Most financial ‘influencers’ out there will tell you what I am sure you have already heard when it comes to building a good to excellent credit score. They will explain the percentages of the credit scoring model, such as 35% from payment history, and 30% from the amount owed, etc. But here is some of what they DON’T tell you.
At the beginning of my obsession with my DEBT score a banker once told me, “to get an 800 credit score you needed to have at least one of each of the big 5 types of credit; Store credit, major credit card, student loan, auto loan, and mortgage, and pay them all on time for 10 years,” and you would have an 800 debt score.
I was on a mission and wasn’t willing to wait 10 years. I quickly built up from the 530 score I had when I first pulled a credit report, to an 810 in just a few years' time. I was in LOVE with my debt score.
I was in love with what that score gave me. At that time I had built a growing business and was just approved for a $110,000 mortgage, on my own, with no cosigner. Not a lot to work with for an area like the Columbus, Ohio metro area, but I did it on my own.
As a single independent female and budding entrepreneur, I felt on top of the world. Just one month into my house hunting, tragedy struck my business, and that 810 debt score did nothing to save me or my business from the slow and painful 2-year decline into bankruptcy.
My response to That Advice
STOP telling people that they just need ALL the credit types, and “make your payments on time,” and that’s all it takes to have excellent credit.
STOP telling people that it takes years to recover from negative credit marks.
Here’s why. In December 2019 when my bankruptcy was discharged through the courts, my score had crashed all the way back down to a 585. It felt like all those years of hard work, building my business while still working a full-time day job (in debt collections, lol) was all for nothing. It was all gone.
One month after my bankruptcy I opened a secured credit card with a $300 cash deposit I put up on a card that had NO credit check for approval. I knew I had to start back somewhere, and now having been disenchanted to the almighty debt score, I knew credit cards can still be a valuable tool.
In just a short 3 months after opening the secured credit card, and just 4 months after my bankruptcy, my score had climbed back up to a 696!! I increased over 100 points in just 4 months after bankruptcy. And at 6 months after bankruptcy, I popped up into the 700’s.
There were of course a few other factors that went into my score rebounding so quickly. We don’t know the algorithms that compute the dozens to hundreds of different scoring models out there. FICO alone has 10 different scoring models, and Vantage Score just released model 4.0 as of the writing of this post.
Then there are auto scores, insurance scores, and rental scores. There are even several credit scoring models for businesses out there. The two most prominent are Dunn & Bradstreet PAYDEX score and Experian Intelliscore Plus.
But the one thing I have noticed that seems to hold true for each and every model is that YES credit scores do heal quickly when you take care of what is negatively affecting them. Because “the most recent six months of your credit activity is weighted heavier when calculating credit scores.” -Unknown
I truly wish I could remember where I heard that golden nugget piece of advice. But, it did give me hope at a time when I felt like I had lost it all. Then seeing that advice play out to be true literally 6 months after my bankruptcy, led me to the biggest realization of all.
What This Really Means
Credit is what creditors issue you… which then makes you a ‘debtor.’ This means ‘credit scores’ are actually DEBT scores!! Credit scores only measure how you manage the current DEBT you have, and how much more DEBT can they burden you with.
You have NO debt? You have NO score.*
Debt scores don’t take into account any assets you may have. You own your car? Doesnt matter if you're not makig monthly payments on it. Remember that my 810 debt score didn’t save me from bankruptcy when a theft destroyed my business.
Important to Remember
Credit DOES HEAL very quickly, once you take care of what is negatively affecting it. Again, the most recent 6 months of credit activity has the biggest effect on your score. Fixing the negative impacts, like falling behind in payments is what takes the longest.
First, you have to get caught up on payments, and THEN stay current for the next 6 months. But usually, you don’t have just ONE line of credit that you’re behind on. If you’re going through a financial crisis you’re probably behind on several or ALL of your unsecured debts.
That crisis has to be resolved first, and THEN you have to have near-perfect activity for the next 6 months. Then some people seem to notice that HUGE bump to their score, 6 months after their crisis. Like their score just improved ‘overnight.’
The bottom line is, if you don’t play their game, you don’t gain (in score terms). There might be a few readers here that think this post doesn’t apply to them, because they “pay their credit cards in full every month.” Well I got news for you, paying the card in full every month has VERY little positive affect to your score.
Sure if you do this long enough, over time you will have a great to excellent score just by exhibiting NO bad habits/issues over an extended period of time. But paying your cards in full every month is NOT going to ‘build’ your credit score.
When you pay your card in full every month to avoid paying their interest, they aren’t geting ‘their cut.’ So in turn you get no love to your debt score.
A better credit card habit, if you are specifically trying to ‘build up’ your score, would be to make a purchase around 50-70% utilization of the card's limit. Then instead of paying off the balance in FULL, pay the balance down under 30% utilization. THEN pay off the card in full the following month.
They earn a little interest off you, you demonstrate good paying AND spending habits, and can get a quick positive score impact.
I will leave you with one final tid-bit that I haven’t fully been able to test out, but I fully believe in. The fastest way to the most positive score impact would be to pay all of your unsecured debt, to below 30% utilization per each account.
A 700 score is not hard to obtain at all, and is a generally ‘good’ score in terms of getting decent interest rates. To get beyond the low 700 range, you have to play their game. Charge more DEBT, so you can pay more DEBT, so they can give you MORE DEBT.
Having a good credit score can be a valuable tool, just like credit cards can be a valuable tool. Hopefully one day the perspective about ‘credit’ can shift to call it what it really is, a DEBT score.
Until then, don’t get starry-eyed over chasing an 800 credit score. A low 700 can still get great interest rates if ultimately your goal is to get approved for mortgage or auto financing. Yes, on-time monthly payments are important, but the fast way to a credit score bump is really to get those credit card balances under 30% of their limit.
More on that in next week’s post when I share my golden rule for using credit cards.
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*Situations vary from creditor to creditor or from state to state.*Disclaimer: This content is for informational purposes only. All materials and information do not constitute financial advice. Always consult a financial professional before making financial decisions.