts.”

For a more detailed breakdown of the credit mix factor of your credit score, see our article, “Credit Mix: Do You Need to Care About Types of Credit?”

New Credit — 10%

The “new credit” category of your credit score refers to how frequently you shop for new credit. This includes opening up new credit cards and applying for loans, for example. This “new credit” activity is reflected in the number of inquiries on your credit report.

Since seeking new credit makes you look like a higher risk to creditors, each hard inquiry has the potential to drop your score by a few points. Therefore, if you are going for a perfect 850, it’s best to avoid applying for new credit for a while.

However, it is possible to score an 850 with hard inquiries on your record. FICO recently stated that around 10% of 850 scorers had one or more inquiries within the past year, and about 25% had opened at least one new credit account within the past year.

If you need to shop for an auto loan or mortgage, be sure to complete all your applications within a two-week window in order for all of the credit pulls to count as one inquiry. For credit cards, however, each inquiry will be typically be counted individually.

Fortunately, inquiries only remain on your credit report for two years, and FICO scores only consider inquiries that occurred within the past year, so it shouldn’t take long for your credit to recover if you do have new inquiries on your credit report.

Inquiries aren’t the only thing that matters when it comes to the new credit factor of your credit score, however. It also includes data points such as the number of new accounts you have, the ratio of new accounts vs. seasoned accounts, and the amount of time that has passed since opening new accounts. The main idea if you want to maximize your credit score is to not open too many new accounts at once, which can make you look riskier to lenders and bring down your score.

More Tips on How to Get an 850 Credit Score

In addition to optimizing each of the above five categories that factor into your credit score, it is also important to regularly check for errors on your credit report and dispute any inaccurate information both with the credit bureaus as well as with the lenders who furnish the data to the bureaus.

In addition, those with very high credit scores rarely have serious delinquencies or public records on their credit reports, such as bankruptcies or liens. Obviously, this will be easy to avoid if you follow all of the suggestions above, but if you have a history of bad credit in your past, it could take up to 7-10 years to recover enough to get an 850 credit score.

850 Credit Score Benefits

What are the benefits of being in the 850 credit club? In reality, you’ll be able to take advantage of the benefits of having an excellent credit score whether you have a 760 credit score or an 850 credit score. You don’t need to score a perfect 850 to get the best credit cards or the best interest rates on loans.

Essentially, the main benefit of having the best possible credit score is bragging rights!

Final Thoughts on How to Get the Perfect Credit Score

While it’s probably not necessary to get an 850 credit score, it is smart to work toward the goal of having excellent credit by managing your credit wisely, which will eventually get you into the upper levels of high credit score achievers.

The most important factors of your credit score are payment history, utilization, and age. Therefore, to keep your credit in pristine condition, you’ll need to make all of your payments on time, keep your utilization as low as possible, and maximize your credit age. Beyond that, you’ll also want to maintain a balanced mix of accounts and minimize new credit inquiries.

How to Get an 850 Credit Score Pinterest graphic

Finally, take advantage of your three annual free credit reports to make sure your credit reports are free of damaging errors.

To summarize, here’s an example of what the credit profile of someone who has an 850 credit score might look like, as we illustrated in the infographic above:

No missed payments or delinquencies within the past seven years
A high total credit limit
The overall utilization ratio is 5% or lower
Individual credit cards each have low utilization, around 5% or lower
The oldest account is likely about 25-30 years old
The average age of accounts is at least 11 years
Typically has at least seven credit card accounts (whether open or closed)
Usually has an auto loan and/or a mortgage loan
May have additional installment loans
Minimal inquiries within the past year
No damaging errors on their credit report

Have you ever achieved the perfect 850 credit score? Is it a goal that you are currently working toward? Share your thoughts with us by leaving a comment below!

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What Is Bad Credit and How Can It Affect You?

November 29, 2019CreditBy toptierfinancial

Bad Credit - Pinterest

Bad credit is something we all fear, but what is actually considered poor credit and how could it affect you? In addition to explaining what bad credit is and why you need to avoid it, we’ll also provide some strategies in this article to help you fix bad credit.

What Is a Bad Credit Score?

The definition of “bad credit” varies depending on which credit scoring system you are talking about. Since FICO 8 is the scoring model most widely used by lenders, we will focus on FICO when discussing the question of what is considered bad credit.

The FICO 8 credit scoring system assigns consumers a number to represent their creditworthiness, with the lowest credit score possible being 300 and the high end of the scale being 850.

A high credit score shows lenders that they can be fairly confident that a consumer will repay debts because they have demonstrated responsible behavior when it comes to credit in the past.

A low credit score, on the other hand, means that someone represents a higher risk to lenders because they are thought to have a higher probability of defaulting on a loan.

According to Credit Karma, a FICO score between 300 to 579 is considered a poor credit score, while a fair credit score is between 580 and 669. In contrast, an excellent credit score is between 800 and 850.

Credit scores between 300 and 579 are considered poor credit.

Credit scores between 300 and 579 are considered poor credit.

What Gives You Bad Credit?

As we mentioned, a bad credit score means lenders perceive you as a high-risk borrower. Therefore, what causes bad credit is poor management of credit and risky behaviors that indicate you may have a higher probability of default.

For example, being late on payments or missing payments altogether can really hurt your credit because payment history is the most important factor of a credit score.

High credit card utilization can lead to bad credit.

High credit card utilization can lead to bad credit. Photo by Natloans

What causes bad credit specifically? Here are some more examples:

Late or missed payments
Defaulting on a loan
Charge-offs
Collection accounts
Judgments
Settlements
Bankruptcy
Foreclosures or repossessions
Maxed out or high-utilization credit cards
Too many inquiries at one time
Too much new credit

Sometimes people have bad credit because of things they can’t control, like having a medical emergency that leads to huge hospital bills that they can’t afford to pay. In fact, the majority of consumer debt in collections is medical debt, according to Magnify Money.

