These surprising facts about credit will help you be a smarter consumer of debt and increase your FICO score
Despite what Dunkin Donuts would like you to believe, America runs on credit rather than deep-fried donuts.
Americans hold $9.1 trillion in debt they used to buy a home and $1.4 trillion to pay for education. They used $1.2 trillion in credit to move themselves around and charged more than $760 billion.
Of course, that’s a speck against the $20 trillion the U.S. government owes. Against these astounding amounts of debt, credit gets a bad name as a destroyer of financial freedom.
The fact is that credit is just a tool, whether it’s used well to build something beyond your financial means or whether it’s used to smash things up.
Understanding the truth about credit can help you use it to your advantage.
That’s why I reached out to six credit experts to get their most surprising fact about credit, good or bad. Use the list to become a better consumer of debt and get the credit you deserve.
Facts about Credit to Make You Rethink Debt
Debt-free is a popular meme in the blogging community but debt isn’t all bad. Using debt wisely can not only get you cheap access to money when you need it but can help you do a surprising number of other things.
Gary at Super Saving Tips warns readers not to underestimate how credit affects your life.
When it comes to bad credit, one of the biggest mistakes you can make is to underestimate how it may affect you and your lifestyle in many areas besides the amount of money you can borrow and the interest rate you will pay.
Mismanaging your credit will affect whether you can qualify for loans like a mortgage, car, or personal loan. Additionally, bad credit can affect your ability to gain employment, rent an apartment, or obtain life insurance.
Overall, it can hurt your lifestyle in ways that you just aren't prepared to deal with and can all be avoided if you don't misuse your credit.
Yes, bad credit can keep you from putting a roof over your head whether it’s to buy or rent. Insurance companies can also use your credit score to increase your premiums. A survey of drivers found that those with bad credit paid 91% more in premiums because of credit-based insurance scoring.
Ian of Fit Small Business shares some surprising facts about bankruptcy and credit.
Bankruptcy can actually improve your credit score. Data from the New York Federal Reserve on bankruptcy filers showed people saw their FICO score fall an average of 100 points leading up to bankruptcy as their financial lives deteriorated.
After wiping out much of their debt or renegotiating it in bankruptcy, credit scores actually increased.
Credit Score Facts about Bankruptcy
Editor’s note: Before you rush out to file bankruptcy to improve your credit score, take another look at the chart. After an initial bump in their credit score, it was a long road ahead for bankruptcy filers. Chapter 7 bankruptcy stays on your credit report for 10 years while Chapter 13, where you negotiate to pay your debts instead of clearing them in bankruptcy, stays on your report for seven years.
Even 10 years after bankruptcy, filers had an average score of just 640 on the FICO scale. That’s only marginally above the 620 score designated as sub-prime credit and rates are still going to be very high.
Thin credit can be almost as bad as bad credit. Not establishing a credit history means lenders have no way of judging your creditworthiness, since credit decisions are all about lender risk, no information is as risky as bad information.
Understanding the Credit Score Game
So it’s clear you can’t just ignore credit but you probably don’t have to worry about it either. Building and keeping a good credit score is a game that can be won if you know the rules.
Chonce of My Debt Epiphany helps to shed light on the credit score game with the truth about credit.
Bad credit isn't for life and you don't need to hire someone to fix your credit. I started off with bad credit at 18 after making a costly and foolish mistake. Now, I'm 25 and my credit score is almost 800 on the FICO scale.
I realized that credit cards and bank accounts aren't bad, it's bad spending habits and inadequate money management that are to blame.
I fixed my bad credit on my own by looking at all the factors that influenced my score and improving them especially the important ones like my overall credit utilization rate and payment history. Paying all your bills on time and consistently paying down your debt are the keys to get back on track.
There are five factors in your credit report that affect your FICO score:
- Payment history is the largest factor (35%), measuring how well you’ve paid debts in the past
- Total amount owed (30%) measures how much you owe and how much you have available
- Length of credit history (15%) is just the amount of time you’ve been using credit
- New credit (10%) is any requests for loans you’ve made in the past year
- Types of credit used (10%) is the mix of non-revolving debt (mortgages, auto and personal loans) versus revolving debt (credit cards)
CJ at Vow of Practicality shares an eternal truth about banking and credit.
