Debunking Your Credit Score

Have you ever dealt with a crazy relative? They complain you haven’t dropped by in a while so you stop by one day after work.  As soon as this crazy relative opens the door she is ranting and raving about how inconvenient this is and your timing is inconsiderate! You’re left feeling like, huh?! That same huh feeling tends to commonly apply to credit scores. There’s a lot of myths out there surrounding what makes up your credit score.  When you don’t know what’s working, it’s easy to be confused about what you should do more of and what you should stay away from. We’ve all heard it in passing, “You should close any credit card you don’t use” or “You should keep all your old credit cards open”. So what’s the right answer?

While there are many considerations when determining your credit score, a major factor is called credit utilization. Let me break this down for you. The credit bureaus are looking at how much credit you have available and how much you are already using.  The credit bureaus are not evaluating your income or your account balances.  They’re solely judging you based upon what’s showing up on your credit report.

Credit utilization takes into consideration how much credit you have used up in total, like an auto loan, a mortgage, things like that. They also look at how much credit you have available in the event you needed to access extra funds today. Again, since they don’t know what your overall financial situation looks like, they tend to freak out easily. Just like a crazy relative. Here’s an example, let’s say you only have one credit card with a balance of $3k and your credit limit is $5k. You think you’re in good shape because you only have one credit card and it’s not maxed out.  Not according to the credit bureaus. They’re going to look at this like you only have $2k of credit available to you and start to freak out. Your score begins to slowly decline based on this fact alone. 

Let’s say your partner, Steve, has a credit card with a balance of $5k and a credit limit of $20k. Steve also has another credit card with a balance of $4k and a credit limit of $25k. On the surface, you may think your credit score should be higher since you have less debt. Not according to the credit bureaus. Steve has access to $36k of additional credit where you only have access to $2k. Steve makes the credit bureaus feel warm and cozy so they slowly increase his credit score each month.

While the credit bureaus consider multiple factors when determining your credit score, simply closing credit cards as you pay them off could have an adverse effect on your score. If you worked hard to pay down some credit cards, it’s natural to want to close them out as a reward for being done. But if you immediately get rid of your access to credit the credit bureaus will take notice. So if you want to close cards with zero balances, just do it slowly and make sure you still have access to credit. You can also increase your limit on the credit card you want to keep to increase your available credit if you don’t want to have multiple credit cards.

In addition to your score, the information on your credit report can be the difference between getting approved for several financial milestones like buying a car or a home or not. For this reason, it is important that you check your credit report regularly to make sure the information is accurate. If you find the opposite to be true, then you might need to dispute the information with the credit bureau or directly with the reporting business. The process can take some time, but it is worth doing so in order to keep your credit in check and avoid negative experiences down the road.