Understanding Debt, Credit Scores, and Zombies

Watched any good horror movies lately?  More specifically, are you into zombie flicks?  Zombie movies?  Eh, whatever.  If that’s your thing, then great.  Not mine.  And then we seemed to go through this whole phase where the world seemed to embrace the idea that there really was an impending zombie apocalypse headed our way.  We were prepping supplies, coming up with defense plans, the whole works.  Seriously.  ZOMBIES AREN’T REAL!

Well maybe not in the undead body sense.  There is one particular concept that seems to come up again and again in my classes.  And it’s not a good one.  It is like the zombie of the credit world so we are just going to treat it like a zombie and cut the head off right here, hopefully ending it for good.

There is this idea that you have to put some charges on your credit card and then pay it off slowly over multiple months for that card to do anything to improve your credit score.

Die, zombie!

To understand why that concept deserves the same respect as a real-life impending zombie apocalypse, let’s understand what your credit scores are based on.

First the truth in it.  You will need to use your credit card a couple of times a year.  But this is ONLY so that the credit card company doesn’t shut down your card for lack of use.  That’s it.  That’s the only reason.  Use it for a gallon of milk.  Pay it off immediately.  You won’t pay interest.  The account will stay open.

And now, the rest of the story.

35%, the largest single piece of your credit score, looks at paymentFICO-Score-chart history.  Do you make your payments on time?  So you have to use the card to have a payment, right?  WRONG!  If you don’t owe the card anything, they will send a statement saying as much.  Do what they ask (don’t send them anything), and your credit report will show you made your payment on time because you did what they asked.  You don’t have to have debt to build payment history.

The next largest factor in your credit score, a weight of 30%, is how much debt you carry.  Now FICO does let you carry some debt without hurting your score, but it certainly isn’t going to help your score.  Why start pushing that line in the sand?  But you pay it off at the end of every month, so you’re good.  Right?  Wrong.  Your information can be reported at any given point in the month.  If that is in the middle of the month when you have charged items and haven’t even gotten the bill yet, it will show that you have debt, thereby decreasing your score.

Your length of credit history (how long you keep accounts open) and credit mix (can you multitask and manage different types of credit) make up an additional 25% of your credit score.  Again with both of these, you only have to have the accounts open and credit available to you.  YOU DON’T HAVE TO CARRY DEBT.

Right from FICO’s own numbers, we see how much of a zombie this idea that credit card debt will build your credit history really is.  When we understand the truth, it actually can become easier and cheaper to build a positive history.

I get it.  Credit reports and scores can be a bit to navigate.  MyFICO.com has some good information on what scores are, how they are calculated, and how they impact you.

If you would like a little more personal help, the counselors at the Center for Financial Resources are happy to help you out.  We do credit education, so we can go through your credit report with you to explain what it means and how you can improve your credit.  Anything that can be done to improve your credit, you can do yourself.  We can walk with you through that process.

You can find out more or schedule an appointment by calling us at 605-330-2700 or on our website at cfr.lsssd.org.

written by Breck Miller, Community Relations Coordinator
image courtesy myFICO.com

LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus| Financial Fitness Education
705 East 41st Street, Suite 100 |Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
Strengthening Individuals, Families & Communities

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