3 Things Anchoring Your Credit Score

The major credit reporting agencies DO NOT reveal their computer based formula for adjusting your credit score. As consumers, we’re left guessing which activities or behaviors may be impacting the health of our credit scores.

20+ years in banking has given me the opportunity to review hundreds, if not thousands of credit reports and corresponding credit scores. Although I’ve not scientifically quantified what I’m about to share, I did begin my observance of these three items about five years ago and have found most of the credit reports I’ve reviewed since, to have a positive correlation to these three items.

The first item has to do with the types of credit being reported on your credit report. I’ve noticed credit obtained at specialty finance companies, think financing offered at a furniture store, and other store-based credit cards weigh down your score. Scores seem to be higher for credit cards that are issued by the major credit card companies, like Visa, MasterCard and Discover.

The next item is the relationship between your available credit and your actual balances. The higher percentage of the available credit that you’ve used, the more downward score pressure. Around 50% seems to be an invisible line that determines the difference. Loosely, if you carry balances over 50% of your available open credit card limits, then you are likely not helping your credit score.

Lastly, most people understand that making payments on-time will improve credit scores, but I’ve viewed very few credit reports that have never had a late payment. Practices differ, but generally speaking, only payments over 30 days late get reported to your credit agency. However, not all late payments appear to be equal, late payment on home mortgage loans seem to carry a disproportionate weight when it comes to credit scores.

Eking out a higher credit score through these methods could mean real dollars. Every bank I’ve worked for over my career has set minimum credit score standards for consumer loan approvals, but they've also generally charged higher interest rates for lower scores that still get approved. The general range of lower credit scores that get approved, but get charged higher rates are in the mid-600’s. The better rates (and terms) are being given to those with credit scores at or over 700. I’ve witnessed lower scoring customers paying up to 15% while higher scoring customers could be paying rates of around 4%. The 11% difference in this example could result in thousands of dollars of interest. 

Keeping your credit score higher will very likely save you a ton of money over time. If you disagree with my tips or have other little known tips, please feel free to leave your comments below.