Bad Credit Loans

If you have bad credit, you’re likely going to have a hard time getting loans with favorable terms or possibly even getting approved for a loan in the first place. Since a bad credit score represents a high risk for the lender, loans for people with poor credit typically have higher interest rates and may require collateral or a down payment—if the lender is willing to approve the loan at all.

Personal Loans for Bad Credit
Those with bad credit might turn to payday loans, which can come with interest rates of up to 400%.

Payday loans can come with interest rates of up to 400%. Photo by Aliman Senai.

Personal loans for bad credit are few and far between. Usually, at least fair credit is needed to be considered for a loan. Bad credit loan lenders may charge very high interest rates since they are taking on a lot of risk by lending money to someone with poor credit. These higher interest rates may translate into thousands of dollars of additional interest payments over the term of a loan.

Very bad credit loans such as payday loans often have astronomical interest rates of up to 400%, which makes it nearly impossible for many consumers to get out of debt.

Bad Credit Car Loans

Bad credit auto loans, also known as subprime auto loans, are often considered “second-chance” loans because they are typically the next option for those who have been rejected for traditional auto loans. Although there is not necessarily an official dividing line between which credit scores are considered prime and subprime when it comes to auto loans, credit scores below 620 tend to be considered subprime.

Car loans for bad credit, similar to personal loans for bad credit, are associated with much higher costs than prime auto loans. Since lenders of second-chance auto loans are taking on additional risk, these loans often have significantly higher interest rates and more fees than auto loans for consumers with good credit. Additionally, car loans for bad credit may come with penalties for paying off the loan early.

Bad credit car loans can have triple or more the interest rate as prime auto loans.

Bad credit car loans can have triple or more the interest rate as prime auto loans. Photo by QuoteInspector.com.

According to Investopedia, “While there is no official subprime auto loan rate, it is generally at least triple the prime loan rate, and can even be five times higher.”

Credit Cards for Bad Credit

If you have bad credit, your options for getting a credit card will be limited, and you will most likely not be able to get the perks associated with premium credit cards, such as low interest rates, high credit limits, and rewards. Credit cards for poor credit may also come with annual or even monthly fees.

Subprime credit cards often require you to make a deposit with the lender as collateral. These cards are known as secured credit cards since they are secured by your deposit, which the lender can keep if you fail to make payments on the card. Sometimes, the lender may be willing to switch you to an unsecured card after you have shown a history of consistent on-time payments.

As we’ve seen with loans for bad credit, credit cards for bad credit, both secured and unsecured, will likely have high interest rates, sometimes as high as 30% or more.

How to Fix Bad Credit

Having a bad credit score is expensive. It makes getting any kind of credit more difficult and more costly because bad credit lenders tack on high interest rates and fees to compensate for the higher financial risk of poor credit loans.

Bad credit doesn’t just dramatically increase the cost of credit. It can also affect other aspects of your life, such as your insurance premiums, your ability to find housing, and even your job, since many employers now check prospective employees’ credit reports. Therefore, most people with bad credit want to fix it as soon as possible.

Here are some strategies that you can try if you need to fix bad credit.

Credit Repair

If you have bad credit as a result of identity theft or extensive errors on your credit report, you’ll likely need to undergo credit repair in order to clean up your credit file.

Some people opt to try their hand at DIY credit repair, while others may prefer to hire a trusted credit repair company to get help with the dispute process and potentially faster results. [Disclosure: This article contains affiliate links.]

Either way, it’s important to be aware of best practices when disputing credit report errors. It’s best to submit your dispute by sending a letter along with documentation to verify your identity and support your claim. Trying to dispute errors online or over the phone may not yield the best results.

In addition to disputing inaccurate information with the credit bureaus, it’s also important to contact the company that is furnishing the data so that the error doesn’t get reported again in the future.

Rebuilding Credit

Improving bad credit takes time and patience. While credit repair companies may claim to have tactics that can boost your credit fast, the reality is that these tactics are usually limited to removing inaccurate information from your credit report. If you remove everything from your credit report, what are you left with?

The best way to fix bad credit, beyond correcting inaccuracies, is to rebuild it with more positive credit history over time. In other words, you need to add more positive accounts to your credit profile and keep them in good standing while they age. At certain age levels, these accounts should begin to boost your credit profile with that positive payment history.

Rebuilding credit with positive credit history helps to fix bad credit.

Rebuilding credit with positive credit history helps to fix bad credit.

One option that can help people re-establish credit is opening a credit-builder loan, which works in the reverse order of a traditional loan. Instead of receiving the loan amount up front and then making payments to the bank to pay off your debt, with a credit-builder loan, you make all the payments first and then receive the funds after you have finished paying off the loan. Since these loans are much less risky for lenders, they can be offered to those struggling with bad credit or lack of credit history.

Generally, though, building credit by opening new accounts can take at least two years to see much of a positive effect. The best way we have seen to bypass this two-year waiting period is by piggybacking on the good credit of others.

Have you been affected by bad credit? What did you do about it? Tell us your story in the comments.

Read more: tradelinesupply.com

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#AskanExpert: Should I Apply for an Apartment or a Credit Card First?

October 31, 2019CreditBy toptierfinancial

Q. I am planning to apply for a new apartment soon and my credit score is 678 from Equifax and 608 from Transunion. What do most rental companies require to get approved? This is a low-income property.

I also want to get a new credit card for someone with low income and no annual fee. Are there any credit cards that will give me a card with my current credit scores? Also, should I wait to get a credit card after the apartment complex does their credit check or should I get a credit card first?

Dear Reader,

Each rental company will look at your credit report differently. Ultimately, they want to know if they can trust you to pay them on time every month. Because your credit score is considered fair, you may end up needing to have a bigger deposit to secure an apartment.

Having only fair credit can make it difficult to get a credit card with a decent interest rate. However, you can look for a secure credit card. These cards work like regular cards, but they are secured by a deposit you make. Secured cards provide a great way for people with no credit or with a low score the opportunity to improve their scores and their credibility.

