Ask John: The Secret to Healthy Credit Scores

Hey John, I've never ever missed a payment on anything. I make all my payments on time but my credit score is 671! I don't get it! What gives? How can I improve my credit if I think I'm doing everything right already?

This is a very common question that I get though AskJohn@credit.com. It is so common that I decided it was time to dedicate another article to the topic of score improvement.

Renee's question is a good one, but she is making an incorrect assumption. She thinks that making payments on time is the only factor that determines her credit score.

It is completely understandable because it makes logical sense'. as long as my checks arrive to the lenders on or before the due date then everything is fine -- right? In fact, I even talk about this commonly held misbelief in Chapter 6 of my new book, You're Nothing but a Number.

Here's the real story. FACT: The majority of the points in your credit score have nothing to do with whether or not you make your payments on time. Payment history only counts for a third of the points in your score.

So Where Do Those Points Come From?

Debt - The most important non-payment category in your credit score is, by far, the amount of debt that you carry. When I say debt, I’m not talking about installment debt like your mortgage or auto loan. I’m talking about the credit card stuff.  When I refer to credit cards, I mean anything that’s plastic that’s in your wallet other than your check card or debit card — that includes your Visa, MasterCard, Discover, American Express. It also includes anything that you use at a gas station such as a BP or Shell card, and of course anything issued by a retailer like a Macy’s card or Target card.

The balances that you carry on those cards can impact your credit scores almost as much as whether or not you actually make the payments on time. The bottom line for credit card debt: If you allow your balances to get too close to your credit limits, you will severely damage your credit scores.

If you want to truly improve your credit and you’re already making all of your payments on time, it’s very important that you keep your total balances at no more than 10% of your total credit limits. That’s on all of your cards, not just a few of them.

So remember: When it comes time to sit down and write that check to the credit card company, write it for more than the minimum payment.

Inquiries – Next is the amount of credit shopping that you’re doing. Every time you apply for credit, you give the lender permission to pull your credit report and credit scores. They leave behind a little bread crumb called a credit inquiry each time they pull your report. This is nothing more than a record of who has accessed your credit report and the date. The more inquiries you have, the more it will hurt your score.

The credit score system is not designed to penalize you for credit shopping. You will be penalized, however, for excessively opening accounts. Since it’s November and we’re about to enter the busiest shopping time of the year, be careful when you’re at the mall buying holiday gifts. Don’t ever use your credit report as a 10% off coupon — it’s never a good idea.

Credit Age – The next non-payment category is age of your credit report. This isn’t how old you are…it’s how old your credit report is.  Essentially, the credit score is looking for whether or not you have a long history of managing credit obligations.

There’s really not much you can do in this category because, well, you can’t control time.  But as your accounts get older and older, you will organically earn more points from this category. You can help yourself along by not closing older accounts.

Credit Diversity – And last but not least, what types of accounts are you using? Believe it or not, the type of accounts you use can cost you points. Credit scoring models want to see that you have a diverse list of different types of accounts. That means that you should have (or have had) mortgages, auto loans, credit cards, installment loans… anything that shows that you have a responsible record of paying different types of accounts.

Consumers with nothing but credit cards on their credit reports are definitely riskier than consumers with other types of accounts. This doesn’t mean you should open a bunch of new credit just to have a diverse list on your credit report. You’ll do that naturally in time, and doing so will eventually pay off.

So here you have it: John’s recipe for score improvement. It’s a little more complicated than just paying your bills on time each month:

3 cups of Solid Payment Management
2.5 cups of Controlling Your Debt
1 tablespoon of a Well-Aged Credit Report
A teaspoon of Shopping Only When You Need To
And a Hint of Credit Diversity.

Happy cooking!

If you have a comment for John or would like to ask him a question then please feel free to drop him a note at AskJohn@credit. com

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