Ask Our Experts: What's the Secret to a Good Credit Score?
Hey everybody. Thanks for joining us live here on Facebook as we broadcast from Copper State Credit Union's operation center here in Phoenix. My name is Christina Kredit. I manage our Financial Wellness program here at the credit union and we will be sharing the inside scoop on credit scores tonight. What is considered a good credit score? What is the secret to getting or maintaining a good credit score? And the surprising connection between your debt and your credit. Joining me today is a Copper State Credit Union expert, the man of the hour, Russ L. Russ, do you want to tell us a little bit about yourself?
Russ: Thank you, Christina, and welcome to everyone out there that's joining us this afternoon. I'm currently the VP of Lending here for Copper State Credit Union. And I guess a little bit about my background, if you notice a little bit of an accent, I'm a native Mainer and I grew up in Coastal Maine and that's where I started my banking career and I won't tell you how long ago, but it's 30 plus years. So I got to loan money to lobster fishermen and others and I really learned lending from a very different perspective, self-employed borrowers and local community, and that's before the fancy credit scores and automation, which we'll get into a little bit later in the process here. But long story short, I've seen lending from every perspective, whether it's been from retail, from operations, from underwriting and I can honestly say one of the hardest things learning lending as an originator was to say no to somebody. The flip side of that though was the most rewarding thing once I figured it out was helping that person I said no to, to be able to help them and have them come back and ultimately say yes because I was able to educate them on what was making the no and what they needed to do to make it turn into a yes.
Question: So first of all, in your professional opinion what would you consider a good credit score?
Answer: FICO was the original company that developed the magic sauce to come up with a credit score. But they have different versions, and now there are different models and vendors that score people a little differently. But most of them should be comparable and should be in the range of 300-800. A good score is in the high 600s. 680, historically, has been the magic number. A great score is in the mid-700s and usually in the 750 to 760 range is where you're going to get the lowest interest rates from creditors. And then of course the awesome score is anyone that can get into the 800s, 850 is the absolute highest and we refer to that in business as a unicorn.
Question: Now that we have a general idea of a good, great, and awesome credit score ranges, I want to talk for a moment about the difference between my credit score and my credit report. I know that I'm supposed to request my free credit report once a year, but how is that different than checking my credit score via my Copper State CU online banking portal?
Answer: The credit report is nothing more than your history of how you've performed with credit, your open accounts, your closed accounts, what they were for, how much they were for, what your monthly payments were, and how you performed with it. The last 10 or 12 years of your life from a credit perspective will be on your credit report, open, closed, applications, and so forth.
Unfortunately or fortunately, depending on perspective, is your credit score takes all of that information and reduces you to a three-digit number. This enables the big guys with their automation to use that number to instantly approve or decline. And the way we do it, the way I train the lenders, is that number will tell you how much of a story there is to get from the member. If somebody has an 800, in some places that's an instant approve. Those are easy to approve. But the people in the low 600s, doesn't mean it's going to get declined by us, that just means there's a story to be told that the full credit report would tell us some of that.
If you ant to know more, our credit score chart can help you dive deeper into the specifics.
Question: Love that! So what's the best way to keep an eye on both credit score and credit report?
Answer: Awesome question and it's an easy answer. We offer free credit bureau score tracking as a benefit of membership and it's available right within your online banking portal. Every month you can go and look at your credit report, but every month we'll tell you what your new credit score is and what the factors are that are contributing to it going up or going down and you can monitor for yourself at no cost.
Question: I know that everyone wants to know, because of the title of our event tonight, What would you say is the secret to a good credit score, or if you are someone who already has good credit, what's the secret to maintaining it?
Answer: Well, part of it is to understand how credit score is calculated and the importance of different criteria. But the other part of it is, I kind of attribute it similar to those of us that would like to lose weight, you've got to be disciplined and you've got to track it and you can't get discouraged if it moves in the wrong way. You've got to keep it a long-term approach. But once you understand some of the magic behind it, it's purely discipline to get to where you want to go.
Question: We hear the term 'credit utilization' a lot but can you tell us what that really means and why it's so important?
Answer: It means a couple of different things, but one thing, the factors that go into developing your score, credit utilization represents 30% of that so it is a big chunk of what determines your credit score. Now utilization is a couple of things, what types of credit, how recently you've gotten the credit, and probably more importantly is how are you handling the credit that you have, and utilization in the industry is more about how people are handling their revolving debt. The cardinal rule is don't carry a balance greater than 35% of your credit limit. The number of people that I've personally talked to, and I still hear it from our loan officers that are talking to members is, "Well, I have good credit. I make my payments on time and I was told to use them." Yes, use them, but don't carry a balance unless you have to. And if you do have to, try to keep it under that 35%.
