Americans Don’t Understand Credit Scores, Survey Says
Four in five people don’t know that carrying a high balance on their credit cards can hurt their credit rating, even if they never miss a payment due date.
According to a recent industry survey, the majority of Americans don’t understand how credit scores work, and what things could negatively impact their credit score—which could lead to their not being approved for credit cards with the best rewards and lowest interest rates. When folks have less than excellent credit, they may only be approved for credit cards for fair credit, which usually offer less lucrative rewards and may come with higher APRs and more fees.
What counts in a credit score
Carrying high balances and maxing out credit cards is one thing that can easily bring down a good credit score. That’s because one factor in determining credit scores is something called “debt-to-credit ratio,” or how much credit is available. If someone has a credit card with a limit of $5,000, but is carrying $4,000 of debt, the debt-to-credit ratio will not look good on their credit report. Keeping balances to less than 30%, and less than 10% if possible, will lead to the best credit score.
Debt-to-credit ratio counts for about 30% of a consumer’s credit score. Payment history counts for another 35%, length of credit history counts for 15%, types of credit in use counts for about 10%, and the last 10% is impacted by how much of the consumer’s credit is new credit. That’s why opening a lot of new accounts in a short time period is not generally recommended.
More misconceptions about credit
The survey also showed that 55% of people mistakenly think they need to carry a balance on their credit card in order to have a good credit score. In fact, as long as cardholders are using their cards and paying their bills on time, they can be improving their credit score—even if they never carry a balance from month to month. There is no need to owe money in order to achieve a good credit score.
One thing that can bring down a credit score is closing accounts. While 70% of survey respondents thought having only one credit account would be beneficial for their credit score, that is not necessarily the case. Having a long credit history is important in order to maintain a good credit score—so closing an old account is actually a bad move.
The key to having good credit is to keep balances low, make payments on time, and keep a variety of credit accounts open for a long time.