Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about credit scores; specifically, why your score can remain stuck at less than an ideal level even though you’re doing everything right.
For an answer to this question — as well as a brief explanation of how credit scores work — watch the following video. Or, if you prefer, scroll down to read the full transcript and find out what I said.
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For more information on this topic, check out “6 Ways to Get Your Official FICO Credit Score for Free” and “11 Surprising Ways to Wreck Your Credit Score.” You can also go to the search at the top of this page, put in the words “credit score” and find plenty of information on just about everything relating to this topic.
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Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this question is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Virginia:
We’re seniors. Always paid our credit card invoices on time. As soon as they arrive in the mail. Never borrowed any money, except for a mortgage, and that’s been paid off for 25 years. And yet, our credit score remains stuck at 748. Why is that?
I’m assuming Virginia is talking about a FICO score, the most commonly used credit score. The highest FICO score is 850. In most cases, anything over 760 might as well be 850, because it will get you the best credit terms and deals. Note that Virginia is already pretty close to that, with a 748.
Still, Virginia’s got a legitimate gripe. Why isn’t her score higher?
Let’s understand how a credit score is determined. For example, one factor is how much credit you’re using, especially in relation to how much credit you have available.
Example: Let’s say you’ve got a credit card with a $10,000 limit and your balance on the card is $6,000. You’re using 60 percent of your available credit. This is called credit utilization. If you were using $1,000 of a $10,000 credit limit, you credit utilization would be 10 percent. Experts recommend you try to keep your credit utilization under 30 percent.
What’s Virginia’s utilization? We don’t know. She says, “We pay off our credit card every month.” That may be true, but at some point in the month — before she’s received or paid the bill — she may have a big balance on her card. If a company happens to pull her score at the moment she’s got a high balance, it’s possible her credit utilization ratio could be high enough to negatively impact her score.
What’s a solution for this potential problem? Virginia could raise the credit limits on her cards, or get an additional credit card. Then, she’ll have more available credit, which could positively impact her utilization ratio.
Another part of credit scores is credit history: How consistently you’ve paid your bills on time. If you’ve always paid on time, every time, for long periods of time, you’ll have a much higher credit score. It sounds like Virginia’s done that.
The remaining part of your credit score is made up of smaller things, including the length of your credit history, the types of credit you have and whether you’re applying for new credit. Let’s look at each.
Length of credit history is self-explanatory: The longer you’ve successfully used credit, the better. Virginia seems to have a long history of responsible credit usage.
As for types of credit, there are two main types:
- Installment, like a car loan or a mortgage
- Revolving, like a credit card
The more types of credit you have, the better. Virginia used to have a mortgage — an installment loan — but that was paid off decades ago, so she doesn’t have a diversified credit portfolio. That being said, I certainly wouldn’t advise her or anyone else to take out an installment loan just to raise a credit score.
Finally, there’s “new credit.” Applying for a bunch of new credit, especially all at once, can lower your score. Doesn’t sound like that’s a problem for Virginia.
Now we see there may be a couple of things Virginia could do to raise her credit score above the 750 mark. But here’s something important as well: It doesn’t sound like Virginia’s about to borrow money. So, what does she care?
A lot of people worry about their credit score more than they really need to. If you’ve got a decent credit score — and Virginia does — and you’re not about to borrow money, then just leave it alone. It really doesn’t matter.
It is true that your credit score can influence other areas of your life, like your car insurance rates. Some employers check your credit history before offering you a job. And if you’re going to rent an apartment or sign a cellphone contract, they can check your credit. So, credit does matter. But if you’ve got a 750 credit score, you probably won’t suffer in any of these areas.
Bottom line? Don’t lay awake wondering why your credit score is not higher, Virginia.
Make it a super-profitable day and meet me right here next time!
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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