Be sure to do your homework and compare several secured credit cards. Look for one that meets your needs–in this case, one that does not have an annual fee. Another option for improving your credit would be to check out Experian Boost. It uses your phone and utility bill payments to “boost” your score if you have been paying those regularly and on-time.

Now, whether you should wait to get your card after the apartment company reviews your credit, I think you should. Whenever you ask for new credit, even for a secured credit card, a hard inquiry is generated on your report, and it lowers your credit score. So, it’s best to have the highest possible score to get your apartment.

After that, apply for the card and use it strategically, always paying on time and only using up to 30% of your available credit or less. If you need additional guidance, feel free to contact an NFCC-certified credit counselor from a local nonprofit near you. They are ready to help and can provide more personalized recommendations for improving your credit. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

The post #AskanExpert: Should I Apply for an Apartment or a Credit Card First? appeared first on NFCC.

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Are Inquiries Really Killing Your Credit? What You Need to Know

October 29, 2019CreditBy toptierfinancial

People often point the finger at inquiries as the cause of their bad credit, but is this blame justified? Can inquiries really kill your credit score? Keep reading to find out.

Credit Inquiries Definition

A credit inquiry, also commonly referred to as a credit check or a credit pull, is a request by a business to check your credit report.

There are two different types of credit inquiries: a hard inquiry (or “hard pull”) and a soft inquiry (or “soft pull”).

The type of inquiry depends on the reason for the credit pull and the business conducting it.

A hard inquiry occurs when a business who is considering issuing you credit gets your credit report from one of the bureaus.

A hard inquiry occurs when a business who is considering issuing you credit gets your credit report from one of the bureaus.

What Is a Hard Inquiry?

A hard inquiry is when a creditor who is considering issuing you credit pulls your credit report from one of the credit bureaus.

Hard inquiries typically occur when you are applying for loans, including mortgages or auto loans, as well as credit cards.

When you are “rate shopping” to look for the best interest rates on an installment loan, such as a mortgage, auto loan, or student loan, FICO doesn’t penalize your score for this. As long as the credit inquiries are within 45 days of each other, they will all be counted as just a single inquiry.

How Many Points Does a Hard Inquiry Affect a Credit Score?

Since a hard credit inquiry on your credit report means you are actively seeking to get new credit, this is seen as risky behavior by lenders. According to FICO, people with six or more inquiries on their credit files are eight times more likely to declare bankruptcy than people who do not have any inquiries on their credit reports.

For this reason, each inquiry may lower your credit score by up to five points. 

The specific number of points an inquiry costs you depends on other factors in your individual credit profile, such as the length of time since your last inquiry. If you do not have any other inquiries on your credit report, a hard pull likely won’t affect your score very much.

Depending on what else is in your credit profile, it may not even lower your score at all.

When Do Hard Inquiries Fall Off a Credit Report?

Hard inquiries are automatically removed from your credit report after two years.

How Long Do Hard Inquiries Affect a Credit Score?

While hard credit inquiries fall off your credit report in two years, they only impact your credit score for the first year.

What Is a Soft Inquiry (Soft Credit Check)?
A landlord may do a soft credit check when evaluating your rental application.

A landlord may do a soft credit check when evaluating your rental application.

A soft inquiry, also known as a soft pull or soft credit check, can happen for a variety of different reasons. Unlike hard inquiries, which are conducted by businesses considering offering you new credit for the first time, soft pulls are used by entities that are interested in your credit report for other purposes.

This could include potential employers or landlords pulling your credit as part of a background check, for example.

When you check your own credit report, this is also considered a soft inquiry.

Soft credit checks may also be used by businesses you already have accounts with who routinely check to make sure you are still a creditworthy consumer.

How Do Credit Inquiries Affect Your Credit Score?

Soft inquiries do not affect your credit score. Soft pulls are typically not used when you are actively seeking new credit, so they do not necessarily indicate risky financial behavior. Therefore, they are not factored into your credit score.

Since checking your own credit report is classified as a soft credit check, you do not need to worry that checking your own credit report will affect your score. It is a myth that checking your credit will make your score go down. You can actually check your own credit report as many times as you like without it affecting your score.

New credit makes up 10% of a FICO score.

New credit makes up 10% of a FICO score.

In fact, you can even get a free soft credit check of your own report using free sites like creditkarma.com.

When it comes to hard pulls, although people tend to fixate on the impact of these hard credit inquiries, the truth is that they are a relatively minor player in your credit score.

Of the factors that go into your credit score, the category that includes inquiries, “new credit,” is the smallest one, making up about 10% of your score. 

Within that small category of new credit, according to FICO, there are several different data points that are taken into consideration. These data points include:

The number of new accounts
The proportion of new accounts vs. seasoned accounts for each type of account
The number of recent credit inquiries
The amount of time that has passed since recent account opening(s) for each type of account
The amount of time that has passed since recent credit inquiries

As you can see, there are several variables in this category that can affect your credit score beyond the number of inquiries on your credit report.

Since inquiries are just one variable within one small piece of the credit score pie, they do not weigh heavily on one’s credit score. Therefore, as we mentioned above, each hard inquiry should only cost you a maximum of five points, and if they are done in a short period of time they often are only counted as one inquiry.

Inquiries typically only cause problems if you show new hard inquiries continuously over a long span of time, which makes you seem more risky to potential lenders.

One possible reason for this conclusion is if you continuously have your credit ran over an extended period of time, the lenders assume that you are being denied credit. As mentioned above, this is not the case as long as the inquiries are done in a short period of time. That is assumed to be the “shopping” period.

In the case of someone having continuous hard pulls over an extended period of time, a few points lost per inquiry can add up if there are a lot of them. If you have 10 inquiries on your credit report over an extended period of time and the average decrease in score per inquiry is 3 points, that’s a total loss of 30 points! If you are near the lower edge of the “good credit” range, this 30-point dip could take you into a lower credit score level.

