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Businesses may need to do more to dispel credit score myths

Nov 04, 2015 Walt Wojciechowski

Businesses may need to do more to dispel credit score myths

Over the last several years, the importance of having a good credit score has become apparent to far more people across the country. Prior to the financial downturn, many Americans likely didn't realize just how crucial a quality score could be, and likewise may have struggled financially as a result. However, this era of paying more attention to scores has done little to reduce the belief in a number of myths about the ways to build and maintain a good score that, in reality, simply aren't true. It may therefore be incumbent upon companies that use credit scores to evaluate potential clients or borrowers to do more to help people understand the ins and outs of good credit habits.

Perhaps the biggest financial or borrowing myth that ends up impacting people's credit scores in a negative manner is the idea that credit card lenders "want" people to owe some money. This is, in fact, not really true. What they want is borrowers who are able to pay their bills every month, and that comes with the understanding that if people owe more money, they're probably going to run into difficulties meeting that monthly payment requirement.

What's the reality?

When it comes to borrowing, lenders don't mind if consumers carry a balance, but they typically don't want to see all their balances exceed what they can afford to pay back. For this reason, consumers who want a good credit score should aim to borrow no more than 30 percent of the total combined credit limits of all their cards. This is known as their "credit utilization ratio," and makes up 30 percent of their overall credit scores. Therefore, the less they owe from one month to the next, the better off they will be when it comes to not only maintaining a strong score, but also avoiding significant interest charges.

Other myths
In addition, many Americans may think that paying down a balance is a good idea, and they're right. But where they often make a misstep is when they close an account after paying it off. That may help them resist the urge to borrow again, but it probably also lowers their combined maximums by a significant amount - therefore boosting their credit utilization rate once again - and in many cases reduces the average age of their accounts, which makes up another 15 percent of their scores.

The more these companies can do, the better off both they and their potential customers are likely to be. The fact is that they may also be able to benefit by relying upon alternative credit scores to make their decisions when it comes to applications they receive. These alternative scores take into account far more than just past credit payments, including the frequency with which people pay their rent and utilities bills on time and in full each month. That should serve to create a more complete picture of how consumers manage their money over time, and help all involved.