Good Credit Can Save You Money!

Surprising Ways to Improve Your Personal and Business Scores

By Mike DuBose and Blake DuBose

 

Many people don’t know that their credit history defines many aspects of their financial lives, including home and auto insurance premiums; mortgage payments; and car lending, student loan, and credit card interest rates. Lenders and insurance companies are just a few of the entities that review your credit history and use the information to determine the costs of the products and services you buy. Your credit score can even affect your chance at getting a job: if you give permission when signing an employment application, it’s legal under the Fair Credit Act for an employer to check your credit history, especially if you would handle the company’s money and finances. Questionable histories will likely raise red flags with future employers. Some banks and credit unions even conduct a credit check before allowing you to open a checking account with them! For all of these reasons and more, it’s important to build a strong credit history.

There are many different scores out there that measure credit health and reliability in individuals, but most organizations use what is called a “FICO score.” This measurement is named for its inventor, Fair Isaac Corporation, a business that was founded in the late 1950s by engineer William Fair and mathematician Earl Isaac. FICO scores, which are mathematical predictions of the likelihood that you will be able to repay debts, first came into widespread use in the 1980s. While researchers are learning more about how credit scores are calculated, up until recently, the components were a very closely guarded secret.

Scores can range anywhere between 300 and 850, with ratings of 730 to 850 regarded as “excellent.” Consumers who fall into this group are considered prime candidates for the best loan terms and lower rates for such things as insurance. According Fair Isaac Corporation, the average score in the US is 695. Scores of 670 to 729 are still good (although most experts suggest aiming for a FICO of 760 or higher). “Below 550 is trouble,” said Heather Struck in a recent article for Forbes.com. Lenders see these borrowers as the greatest risk—with reason. According to a 2015 USA Today article by Jeff Reeves, 78% of borrowers with low credit scores were 60 days late on at least one payment.

In 2013, lenders purchased more than 10 billion FICO scores, and about 30 million American consumers accessed their scores themselves. Unfortunately, many others still have no idea what their credit score is—Reeves noted in another USA Today article, “A 2014 study by the National Foundation for Credit Counseling, sponsored by Experian, revealed that 65% of adults hadn’t reviewed their credit reports in the last 12 months.” It’s important, however, to periodically check your score, keeping an eye out for any major changes. This could indicate identity theft, a growing problem in an increasingly Internet-driven world. In fact, one study by Javelin Strategy & Research indicated that roughly $16 billion was stolen from nearly 13 million consumers in 2014.

Some credit card companies, like American Express and Discover, even offer you access to your credit score as a free service. It will only be a snapshot from one of the three major credit bureaus, but it can provide a good idea about the health of your credit. For a more accurate picture, you can buy your scores from all three of the major credit bureaus (Experian, Equifax, and Transunion). Although the information on them may be the same, your scores will differ somewhat between the bureaus. Lenders use the middle of the three when making their decisions.

When you take out a car loan, secure a mortgage, buy home or auto insurance, or apply for credit at the bank, the higher your credit score, the more likely it is that you will obtain lower interest rates, reduced premiums, and higher credit lines. According to studies by research firm Conning and Company, 92% of all insurance companies use credit information when underwriting insurance because research has shown that the credit history of a person or business leader has a strong correlation with future insurance losses. So, if you have an excellent credit history, you are viewed by the insurance industry as a good client who is less likely to file a claim.

According to Credit.com, “Credit reporting agencies collect and maintain the information that forms your credit history and ultimately, your credit report. That includes information about your existing credit accounts as well your payment history from a variety of financial institutions, including credit card companies, banks, mortgage companies and other lenders. Other businesses, like telephone and utility companies, also report information to credit bureaus.” Various information that may be exchanged includes:

• Identifying information: Social security number, birth date, employer, spouse’s name, employment history, homeownership status, previous addresses, and a list of any inquiries made by organizations like credit card, banking, mortgage, and other lending organizations in the last 12 months or by employers in the previous two years.
• Payment history: Credit accounts opened, the amount of credit extended, whether payments have been made on time, closed accounts, the amount of credit being used, and related events (such as a bill being referred to a collection agency).
• Public information: Any issues that are a matter of public record, such as unpaid speeding or parking tickets, bankruptcies, foreclosures, library book fines, tax liens, etc.

So what keeps everyone from reaching a perfect score of 850? There are many things that can bring down one’s FICO score—some of which are surprising. They include:

• Closing credit card accounts: While canceling a credit card seems like a wise idea, it may actually bring down your score. Reeves noted that “older accounts matter more because they provide lenders with longer views of your history.” The best credit card consumers have accounts more than 12 years old. Rather than cancelling old cards, keep them and make a few charges annually so the lending institutions do not cancel them for non-activity. Being debt-free is an admirable goal, but if you are trying to keep your FICO score high, reduce your debt across multiple credit lines versus concentrating on just one. If you have to close an account, choose one with a positive payment history: that information will stay on your credit report for up to ten years!