This would be an example of a more extreme situation, but if this person were in the “bad credit” category after the hit from these inquiries, the inquiries may have tipped the scale on the credit score category, but they are not the original cause of being on the cusp of bad credit to begin with.

Some people believe that you cannot get a mortgage if you have recent inquiries on your credit report. However, inquiries themselves are typically not an automatic disqualifier, although you may have to give a few sentences explaining each inquiry. If you have enough inquiries on your credit report to lower your score, though, this could affect the terms of your loan.

Can You Remove Inquiries From Your Credit Report?

People with a lot of inquiries on their credit reports often want to know how to remove inquiries from a credit report fast. However, as with any credit repair process, there is no silver bullet that will instantly boost your credit score. It takes time, work, and patience if you want to see your credit score go up.

It’s also important to note that there is no legitimate way to remove timely and accurate inquiries from your credit report. If you really did get a hard inquiry, it would be fraudulent to lie and claim that the inquiry should be removed.

According to the Federal Trade Commission, “No one can legally remove accurate and timely negative information from a credit report.”

The same rules apply when you are working with a credit repair company. The FTC says, “The first rule of credit repair is that no credit repair company can remove accurate and timely negative information from someone’s credit report.” 

If you have inaccurate inquiries shown on your credit report as a result of identity theft or a reporting error, however, you can and should look into how to delete hard inquiries so you can get the credit inquiries removed.

How to Remove Inquiries From a Credit Report

Hard inquiry removal may seem intimidating, but removing credit inquiries from your credit report is certainly possible if they are inaccurate or fraudulent.

If you are interested in how to delete credit inquiries, the best way to go about it is by writing a credit inquiry removal letter. Write a letter to the credit bureau(s) that explains the errors and proving that you did not authorize the hard pull on your credit report. Also, attach a copy of your credit report indicating which inquiries are inaccurate. The FTC provides a sample letter that you can use as a template.

Once the bureau(s) receives your credit inquiries letter, they have 30 days to investigate the dispute and respond. If the creditor cannot prove that you authorized the hard pulls on your account, the bureau will delete the inquiries from your credit report, and the credit inquiry removal process will be complete.

Are Inquiries Killing Your Credit? Pinterest graphic

Conclusion on Credit Inquiries

We often hear people blaming their bad credit on the fact that they have too many inquiries on their credit. However, we do not believe that inquiries are really the cause of bad credit.

We believe the cause of bad credit usually comes down to missed payments, defaults on loans, and/or high credit utilization. These factors are much more significant than simply too many inquiries. 

We are aware that on many credit monitoring platforms, the system may mention that the person has too many inquiries. Perhaps this is one cause of the myth that inquiries are the cause of bad credit.

However, as illustrated in this article, inquiries are only one data point among several other data points within the category known as “new credit,” which accounts for around 10% of someone’s overall credit score. This does not mean that inquiries alone count for 10% of your credit score. It means that inquiries are one of several data points that combined account for around 10% of a credit score, so it should be fair to assume that inquires, in fact, count for less than 10% of a credit score.

It may be possible for inquiries to have a significant effect on one’s credit score in extreme cases such as someone having multiple hard inquiries pulled continuously over the course of a year. However, in more typical scenarios, inquiries most likely are not the cause of someone having bad credit.

 

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Let’s Get to the Bottom of These Credit Myths

September 22, 2019CreditBy toptierfinancial

Myths and misinformation about credit scores, credit reports, and credit repair are extremely common. Unfortunately, many people believe these myths, and their credit suffers as a result of taking incorrect actions. 

Let’s get to the bottom of these credit myths and learn the truth about them so you can start improving your credit the right way.

Credit Myths - Pinterest

Myth: Everyone automatically has a credit score.
Fact: 1 in 5 adults in the United States do not have credit scores.

A report by the Consumer Financial Protection Bureau (CFPB) found that one-fifth of adults in the United States do not have enough credit data to calculate a credit score by traditional methods. These consumers are called “credit invisibles.”

Low-income consumers are particularly susceptible to credit invisibility due to lack of access to traditional credit products. Some consumers may be credit invisible for other reasons, such as a voluntary decision not to use credit.

For those that do not use credit for whatever reason, it is likely that they do not have enough of a credit history to generate a credit score.

Consumers that are credit invisible may be able to generate a credit record by piggybacking on the good credit of others, but don’t assume that everyone has a credit score just by virtue of existing.

Myth: Checking your credit report will hurt your credit score.
Fact: Checking your own credit will not hurt your score.

Checking your own credit report results in what is known as a “soft pull,” which means the inquiry does not affect your credit score. 

To understand the difference between hard and soft inquiries and how they affect your credit score, see our article, “Are Inquiries Really Killing Your Credit?”

Myth: Your income affects your credit score.
Fact: Your credit score does not look at your income.

However, your income can affect your credit indirectly in that it influences the “five C’s” that have been shown to predict credit performance: capacity to pay off debts, the collateral backing a loan, capital available to repay a loan, conditions that affect income and expenses, and the character of the borrower.

Your capacity to pay off debts as well as the collateral and capital they have available to repay loans may all have a relationship with your income. 

That’s a big part of the reason why low-income consumers are 8 times more likely than high-income consumers to have no credit score at all. In consumers that do have credit scores, those who reside in low-income areas have lower credit scores. In addition, low-income consumers are 240 percent more likely to have their credit file originated due to derogatory items such as collections.

So while your income is not technically incorporated into your credit score, it can definitely influence your ability to repay debts, which is the basis of a credit score.

Myth: You only have one credit score.
Each consumer can have dozens of different credit scores.

Each consumer can have dozens of different credit scores.

Fact: There are many different credit scores.