Question: What are your thoughts on 'maxing' out your credit. For example, if I'm 19 years old and I get my first credit card, it's a $500 limit and I go out and put $500 worth of purchases on it. Is that going to help me because I've put the maximum amount on there?
Answer: Once you go over $150 on that $500 line, it's going to start to hurt you. That $150 out of $500 is the 35% I'm talking about and you should try to stay under that. Now the reality is, life throws curve balls sometimes you use your credit card and you make major purchases, but you know you're going to be paying it down rapidly or you've got the money sitting in the savings account and you're just going to wait for it and then in a matter of one, two, three, six months, you're going to pay it right back down. That's not alarming. You're going to have a minor hit to your credit score. It's constantly moving but it's the people that use the credit and don't pay it off rapidly, they just keep making minimum payments. That's going to hurt you long-term and your credit score will never get to where it could be as long as you keep up that behavior.
Read our article on credit card minimum payments for more help on how to navigate this topic.
Question: It sounds like the secret of a good credit score is not necessarily how much of it you have, but how you use it and how much you use, which is really interesting. So what would you say is the biggest mistake or misunderstanding that you see on folks' credit reports regarding that topic?
Answer: Well, one thing I referred to is they think just using a credit card and carrying a balance is good for their credit. It can be up to a point, but again the 35% utilization. The other thing that is intriguing to me, and again, I'm more conservative, I'm a fan of having less accounts, but there are some people and I get it, they've got JCPenney, they've got Lowe's, they've got Amazon, they've got Discover, they've got a Visa card, they've got a Mastercard. And because they can get discounts if they shop at this store and use the card, they'll get a discount. The problem is, that's great if you're going to just pay it off when the bill comes in, because then you pay no interest. But if you don't do that, then you're going to pay a much higher interest rate and you will have paid more in interest than what you got for a discount! But people get into the trap of just doing that and feeling good about the $15 off they got on that new blouse or a pair of slacks, and it's costing them in interest. So I see many people with 12, 15 credit cards, most of them coming from their favorite store retailer cards.
Question: All right, so now that we've talked about utilizing your credit correctly, what are some other big factors when it comes to that three-digit number?
Answer: Avoid late payments because that really hurts you, it's 35% of your score.
Question: What's the rest of your credit score made up of? You said that was about 65%, so where does the rest of it come from?
Answer: Yes - so you got 10% is just the mix of credit. So auto loans, mortgage, credit cards, car loans, personal loans, a mix of credit types is good. You don't want to JUST have credit cards or revolving debt, for example. You want to mix that up with some secured loan options and some closed-end or fixed term options.And then consider age of accounts, the longer you have an account and have performed well, the better that is for your score.
Question: So is that why you suggest not closing the card that's been open the longest period of time?
Answer: Yeah, in my career, there are two types of people. Well, there's more than two, but when it comes to the credit cards, it's those people that kind of admit, "Russ, if I have it in my hand, I don't know that I can not use it." So cut the card up then, keep the account open, cut the card up so that you're not tempted, or in some cases just close the accounts that you don't need and keep the ones that make sense for the longer-term.
Question: What's the connection between debt and credit score?
Answer: A lot of people use 'the plastic' for the holidays and it may be taking them longer to pay it down or pay it off than they anticipated. one of the simple fixes or solutions could be just do a debt consolidation loan or personal loan. It's a fixed interest rate. It's a fixed term. Obviously if it's for holiday, I wouldn't recommend doing a 24-month because guess what? Christmas is rolling around in less than a year, but get a fixed rate, closed-end loan and pay down your credit cards. Now that does two things. I'm guessing that our personal loan rate will be lower than what you're paying on the credit card. And number two, and probably more importantly, guess what happens when you pay down that credit card? Your utilization goes down which helps the FICO go up and so that's it.
As long as you don't then go back and build up the debt, right? Check out our recent webinar on smart debt consolidation for more info.
Question: If you could give only one piece of advice regarding credit score, what would that be?
Answer: Oh, that's easy. Treat your credit score like you treat your reputation, it's that important. And today you've got employers that use it to screen applicants. You've got insurance companies that use it to determine how much they're going to charge you for auto insurance and home insurance. And you've got financial institutions that use it to determine what price you're going to pay on your loan request. And it's a simple thing like a car loan. A few points on your credit score could cost you over the life of a car loan, $2,000-$3,000, more or less. So treat it the same as you would your reputation, keep your eye on it. Use "My Credit Score" via our online banking. Monitor it. And don't worry if you lose ground one month, it's the long approach. And if you can gain five points every month, man, 60 points in the course of a year, you're talking a lot lower interest rates than you're paying today.
Christina: Absolutely. That's a really big difference. I really appreciate you coming live with us today Russ and I hope to have you back as a guest very soon! Thank you!
Russ: Thanks for having me!
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