• Making late payments: Missing just one payment may dent your credit, even if you paid promptly every other time. (Some lenders will forgive your first late payment and waive the interest, but it’s best not to rely on it. Even if they forgive your additional fees and interest, the late payment may still be reported to the credit bureau). As a preventative measure, set up automatic withdrawals from your checking account for all payments that can be made online.

• Maxing out credit cards: Lenders like for you to use all of your credit line—but to credit bureaus, who consider credit utilization, this gives the appearance that you rely too heavily on credit. Avoid using all of your credit availability, and if you are making a large purchase, split it amongst two or three credit cards. A good guideline is to utilize 30% of your available credit or less to avoid negatively impacting your credit score. If you find yourself frequently approaching the limit or making multiple payments during the month, you may want to request an increase in your credit line. Also, pay off any small or “nuisance” balances on credit cards, since the credit bureau will examine how many credit cards are being used at any one time and this could impact your score. Instead, distribute your major spending activities between one or two cards. Your goal is to show current and future creditors that you (or your company, in terms of business credit) spend responsibly.

• Opening lots of credit lines: Credit bureaus look at your debt-to-asset ratio (how much you owe compared to the amount of credit available to you). Even if you don’t utilize all of the credit available, having many different credit cards can hurt your FICO score because all of the credit lines are added together by computer to determine your ability to repay all of the potential debt you could accrue.

• Applying for credit excessively: Every time you apply for a credit card or loan, the lending institutions you have contacted conduct a search of your credit history. When multiple inquiries appear, flags go up with FICO and your score takes a small hit. Myfico.com explains, “Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”

Fortunately, for credit that typically requires comparison shopping—like mortgage, auto, or student loans—FICO ignores inquiries made in the thirty days before scoring. If you find a loan within that time period, the inquiries will not affect your score, and FICO will sometimes go back further and consolidate previous inquiries into just one hit. So, if you are thinking about buying a car, applying for a mortgage, or securing another credit card, try to focus your shopping within a period of a few weeks. Also, don’t allow any organization to make an official inquiry on your credit report until you are serious about making a purchase.

• Using only cash: Mike’s grandparents paid only by cash or checks and never owned credit cards. Having been raised during the Great Depression, if they didn’t have the money for something, they didn’t buy it. Today, however, lacking sufficient credit history can make your life very difficult (and ultimately cost you a lot of money). How much you pay in home and auto insurance premiums, for example, is based on your credit history. Also, many credit cards will generate travel and other rewards, so you can earn some benefits for obtaining the right cards, using them wisely, and paying them off promptly every month.

• Failing to monitor your credit: The Federal Trade Commission says that 1 in 5 consumers have a mistake on their credit report, and one study, according to Entrepreneur.com, found that 79% of credit reports had errors. Therefore, it’s a good idea to check your credit file annually by going to annualcreditreport.com, a website set up by the three largest credit bureaus. Your inquiry will not impact your FICO score, and it will give you the opportunity to confirm that all of the information on your report is correct. You can also see who has been making inquiries about you (which could include unauthorized people who are using your information to make false credit applications!).

Each year, you are entitled to one free credit report from each of the three bureaus. You can choose to receive them all at once, or to space them out. It is easy, free, and takes only a few minutes to download a detailed report. However, your FICO score is not included, although you may buy it from the bureaus for an additional charge.

Most data will remain on your credit report for seven years, so problems like bankruptcy and nonpayment will follow you for a long time. If you see any mistakes on your credit report, promptly report them to the credit bureau in writing and include relevant documentation like payment receipts. Then, according to Reeves, “that credit reporting bureau has 30 days to investigate your claim, and must forward you details about the disputed account as well as alert the source of that information on your behalf.” See www.consumerfinance.gov/learnmore for how to report incorrect information on your credit history and have it fixed.

• Not establishing credit history as a business: If you are a business owner, your personal and business credit histories are separate (even though financial organizations like banks look at both). However, lending institutions want to see a financial history for a company before lending money or establishing credit lines—a vital necessity for any organization. In fact, according to the US Small Business Administration (SBA), lack of credit, financing, and adequate cash flow are primary reasons that companies fold or fail to launch. We have personally talked with many entrepreneurs who had great ideas for a start-up but lacked the cash, credit, or investors needed to start and operate the company.

To begin establishing credit history as an organization rather than a person, every business owner should apply for an employer identification number (EIN), even if their business has no employees. Rather than using personal credit cards and lines of credit to buy supplies, pay rent, and purchase other services, establish a separate company financial presence. To do this, create a legal entity such as a limited liability company (LLC) and obtain corporate credit lines, commercial banking accounts, business credit cards, and bills in the correct legal name, even if you have to personally guarantee them. Also, set up an account with Dun and Bradstreet (www.dnb.com), which monitors business histories like credit bureaus do for individuals.