There are two general types of credit scores: FICO scores, developed by Fair Isaac Corporation, and VantageScore, developed by the three major credit bureaus (Equifax, Experian, and TransUnion).

FICO 8 is the credit score most commonly by lenders today, but in some industries, older models or industry-specific models are used instead. For example, there are FICO scores tailored specifically toward auto loans and credit cards, and mortgage lenders are known to use the older FICO score versions 2, 4, and 5. Plus, FICO scores are different for each credit bureau.

VantageScore, which is increasingly used by some lenders as well as for consumer credit education, also has a few versions. The latest version is VantageScore 4.0, but VantageScore 3.0 is still the most commonly used version today.

Altogether, between the many versions of FICO scores and VantageScores, consumers can have dozens of different credit scores.

Myth: Paying half of your minimum payment twice a month counts as two full payments and tricks the system into giving you twice the credit score boost.
Fact: Dividing your bill in half and making two payments is the same as paying the full amount once.
Screenshot of a tweet that says: "Pay half of your payment 15 days before the due date then pay the remaining half 3 days before the due date. It'll boost your credit score. You trick the system into thinking you made two full payments which helps boost your credit score."

This credit myth is unfounded yet often repeated.

If this “credit hack” sounds a little too good to be true, that’s because it is. It is simply not true that you can “trick the system” into thinking you have made two full payments by making two half payments.

Making a payment on a credit account affects two main factors of your credit score: payment history and credit utilization. Let’s discuss each factor individually.

When it comes to your payment history, making a partial payment that is less than the minimum amount due does not satisfy the requirement and will not count as an on-time payment. Only once you have made the second payment for the other half of the amount due will you have satisfied the requirement to be considered paid on time. Therefore, you do not gain any extra benefit to your payment history from dividing your payment into two parts instead of paying the full amount at one time.

As an example, let’s say you have a bill due on the 30th and the minimum amount you must pay is $50. We have laid out the two payment scenarios in the table below.

Scenario 1: Pay the full amount in one payment
Scenario 2: Make half of the payment twice

Date
Amount Paid
Payment Status
Date
Amount Paid
Payment Status

15th

15th
$25
Insufficient payment—$25 still due

30th
$50
Paid on time
30th
$25
Paid on time

 

As you can see from the table, in both scenarios, you only get the benefit of paying your bill on time once per billing cycle, not twice.

Now let’s discuss the utilization factor. Continuing with the same example, the total amount you are paying toward the account is $50 in both scenarios. Therefore, the overall improvement in your utilization ratio is going to be the same either way.

Now, if the reporting date for that account is in between the first and second payments, since you have already sent a partial payment, you may temporarily get a small boost from having a slightly lower utilization ratio when the account reports to the credit bureaus. But at the end of the billing cycle, the result will be the same.

If you don't have any credit history, you can being building credit by piggybacking on someone else's good credit.

If you don’t have any credit history, you can being building credit by piggybacking on someone else’s good credit.

If you decide to make extra payments in addition to your minimum payment, which is ideally what all responsible borrowers should be doing, that can certainly help your credit score by speeding up your debt repayment. But simply splitting the minimum payment into two payments won’t do anything to boost your score.

Myth: If you don’t have credit history, you’ll never be able to get credit.
Fact: You can start building credit by piggybacking.

While it can definitely be more difficult to get credit when you don’t have any credit history to begin with, it’s not impossible. There are credit products out there designed for people with no credit or bad credit, such as secured credit cards and credit-builder loans.

Another way to start building credit fast is by piggybacking off of the good credit of someone else. You could have someone you trust cosign on a loan or open a joint account with you, or you could become an authorized user on someone else’s seasoned tradeline.

If you are not lucky enough to know someone who has a seasoned account with perfect payment history that they could add you to, consider purchasing tradelines from a reputable tradeline company.

Myth: Paying off a collection will “re-age” the debt because the account falls off your credit report based on the date of last activity.
Fact: Collections fall off your credit seven years after the initial delinquency and cannot legally be re-aged.
It is illegal to "restart the clock" on collections.

It is illegal to “restart the clock” on collections.

If you’ve read our article about collections on your credit report, then you know that it is the date of first delinquency (DOFD) that determines when the collection will be removed from your credit report, not the “date of last activity” (DLA). 

The reason why some people may believe this myth is because shady debt collectors sometimes illegally change the date of first delinquency to the date of last activity in an attempt to re-age the debt.

As we said, this practice is illegal. If you notice that a debt collector has improperly changed any information about a collection account on your credit report, you have the right to dispute the inaccurate information.

Myth: Paying off a collection will boost your credit score.
Fact: Paying off a collection may or may not raise your score depending on which credit score is used.

While it makes sense to assume that paying off a collection should increase your credit score, that is not always the case. In fact, more often than not, this is not the case, although it depends on which credit score is being used.

With FICO 8 and all previous FICO scores, both paid and unpaid collections are categorized as major derogatory items on your credit report. Therefore, paying off the account will not change how it is considered by the credit scoring algorithm, which means your score may not go up at all.

On the other hand, FICO 9, VantageScore 3.0, and VantageScore 4.0 ignore paid collection accounts, so your score should recover after paying off a collection if one of these credit scoring models is being used.

Myth: You should close accounts you’re not using.
Fact: You should keep accounts open and use them periodically.

While you might think that closing accounts you don’t need will help your credit score, the opposite is actually true, especially when it comes to revolving accounts such as credit cards. 

The main reason for this is that credit utilization is an important part of your credit score, and closing credit card accounts will hurt your utilization ratio by decreasing your credit limit.

It could also hurt your mix of credit, although that’s a less important factor.

In addition, payment history is the number one factor that helps your score. It’s better for your credit to keep the account open, use it for small purchases here and there or a monthly subscription, and pay it off every month to keep building more positive payment history.

The exception to this is if an account comes with an annual fee that’s no longer worth the price or if you can’t resist the temptation to overspend.

