Credit scores are based on five things: payment history, credit utilization, length of credit history, new credit, and credit mix. Sounds pretty simple, right? But delve into the world of trying to obtain the perfect credit score and you will see just how confusing it can be.
Payment history is pretty straightforward — pay on time, and the score goes up. However, if you are not opening up new credit, your score can plummet no matter how consistently you pay your bills. Also, without the right ratio on your credit card balances, you can get hit and the score lowers again. Word to the wise, don’t pay the whole balance on your credit card purchases, and whatever you do, don’t max out said credit card. The powers that be want you to maintain around a 30% balance on your credit cards. Well, I ask who does this benefit, definitely not the consumer. Why would you want to carry a balance on a credit card unless it was one with no interest being charged?
Also, the credit gods want you to finance that new car, but what is wrong with the one you have been consistently paying on for 2 years? Talk with a loan officer when trying to buy a home and you may hear that your credit is too old. Wait, what? Your answer may be I have 3 credit cards with low or no balances, and one I have had for 15 years and I am currently paying for 2 cars, one for 4 years that is almost paid off, and one that I bought 2 years ago. What am I to do to make everyone happy and get that lower interest rate? Why not look at the viability of my job? Or how I have paid my rent and utilities for the past 10 years? Shouldn’t that account for more than taking out some sort of credit line this year?
Changes are coming to how credit scores are obtained. Unfortunately, I think they may remain just as confusing as they are now and benefit the finance companies… not the consumer.
