Randy had a credit score of 850. According to FICO, the most popular scoring model, that’s as good as it gets.
Still, his credit report said he could lower his utilization rate, so he immediately paid off the rest of the car loan with one $6,000 payment, and then his score dropped 30 points. (Randy has been the target of identity theft and asked that his last name be omitted due to privacy concerns.)
Most people assume that deleting those auto payments can’t hurt, but that’s a mistake.
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When it comes to credit scores, there are a few things that many borrowers often get wrong, experts say. Here are the main misconceptions and why it’s so hard to set the record straight.
Misconception no. 1: Debt is bad
Your credit score — a three-digit number that determines the interest you’ll pay on credit cards, car loans and mortgages — is based on a number of factors, but most importantly, it’s a measure of how much you owe and how responsible you are when it comes to paying.
Having a great score doesn’t mean you have zero debt, but a proven track record of managing a combination of outstanding loans. In fact, consumers with the highest scores owe an average of $150,270, including mortgages, according to a recent LendingTree analysis of 100,000 credit reports.
Borrowers with credit scores of 800 or higher, like Randy, pay their bills on time, every time, LendingTree found.
To that end, having a four-year car loan in good standing worked for Randy.
“Lenders also want to see that you’ve been responsible for a long time,” said Matt Schultz, chief credit analyst at LendingTree.
The length of your credit history is another of the most important factors in your credit score because it gives lenders more insight into your repayment background.
Misconception no. 2: All debts are the same
Since Randy has already paid off his mortgage and has no student debt, that auto loan was key to showing a diverse mix of accounts.
“Your credit mix should include more than just having multiple credit cards,” Schultz said. “The ideal credit mix is a mix of installment loans, such as auto loans, student loans and mortgages, with revolving credit, such as bank credit cards.”
“The more different types of loans you can prove you can handle successfully, the better your score will be.”
The total amount of credit and loans you use compared to your total credit limit, also known as your utilization rate, is another important aspect of a great credit score.
As a general rule, it’s important to keep revolving debt below 30% of available credit to limit the effect that high balances can have.
Misconception no. 3: You need a perfect score
Only about 1.6% of the 232 million U.S. consumers with a credit score have a perfect 850, according to the latest FICO statistics.
Aside from bragging rights, you won’t have much of an advantage by being in this elite group.
“Typically, lenders do not require individuals to have the highest possible credit score to secure the best loan features,” said Tom Quinn, vice president of FICO Scores. “Instead, they set a cap, which is typically in the upper 700s, where applicants who score above that cap qualify as having a good credit score and receive the most favorable terms.”
Each lender sets its own credit score thresholds for which it considers the most creditworthy. As long as you fall within these ranges, you’ll likely be approved for a loan and qualify for the best rates the lender has to offer, Schultz added.
“Anything over 800 is gravy,” Schultz said, and “in some cases the difference between 760 and 800 may not be that significant.”
Most credit card issuers now provide free credit score access to their cardholders, making it easier than ever to check and monitor your score.
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