Myth: Closed accounts don’t affect your credit.
Fact: Closed accounts can have a significant impact on your credit.

Although we just discussed why you shouldn’t necessarily close old accounts, that’s not to say that closed accounts don’t impact your credit. They certainly can, particularly when it comes to your credit age.

Closing an account does not remove its payment history or age from your credit report, so closed accounts still contribute to your credit age. In addition, accounts can continue to age even after they have been closed.

So although it’s best to keep accounts open if you can, having closed accounts on your credit report is not a bad thing. If the account was closed in good standing, it will likely continue to help your credit.

Carrying a balance on your credit cards is expensive and does not help you build credit.

Carrying a balance on your credit cards is expensive and does not help you build credit. Photo by Hloom on Flickr.

Myth: Carrying a balance on your credit cards will help your credit.
Fact: Carrying a balance will not help you build credit and it will cost you interest fees.

While it is important to use credit regularly when building credit, it’s not necessary to carry a balance on your credit cards from month to month. If you do this in an attempt to build credit, you will be wasting money by paying unnecessary interest. 

The best way to build credit using your credit cards is to use them responsibly and then pay the full balance due each month, or even make multiple payments each month to keep your utilization ratio as low as possible.

Myth: Shopping around for the best rates on a loan will hurt your credit score.
Fact: Getting loan estimates from multiple lenders will not hurt your score if you complete the process within a specific time window.

Credit scoring algorithms understand that it’s smart to shop around for the best rates on a loan, not risky. Therefore, credit scores typically have ways of preventing the series of multiple inquiries that result from this process from hurting your score excessively. 

If you are applying for student loans, mortgages, or auto loans, FICO scores allow a certain time frame for you to shop around, only counting one hard inquiry to your credit report for this time period. For older FICO scores, the time window is 14 days; for newer FICO scores, the time window is 45 days.

In addition, FICO scores have a 30-day hard inquiry “buffer,” meaning that the algorithm ignores any inquiries that occurred within the past 30 days when calculating your score. 

VantageScore uses a simpler method: it groups all inquiries made within a 14-day window of each other together and counts those all as one inquiry, regardless of what types of accounts the inquiries were for.

Myth: You can fix your credit by disputing everything on your credit report.
Fact: Disputing everything on your credit report could get you in legal trouble and may not even help your credit.

If there is information on your credit report that is inaccurate, outdated, incomplete, or unverifiable, of course you would want to dispute those items with the credit bureaus. But it’s not necessarily a good idea to dispute negative items on your credit report that are accurate.

First of all, the derogatory items won’t necessarily get deleted from your credit report, especially if you don’t provide proof that they are inaccurate. They might just get updated with the correct information, or they may get deleted temporarily until an investigation determines the items are valid and they go right back on your credit report.

Furthermore, the credit bureaus don’t have to investigate disputes that are deemed “frivolous,” and they could decide that some of your disputes are frivolous if you are disputing every item in your credit file, regardless of accuracy.

Plus, lying on a credit dispute could be considered fraudulent. According to the FTC, “No one can legally remove accurate and timely negative information from a credit report.”

Even if you were to get away with disputing everything on your report, this might not necessarily help your credit as much as you hoped. If you’ve gone through an aggressive credit sweep and have nothing left on your report, then you essentially have no credit history and likely no credit score, which could be just as problematic as having bad credit.

Myth: CPN numbers can be used in place of social security numbers to create a new, clean credit file.
Using a CPN to apply for credit is a federal crime. Photo via seniorliving.org.

Using a CPN to apply for credit is a federal crime. Photo via seniorliving.org.

Fact: CPNs are illegal and using one to apply for credit is a federal crime.

Although you might have heard some people claim that “credit profile numbers” or credit privacy numbers” are a legitimate way to protect your privacy or wipe your credit slate clean, in reality, there is no legitimate or legal source for CPN numbers.

Most of the time, these numbers are either fake social security numbers that have not been created yet or real SSNs that have been stolen from children, the elderly, deceased people, people who are incarcerated, and people who are homeless. Either way, using a CPN means getting involved in identity fraud, which is a federal crime.

The Social Security Administration and the Federal Trade Commission have both explicitly stated that applying for credit using a CPN is illegal and that those who sell CPNs are scamming consumers.

Learn more about the dangers of CPNs in our article.

Myth: The credit score you check online is the same one lenders see when they pull your credit.
Fact: Lenders often do not use the same credit scores that are provided for free online.

When you check your credit score for free online, the credit score you see is most likely going to be a VantageScore. This is the score most commonly used by free online services such as Credit Karma.

The majority of lenders, however, primarily use FICO scores, although some lenders are now starting to use VantageScore. Just keep in mind that the score you see online may not be the same as the score lenders see, as there can often be a significant difference between your VantageScore and your FICO score. 

If you want to check your FICO score for free, check with your credit card issuer, since many now offer this service.

Myth: If you don’t have any debt, you will have a good credit score.
Fact: You need to use credit to build your credit score.

Having good credit doesn’t just come down to the amount of debt you have—that’s just one part of your credit score. Payment history is the most important part of a credit score, so if you’ve never had debt and you don’t have any payment history, you might not even have a credit score at all.

To get a good credit score, you have to use some form of credit and demonstrate that you can use credit responsibly by building up a positive payment history over time.

Myth: There’s no need to check your credit report until it’s time to apply for a big loan.
Fact: It’s important to monitor your credit regularly.

Waiting to check your credit score until you need to apply for credit is a mistake because there could be errors on your credit report bringing your score down. Studies estimate that about one-fifth of consumers have at least one error on their credit report, some of which could be serious enough to result in higher interest rates, less favorable loan terms, or being denied credit.

It’s important to keep an eye on your credit so that you can correct errors and fight fraud as soon as possible instead of waiting until it’s too late.

Myth: A late payment will make your score go down by 50 points.
Fact: There is no set amount of points that is associated with any particular item on your credit report. 

