5 reasons credit scores don’t make sense

0

[ad_1]

While this does not influence our opinions on the products, we may receive compensation from partners whose offers appear here. We are by your side, always. See our full advertiser disclosure.

Image source: Getty Images

Whether you like it or not, your credit rating is a big part of your daily life. You will have a lot more ease financially with a higher credit score. But as you try to increase your credit score, you might find yourself faced with a frustrating problem: Credit scores aren’t as intuitive as you might think.

Things that seem to help your score can actually hurt it, and vice versa. In situations like these, you might wonder why a smart and responsible financial decision (like paying off a loan) caused your credit rating to drop.

Simply put, there are many ways that credit scores don’t make sense. But when you are aware of these quirks, you can make sure that they don’t trip you up as you work towards getting good credit.

1. You must borrow money to build credit

A credit score is an assessment of your creditworthiness. Based on that, you would think that having no debt and paying all of your bills on time would be points in your favor.

Unfortunately, it doesn’t work that way. To establish your credit history, you need a credit account, that is, a credit card or a loan. Otherwise, you will have a low or no credit rating due to a lack of information on your credit report. On the plus side, you can use a credit card and avoid interest charges on your purchases if you pay in full each month.

2. Late payments do not harm your credit until they are 30 days past due.

You may have heard that a late payment by credit card is bad for your credit score. This is true, but only when you are at least 30 days late.

Each month, your card issuer sends an account status code to the credit bureaus that calculate your credit score. The code for current accounts, that is, those that are up to date with their payments, applies to accounts overdue from zero to 29 days. The following code covers those that are 30 to 59 days past due.

If you pay your bill 29 days late, this counts as a one-time payment for credit scoring purposes (although your card issuer may still charge late fees). But if you pay a day later, it can cost your credit score up to 110 points.

3. Having more credit cards can help your credit

Your credit utilization rate is an important part of your credit score. This ratio is your credit card balances divided by their credit limits. Since a lower ratio is preferable, you can benefit from more credit cards.

Let’s say you have a credit card with a balance of $ 500 and a limit of $ 1,000, for 50% credit usage. Your friend has four cards with combined balances of $ 1,000 and combined credit limits of $ 10,000, for 10% credit usage.

Although they have to pay more, your friend is doing better with their credit rating. Thanks in part to their higher number of credit card, they have much more credit, which reduces their use of credit.

4. Paying off a loan can lower your credit score

This one always throws people for a loop. How can paying down debt is bad for your credit?

There are two reasons why this can happen. The age of your credit accounts affects your credit score. When you pay off a loan, that account is no longer on your credit report. If this was one of your old accounts, this loss will affect your credit score.

Your credit combination also affects your credit score. It is better to have both credit cards and installment loans rather than just one of the two. If you pay off your one loan and only have credit cards left, your credit mix will get worse.

5. Minimum and full payments count equally on your payment history.

While it’s best for you to pay your entire credit card bill, you don’t get extra credit for it. When it comes to your credit history, paying on time is paying on time. It does not matter if you have paid the minimum balance or the total balance.

To be fair, there are other perks that come with paying in full. you avoid credit card interest, which will save you money. It can also lower your credit utilization rate, which can improve your credit score.

It is certainly confusing to learn about the factors that can affect your credit score. Just keep in mind that you don’t need a complex strategy to build credit. Sometimes things can affect your score in unexpected ways. But all it really takes to get good credit is using a credit card, paying on time, and not letting your balance get too high.

The best credit card erases interest until 2022

If you have credit card debt, transfer it to this top balance transfer card can pay you 0% interest for 18 months! This is one of the reasons our experts rank this card among the best to help you get your debt under control. This will allow you to pay 0% interest on balance transfers and new purchases until 2022, and you will not pay any annual fees. Read the full review of The Ascent for free and apply in just 2 minutes.

We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool recommends Bitcoin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

[ad_2]

Leave A Reply

Your email address will not be published.