By Susan Tompor
Detroit Free Press.
What you don’t know can hurt your credit score.
As much as people talk about credit scores on TV commercials, many consumers are in the dark about what drives down a credit score and drives up the cost of getting a car loan, taking out a mortgage or paying for big ticket items with a credit card.
It’s not a small point, especially for young consumers who are just taking out loans and opening credit cards. It’s simply not good enough just to pay bills on time or just to make the minimum payment if you want a strong credit score.
Consumers under age 30 are showing a renewed appetite for credit cards, according to a report by TransUnion. New accounts and users of credit have been key drivers of growth for much of this year, according to TransUnion.
The number of consumers under age 30 with a credit card balance rose to 20.7 million in the second quarter of 2015, according to TransUnion. That’s up 8.6 percent from the second quarter last year.
Average balances for the under 30 group rose slightly to $2,154 in the second quarter, up $19 from the same quarter last year.
Yet misconceptions continue when it comes to what can hurt your credit score. For example, about 4 in 5 consumers do not understand that having high outstanding balances on credit cards will damage a consumer’s credit score, even if you pay your bills on time, according to a survey by Bankrate.com.
Jeanine Skowronski, Bankrate.com’s credit card analyst, said millennials, those age 18 to 29 in this study, were most likely to wrongly think that carrying a high balance on a credit card and paying on time would help a credit score, not hurt a score.
About 55 percent of consumers overall think that they must carry a credit card balance in order to improve their credit score. That’s just not true. You do not need to carry a balance on your credit card to improve your score; it’s OK and even good to pay the bill in full each month.
“You don’t have to revolve any purchases in order to build credit,” Skowronski said.
-More than half of millennials don’t know that having a short credit history can potentially delay one’s ability to get an attractive mortgage to buy a home, according to a Bankrate.com report released in early September.
-About 37 percent of U.S. adults did not know that being more than 30 days late with a credit card payment will show up as a negative account on their credit report, even if the bill is later paid in full.
Todd Albery, CEO of Detroit-based Quizzle.com, said while it is important to pay bills on time, many lenders also want to dig deeper into someone’s use of credit before taking the risk involved with making a new loan.
“The common belief if that if you pay your bills, you’re doing everything right,” Albery said.
But if a consumer only makes the minimum payment each and every month, the consumer could be vulnerable and not make regular payments in the future if he or she loses a job or goes through an emergency situation.
For those who borrow heavily on their credit cards already, it might not take very much to push them over the financial edge.
“All it takes is an air conditioning unit to go out,” Albery said.
Albery, whose company is now part of the Bankrate.com family, said it’s important that consumers try to pay more than the minimum payment each month on a credit card to build up a better credit score.
It’s also important, he said, for lenders to see a range of types of payments or a longer history of making regular on-time payments on different types of loans.
Paying a mortgage on time, he said, can show lenders that the consumer does a good job keeping on track and working with a budget.
For many consumers, it’s all about getting a better education. And there are some online options for learning more on how to build a better credit score. One option is CreditScoreQuiz.org for a 12-question quiz. The site is a tool that’s offered through the Consumer Federation of America and VantageScore Solutions.
As young consumers open credit card accounts, often the first step to building a credit history, it’s important to take time to start understanding a credit score long before you apply for a car loan or a mortgage. That way you have time to do some more things that are right _ such as paying down more debt or avoiding opening new credit cards shortly before applying for a mortgage or car loan.
ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press