While it is certainly possible that a 30-day late payment could cause a 50-point drop (or more) in someone’s credit score, this is not always going to be the case. There is no fixed number of points that your score will go up or down by for each item on your credit report. Rather, the way in which a late payment affects your score is always going to depend on your individual credit profile.

There is no set amount of points associated with missing a payment.

There is no set amount of points associated with missing a payment.

Credit scoring algorithms are very complex and they incorporate hundreds of variables, such as how recent the late payment is, whether you have other late payments in your credit history, and how severe the delinquency is, not to mention the myriad other variables associated with the other categories within a credit score.

Because delinquencies on your credit report are always going to be relative to whatever else is in your file, there is a “diminishing returns” effect where the first late payment hurts your score the most and each subsequent late payment tends to have a smaller impact. Someone who has a high credit score and has never missed a payment before is going to experience a severe drop from their first missed payment, whereas someone who already has lates on their record and a lower credit score is going to be hurt less by a subsequent late payment.

According to credit expert John Ulzheimer in a blog article, “Delinquencies, like inquiries, do not have independent value… It is entirely inappropriate and incorrect to say that ‘X’ lowered my score by ‘Y’ points.”

He continues, “The late payment didn’t lower your score but because adding a late payment to a credit report moves other things around it caused your score to be different than it was before the late payment was added. If your score is 50 points lower it’s not as if the new late payment lowered your score 50 points…but because the addition of that item caused a different evaluation of EVERYTHING on your credit reports…the new reality for you is 50 points lower.”

The same principle goes for other items on your credit report as well, not just late payments.

Myth: You don’t have to worry about your kid’s credit.
Fact: You should keep an eye on your kid’s credit report, too.

The proliferation of scammers and hackers stealing people’s private information means even your kid’s credit profile could be at risk of identity theft. When people use “credit profile numbers” (CPNs), for example, these numbers are often real social security numbers stolen from children.

Make sure you monitor your kid's credit in addition to your own.

Make sure you monitor your kid’s credit in addition to your own.

You don’t want to wait until your child is grown up and ready to apply for credit to realize they have bad credit as a result of identity theft. Consider freezing your kid’s credit to prevent fraudsters from opening accounts in their name. 

Myth: Everyone’s credit score is calculated in the same way.
Fact: Credit scores have “scorecards” that categorize consumers and score them differently.

You already know that credit scoring algorithms are extremely complex, but what many people don’t know about is the “scorecards” or “buckets” within each credit scoring model. These  “buckets” consist of different categories of consumers.

For example, according to John Ulzheimer, “There are scorecards for thin files or those with few accounts, bankruptcy, derogatories, and those with clean credit files… Comparing like populations gives this population an opportunity to be considered based on [the] behavior of that group rather than a comparison to another, better group.”

The credit scoring formula is different for each bucket. In other words, items on your credit report can be treated differently based on which scorecard you fall into.

Sometimes your credit score changes in a way that you don’t expect. For example, perhaps an inaccurate collection account got deleted off of your credit report and your score went down, instead of up. This could be because you changed scorecards as a result of the deletion, causing your credit score to be calculated in a different way. Essentially, you might now be at the bottom of a different bucket instead of at the top of your previous bucket.

It’s always good to keep the concept of scorecards in mind, especially when trying to predict any kind of change to your credit score. You can never guess exactly how your score will change because of all the complexities and trade secrets that go into credit scores.

Conclusions

Unfortunately, there are tons of credit myths out there, and believing them may lead you to mismanage your credit and eventually end up with poor credit. We hope that this article helped to dispel many of the misconceptions about credit and helped you get started on the path to better credit.

What credit myths have you heard of? Did you use to believe any of these? We’d love to hear from you, so share your experience with us in the comments!

Read more: tradelinesupply.com

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Credit Mix: Do You Need to Care About Types of Credit?

September 8, 2019CreditBy toptierfinancial

Mix of credit comprises 10% of a FICO score.

Mix of credit comprises 10% of a FICO score.

Credit mix, also called mix of credit, is one of the factors that your credit score takes into account. It is one of the least important factors, weighing in at 10% of a FICO score.

However, it’s still important to consider when building credit, especially if you want to get the best possible credit score.

What Is “Credit Mix” or “Mix of Credit”?

Credit mix is the diversity of types of credit accounts in your credit report. Having different types of credit accounts in good standing in your credit file demonstrates that you can use credit responsibly. Lenders ideally want to see that you have successfully managed a diverse mix of multiple types of accounts.

Types of Credit Accounts

Depending on how you define the types, there are 3-4 general categories when it comes to types of credit.

According to Experian, there are 4 types of credit:

Revolving credit is a form of credit with which you can “revolve” or carry a balance each month. You are assigned a credit limit that you can charge up to and you make a payment each month. Interests will typically be charged if you carry a balance from month to month. Credit cards and lines of credit are the most common types of revolving credit accounts.
Charge cards are similar to credit cards, except the balance must be paid in full every month.
Service credit includes accounts with your service providers, such as utilities, cell phone service, etc. These are considered credit accounts because the service is provided before you pay the bill.
Installment credit is a loan of a specific amount of money that you pay back in regular payments of the same amount over a certain period of time. Types of installment loans include car loans, mortgages, student loans, etc.

Credit Karma simplifies the categories to 3 types of credit:

Revolving credit
Open credit (includes charge cards)
Installment credit

Examples of Revolving Credit

As we touched on above, the two most common types of revolving credit are credit cards and lines of credit.

Credit cards include those issued by banks such as Capital One, Bank of America, and Chase, as well as store cards, which can typically only be used at a particular retailer. 
Lines of credit are similar to credit cards in that you have access to a set amount of money—your credit limit—that you can draw from. After you borrow money from your line of credit, the balance starts accruing interest, and when you pay it back, that credit is then available again for you to use. This is why it’s considered revolving credit: you can use it again and again as long as you keep paying it back.