Be aware that when the Great Recession occurred, banks and other lending institutions decreased loans to consumers and tightened up on credit lines to businesses. New laws such as the Dodd-Frank Act overhauled the banking and financial industry, which restricted lending. Now, when someone seeks a business loan, financial entities often review the business owner’s financial history in addition to the company’s.

• Negative or unusual occurrences: Major financial problems, such as bankruptcy, can drop your FICO score up to 240 points (depending on how good your score was previously), according to “damage points” data revealed by FICO in 2009. Foreclosure can cost you up to 160 points. If you fail to pay your bills and they are turned over to collection agencies, your score will also take a major hit, and a tax lien can stay on your credit report for up to 15 years. There are some smaller penalties (up to 45 points) for less-serious issues like a maxed-out credit card.

According to Bankrate.com, there are also some risky or out-of-the-ordinary activities that may reduce your credit score, such as taking out cash advances from credit cards, using your card at pawn shops or divorce attorneys, or suddenly paying less on your credit card than you normally do. These anomalies hint that you may be having money troubles and raise red flags.

• Concentrating credit with only one spouse: In some marriages, one spouse applies for loans, credit cards, etc., while the other individual is listed only as a card holder without a formal connection. But if something were to happen to the primary credit line holder, the other partner would be left with limited to no credit history. Therefore, each spouse should apply for at least one credit card in their own name.

It’s also wise for couples to have honest discussions (with a counselor, if needed) about finances before they are married. According to our research, finances and spending habits are the most common arguments in a marriage. Spouses’ credit histories are tied together, so if your partner has a poor one, yours may be in jeopardy. If divorce were to occur, both parties could walk away with bad credit ratings, even if one previously had an excellent credit history! In addition, if you are a co-owner of a loan, mortgage, or credit card and your spouse dies or divorces you, the balances could fall back on you and impact your credit.

• Leaving loose ends when moving: Some consumers think that accounts associated with their old home are closed and paid before a move, but it’s not always the case. That last telephone or utility bill that never made it to the new address can blemish your credit report: even if you have forwarded your mail, it’s not 100% effective, and you might not receive notices of unpaid balances, which could eventually be sold to a collection agency. The best strategy is to call former vendors 30 days after your move is complete to confirm that all accounts are in the clear.

• Cancelling memberships incorrectly: Businesses such as gyms and cell phone companies have paperwork that you must complete in order to cancel a membership or contract, and it’s often time-consuming and complex. Still, it’s important to correctly file the paperwork rather than simply instructing your credit card company to discontinue the payments. Otherwise, some businesses will report your payment failure to the credit bureau or turn the balance over to a collection agency, harming your credit.

• Transferring loans to another agency: It’s typical for mortgage and student loan companies and other lending institutions to sell your loan to another organization. However, when they do, your credit history could show one account as being closed and another opened, which can affect your score. You can’t control when this happens, but it is something to monitor, especially if you are planning to make a major purchase.

The good news is that there are things that can increase your FICO score:

• You own your own home and/or have lived at the same address for more than one year.
• You are listed on the electoral register.
• You have a good payment history (the older the accounts, the better).
• You are a stable individual (employed versus self-employed and have worked at the same company for an extended period of time). Surprisingly, your income, assets, and net worth are usually not considered when calculating credit scores!
• You have a long-term banking account.
• You are not connected to a person with bad credit history (for example, co-signing a loan with a person who has a poor financial background).
• You minimize or do not carry debt. The less you use your credit limits, the higher your FICO score.

According to Reeves, “You need to develop good behavior over time for your score to improve. If you use credit well and wisely, it’s a financial tool.” But despite all the time it takes to build up good credit, it can be destroyed very quickly. Going into debt comes with a number of negative repercussions, including stress, a lowered credit score, and of course, the burden of eventually repaying what is owed. If you are having trouble paying down your debt, consult with a certified financial planner who can help you design a strategy to rebuild your credit history.

The bottom line: A person’s financial past can define their future. The ultimate goal should be a debt-free business and personal life, but having some credit is also important. Over the course of their lives, having a less-than-excellent credit score could cost individuals or businesses tens of thousands of dollars. It behooves all of us to study our credit reports, know our FICO scores, and, above all, avoid taking risks with credit. Once you achieve a high credit score, it’s like money in the bank!

 

About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].

Mike DuBose, a University of South Carolina graduate, is the author of The Art of Building a Great Business. He has been in business since 1981 and is the owner of Research Associates, The Evaluation Group, Columbia Conference Center, and DuBose Fitness Center. Visit his nonprofit website www.mikedubose.com for a free copy of his book and additional business, travel, health, and personal published articles.

Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).

Katie Beck serves as Director of Communications for the DuBose family of companies. She graduated from the USC School of Journalism and Honors College.

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