Before you apply for a credit card, the number one thing you should do is get to a point in your life where you don't actually need a credit card.
Once you no longer “need” a credit card you can take full advantage of all the cashback and travel rewards, with none of the high-interest load. This turns credits cards into a power tool… instead of a crutch.
No longer “needing” a credit card means you can meet all your expenses with your income each month. You might still need a card for purchases until you get paid but you have no problem paying the debt off each month. Once you’ve got spending under control and can use credit without paying interest, all those free perks and cash back becomes extra money in the bank.
Using Bad Credit Facts to Fix Your FICO
Now that we’ve got the facts about credit, we can start to use them to improve your credit score and use the financial system in your favor.
Warren at The Lending Mag offers the “tradelines” strategy for a quick bump in credit.
One surprising (and lesser-known) thing about bad credit, is a unique strategy for getting out of it, a strategy known as using “tradelines”.
Most of the time, tradelines work by collaborating with someone who has a high credit score. In a sense, it could be viewed as “piggybacking” onto someone’s account who has a flawless line of existing credit.
A lot of times, it’s parents that put their children on a card to help them establish credit. Other times, it’s a professional arrangement where the newly authorized user pays someone to be added to their account. Both options come with potential risks, and it’s paramount to get an agreement in writing in both scenarios.
It's common knowledge that fixing bad credit can take quite a lot of time, but adding tradelines to improve your credit can have an almost instant positive effective. Most credit scores and reports are updated on a monthly basis, and the tradeline will appear and make an impact within 30 days.
FICO reports that it can take between nine months and three years to recover a credit score after being more than 30-days late on a mortgage payment. It takes even longer to recover your score on loan defaults and bankruptcy.
Protecting your credit score is just as important as increasing it.
Jeff of Simple Thrifty Living offers a simple three-step process for increasing your score and two surprising facts about credit repair companies.
I think the most surprising fact about bad credit is that for many people, it may not be that difficult to fix their score. Granted, if you've missed a lot of payments, or have a bankruptcy or foreclosure, it's going to take a lot of work to turn your score around.
However, many people don't realize that if you have only missed a few payments or your carrying high balances on your credit cards, it may be easier to raise your credit score.
- Pay off your balances: A big portion of how your credit score is calculated is your credit utilization ratio, which compares your over credit limit to your over credit balance. It measures how much credit you are using of what you have available. The lower the ratio, the higher your credit score. If you pay off your high credit card balances, it should make a significant effect on your score.
- Get a new credit card: Keeping in mind the credit utilization ratio, if you raise your overall credit limit, your ratio will go down. If you are already carrying high balances and have a really low score, it might not be the smartest option, but if you are just looking for a little boost in your score, this could be a good solution.
- Negotiate: If you have only missed a couple payments on your credit cards, and you have been good about paying recently, some lenders may be willing to remove some of those negative marks from your credit report. It never hurts to call and ask.
Another surprising fact that many consumers don't realize is that credit repair companies cannot fix all of their credit score problems. Keep in mind that there are the three things that credit repair companies can do to fix your credit:
- Negotiate with your lenders: It's the same concept as you doing it yourself, but the best credit repair companies have a lot more experience negotiating.
- Contest negative marks: Credit repair agencies know the ins and outs of the laws around credit reporting, and they know which marks me be able to be removed just based on lenders or credit report agencies not following the law.
- Remove mistakes: A recent study showed that almost 40 million people have mistakes on their credit reports. Credit repair companies can identify these and file the paperwork to have them fixed.
That's pretty much it. If they promise to do more, it's probably a scam. If you have a lot of missed payments or a foreclosure or bankruptcy, there isn't much a credit repair agency can do, so don't waste your money.
Also, you can do everything an agency can do yourself, if you are willing to put in the time and the effort.
Being armed with the facts about credit puts you in charge. I think the reason debt gets such a bad name is because typically the lenders have all the power and are able to abuse it at the expense of borrowers. Understanding how to use credit, how it affects your life and how to increase your score will put you in control and ready to take advantage of all it has to offer!
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.