A good credit score is one of the most important pieces to a healthy financial life. It’s also one of the more frustrating things to understand.
Team Clark has extensive guides for helping to build a good credit score. And though money expert Clark Howard says you shouldn’t worry about your credit score once it tops 760, we know our readers love to overachieve in pursuit of an 800+ score.
Our conversation with Rod continues in this article, where he talks about some tips, mistakes and misconceptions that consumers have about their credit score in 2023.
Mistake: Assuming You Can Make Apples-to-Apples Comparisons Between Your Credit Scores
Did you know that you actually have many different credit scores?
Though score providers like FICO and VantageScore are popular among lenders and free score providers, they’re merely two samplings of an assessment of your credit profile.
“A thing that many people don’t understand about scores is that there are many, many different credit scores,” Rod said. “There are three credit reports, but there are literally hundreds of different credit scores. They all use the information from your credit report to do the calculation, but the way that they weigh the information is different.”
Rod said the type of lending that is being done or the type of lender that is doing the lending may necessitate the usage of a score that weighs your credit report in a way that most closely aligns with the lending goals.
So, for example, an auto lender may prefer a score that more heavily weighs factors that they deem important for successfully predicting your ability to pay the monthly note for that vehicle.
Because of this, many credit scores don’t even use the same scale. That makes comparing them a futile endeavor.
“They have different scales,” Rod explained. “For example, most people are aware that FICO score has a scale that ranges from 350 to 850, but they often don’t know that the FICO score for auto lending actually goes to 900.”
Rod said some scores even have scales that work in reverse, making a lower number the preferred outcome.
So when it comes to assessing your credit scores, it’s best to view each score through the lens of their individual scoring model.
Tip: Compare Credit Risks Instead of Credit Scores
Now that you understand the differences in methodology for various credit scores, we have a tip for how you can better compare them: Focus on the risk factors.
“I always recommend that instead of comparing the numbers, look at the information that you get with that score and what it tells you it means in terms of risks,” Rod said.
If you read the first article from our conversation with Rod, you may remember the strategy he suggested for improving your score:
- Get access to your credit report. (Team Clark has a list of free ways to do so here.)
- Sign up to receive your free credit score each month. (Clark recommends free services Credit Karma and Credit Sesame, but you may also get it from Experian. You may also receive it from another source, like your bank or credit card issuer.)
- Focus on the risk factors … in order. Your credit score should be accompanied by some “risk factors” that describe why your score may be increasing or decreasing. Rod says the key to score improvement is likely in the details of these key factors that accompany your score each month.
“Typically you get four, maybe five, risk factors,” Rod said. “They are generally listed in the order of importance as they’re affecting the score you receive. If you use those risk factors to identify what it is in your credit history that you most need to work on, you will be able to improve your score.”
Each credit score will have its own unique set of risk factors. If you see commonality between them, there’s a good chance this is an area in which you could most impact your score.
Mistake: Chasing A Perfect Credit Score
If you’re the type of person who treats your personal finances like a competition, you’re likely very interested in obtaining a perfect credit score.
The 850, which is the highest total on the FICO score, may seem like the top of the financial Mt. Everest to some. But Rod cautions against being obsessed with that number.
“The so-called ‘perfect 850’ is a very fleeting thing,” Rod said. “You might get 850. I’ve been an 850 before, but right now I think I’m an 840 in our system. I made some purchases last year and I was down to a 780. So it’s all about what’s happening in your credit history in that particular moment in time.”
In other words, you may get there by being extremely disciplined and maintaining a very specific credit mix, only to see it disappear as a result of something completely out of your control.
“Scores move a lot,” Rod said. “So if you get an 850, say ‘Yay, I hit that mythical number’ because when you check again in a couple of days it probably won’t be there anymore.”
Tip: Stop Obsessing Over Your Score
This is a topic on which Clark and Rod are very closely aligned.
Neither expert thinks it is a good idea to obsess over the day-to-day or even month-to-month happenings with your credit score.
“It seems contrary. And I understand why a lot of people focus on scores,” Rod said. “I look at mine often, but it doesn’t really help me. And I really shouldn’t be doing it. It’s like how people tell you not to look at your stock portfolio every day. It will move up and down.”
Clark has been very outspoken in recent years that he believes you’re wasting your time by obsessing over your score once you’ve reached a level that will land the best lending rates available for loans.
“Once you’re above 760 — and particularly 780 — you’re happy. In order to get a perfect score, you have to do several things. You have to keep your credit utilization potentially below 3%. You have to have a variety of types of loans. I’d rather you be happy once you’re in the golden range. You don’t need to take out other forms of debt or try to manipulate your score. You’re already qualifying for the best loans and the best loan rates.”
Misconception: Late Payments or Bills Sent to Collections Are a Lost Cause
If you’ve made a mistake or dealt with unforeseen hardships with your personal finances that have impacted your credit report, that doesn’t mean your credit score is necessarily doomed to long-term struggles.
Rod says that paying off a collection in full when you’re able will help accelerate your score’s recovery thanks to some changes in the way that type of delinquency is assessed.
“You can pay off your collection accounts and credit scores today will exclude paid collections,” Rod said. “That can be really helpful.”
As for late payments that didn’t quite make it to collections, you are best served by getting those balances current and then using the power of time and positive actions to heal your score.
“The further in the past that negative things happened, the less effect they have on scores,” Rod said. “Even though they may still be on the report, if you start building back with a positive payment history you may see it offset the negative and your score will start to tick up even before that information comes off the report.”
Misconception: Unpaid Medical Bills Cause Certain and Permanent Damage to Your Credit Score
If you or someone you know has a large amount of medical debt that is teetering on delinquency, there are some important things to know about the modern assessment of this on your credit report.
“We made a number of changes in regards to medical collections,” Rod said. “Most of them — about 70 percent — have been removed from credit reports in the last year or so. Any medical collection that is less than $500 won’t be a part of our report anymore.”
Two key factors you’ll want to know about this type of debt as it relates to your credit score:
- Rod said there is a grace period for this type of delinquent debt: “Medical collections are not reported to us for a year. We won’t include them in a report until they have been in collections for 12 months. That helps ensure that it’s not a billing error or an insurance dispute or things like that.”
- Paying that debt off, even after it goes to collections, can help boost your score by removing the blemish from your report: “If you’ve paid off a medical collection, the scoring systems now exclude them from the calculation,” Rod explained.
So, in other words, if you’re encountering medical collections … it’s not too late to repair your credit.
You can read more about the changes to medical bill assessment here.
Do you have a credit score tip you’d like to give fellow Clark readers? We’d love to hear about it in the Clark.com community!