Types of Lines of Credit
A home equity line of credit (HELOC) is secured by your home.

A home equity line of credit (HELOC) is secured by your home.

Lines of credit can be either secured, which means the borrower has provided collateral to back the line of credit in case of default, or unsecured, meaning no collateral is required.

Beyond those general categories, there are three main types of lines of credit.

A home equity line of credit (HELOC) is a line of credit secured by your equity in your home, which is the difference between the value of your home and the amount you still owe on your mortgage. Since your home equity serves as collateral, if you default on a HELOC, you could risk losing your home to foreclosure.
A personal line of credit is usually unsecured, although sometimes you may be able to provide collateral in the form of savings or investments.
A business line of credit may be secured or unsecured. They are offered by financial institutions as well as many commercial vendors.

Examples of Installment Loans
An auto loan is one type of installment account.

An auto loan is one type of installment account.

Types of installment credit include:

Auto loans
Mortgages
Student loans
Personal loans
Credit-builder loans
Home equity loans (not to be confused with a HELOC, which falls under revolving credit)

The breakdown of account types outlined above is a simplified version of how credit scoring systems actually categorize different types of accounts. In reality, credit scoring models may consider as many as 75+ account types.

In addition, each type of account could have a different effect on your credit.

How Does Credit Mix Affect Your FICO Score?

As we mentioned at the top of this article, credit mix makes up about 10% of your FICO score. With VantageScore, type of credit and credit age are combined into the same category, which makes up approximately 21% of your VantageScore.

With both types of scores, credit mix is a relatively small portion of what determines a credit score, so having the perfect credit mix is not necessarily essential in order to have good credit. However, it’s still a good thing to aim for, especially if you want to get a perfect 850 credit score or somewhere close to it.

What Is a Good Credit Mix?

When it comes to your credit score, the most important thing is to demonstrate that you have managed both revolving and installment accounts. Therefore, it’s best to have at least one type of account of each type.

FICO high score achievers have an average of seven credit cards on their credit reports. Hloom on Flickr

FICO high score achievers have an average of seven credit cards on their credit reports. Photo by Hloom on Flickr.

For example, you might have a credit card (revolving) and an auto loan (installment). Or, you could have a mortgage (installment) and a HELOC (revolving). Any combination of one revolving account and one installment account is a good start for your credit mix.

FICO supports this idea, saying, “Having credit cards and installment loans with a good credit history will raise your FICO Scores.”

FICO also says that people who have managed credit cards responsibly are better off than consumers that don’t have any credit cards, who can be seen as risky because they have not demonstrated experience in using revolving credit.

Statistics show that high FICO score achievers have an average of seven credit cards on their credit reports, which includes both open and closed accounts.

People with credit scores in the 800s also typically have installment loans such as mortgages and auto loans, according to Experian.

The total number of accounts in your file may also play a role. FICO has indicated that those with high credit scores can have 20+ credit accounts in their credit reports.

How Many Credit Cards Is Too Many?
Having too many credit card accounts could hurt your credit score.

Having too many credit card accounts could hurt your credit score.

Keep in mind that it is possible to have too many accounts on your credit file. According to the FTC, having too many credit cards could have a negative effect on your credit score, as could having loans from some types of companies.

There is no hard-and-fast rule when it comes to how many credit cards is too many because the impact of any given factor on your credit score depends on what is already in your credit profile, says FICO.

However, in figure 1 in the article “How Credit Actions Impact FICO Scores,” the hypothetical consumer “Rachel,” who has 33 credit accounts, has a lower credit score than “Maria,” who has 21 accounts. This would seem to imply that at some number between 21 and 33 accounts, one’s credit score might begin to suffer. However, these two consumers have other differences in their credit profiles, so the difference in their credit scores cannot be solely attributed to the number of accounts in their files.

Can Some Account Types Hurt Your Credit?

Certain types of loans on your credit report could make you seem like a more risky consumer and therefore could end up hurting your score instead of helping.

Why? It’s all based on statistics and who the credit score algorithms have deemed to be risky borrowers. 

For example, taking out a furniture loan could actually drop your credit score. That’s because furniture loans are often reported as “consumer finance loans,” which are typically reserved for borrowers with bad credit who are statistically more likely to default on loans. Therefore, having this type of account on your credit report could be viewed as risky by lenders and credit scoring algorithms.

Alternatively, the financing arrangement may be reported as revolving debt, which will appear nearly maxed out until you make enough payments to get the balance to a lower level.

Payday and title loans, however, are typically not reported to the credit bureaus, so these types of loans won’t count toward your credit mix or credit score—unless, of course, you default on a loan and it gets sold to a collection agency, who will then report it as a collection account.

Conclusions on Credit Mix
Credit Mix - Pinterest graphic

Since credit mix makes up about 10% of your credit score, it is helpful to try to achieve a balanced mix of credit by keeping a few revolving and installment accounts in good standing. The best credit mix should ideally include a few credit cards and at least one or two installment loans, such as mortgages or auto loans.

However, it’s also important to note that credit mix is much less important than other credit score factors, such as payment history, credit utilization, and credit age. It’s probably not worth obsessing over because you won’t automatically get an excellent credit score just by having the perfect mix of accounts.

In addition, most people naturally accumulate different types of accounts over time, so it’s not necessarily the best idea to start opening new accounts left and right just to build up your credit mix. This strategy could result in lots of inquiries and new accounts bringing your score down in the short term, and having access to credit you don’t need could also encourage extra spending.

However, one way to add accounts to the mix without the risks of opening a new primary account is to purchase authorized user tradelines. 

As with all credit-related decisions, it’s up to you to take your overall financial goals and priorities into account before taking action. You might decide that you don’t need to worry too much about improving your credit mix, and that’s fine. On the other hand, improving your credit mix can only help your credit score, and it is something that you should pay attention to if you want to get a perfect 850 credit score.

Read more: tradelinesupply.com

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