Prior to 3 weeks ago, I hadn’t seen my credit score in more than 12 years. I couldn’t care less about it. In fact, I don’t even need one.
And yet this strange and mysterious number seems to loom over the lives of people like the specter of death.
Comments and emails about credit score on a post about using credit card rewards programs to fund travel included words such as “damaged”, “ruined”, and “destroyed.”
Are these incredible adjectives warranted? Can applying for a few credit cards result in real world pain and suffering? Should we spend more real $ on travel instead of using rewards points?
Or is a credit score just a meaningless number?
To figure this out, I looked into our own credit worthiness.
That word, worthiness… Are we worthy of credit? Please almighty bankers bestow upon me the blessings of debt.
I used three free services to check my personal score (I certainly wasn’t going to pay for it.) Despite our recent credit binge, it turns out we are indeed worthy.
In addition to my.creditcards.com data (from TransUnion), certain American Express (Experian) and Capital One (TransUnion) credit cards provide free score information. The AX / Experian results were Very Good with a range of 758-764.
There are other services, some free and some not. I don’t know which are best, but the 3 I used worked well and the price was right.
Factoring in the faux concern, Very Good to Excellent scores seem decent.
But hold on a second! How can we have 7 figures in the bank and have anything less than a perfect credit score?
A credit score is comprised of 6 facets:
- 35% of the score is based on payment history and timeliness
- 30% is based on total debt / amount owed
- 15% is the length of time you’ve had debt / credit
- 10% is new credit
- 10% is type of debt (loans, credit cards)
Notably absent from this score is income, savings rate, net worth, and liquid assets. You know… the important stuff. A person who is in debt up to their eyeballs yet manages to pay on time each month can have an equally excellent score as someone with no debt and millions in the bank.
I’d definitely rather have a high bank balance than a high credit score. Conveniently, that is even easier when travel is partially funded by rewards programs.
The my.CreditCards tool seems to provide the most account detail and deepest explanations about current score. According to it, some of the things keeping me from a perfect 850 score are:
- Lack of sufficient relevant first mortgage history
- Too few accounts currently paid as agreed
- The date that you opened your oldest account is too recent
That all sounds ominous, until you consider that we are Renters for Life, we have no accounts to pay, and our oldest account was opened 12 years ago.
Of the 3 tools I tried, I think the Capital One CreditWise tool does the best job of summarizing this graphically:
With a flawless payment history, to get a perfect credit score I need a 25+ year history (only 13 more years!), a mortgage, and some installment loans (perhaps for a car or a boat, woohoo!)
And I was hoping if I gave this credit score stuff an opportunity to show its credibility, it wouldn’t let me down.
Changes to Credit Score
Note that nowhere in the numbers nor in the opportunities for improvement were new credit cards even mentioned. I couldn’t improve my score by applying for fewer cards or having less credit.
Quite the opposite, the additional Available Credit (and thus lower Credit Used percentage) push the score up.
I simulated this with the Capital One CreditWise tool:
- open a new credit card: +4 points
- increase credit limit on existing card: +6 points
The CreditWise tool can also simulate negative life events:
- delinquent on all accounts for 30 days: -216 points
- delinquent on 1 account for 30 days: -117 points
- cancel my oldest credit card: -10 points
- take out a $50k car loan: 0 points / no change
- take out a $500k mortgage: +16 points
While some of these latter events result in a higher credit score, all seem unwise.
Despite more than a decade of neglect and active use of credit card rewards, my credit score is Excellent. I apply for credit cards with Occupation = Retired, and they never get denied.
While I’m glad to better understand the world of credit scores, this new knowledge has the same value as our actual score (meaning none at all.)
However, I will continue to take 3 non-actions to insure we always have the richest and juiciest reward options available:
- Live below our means. This guarantees the bills are paid on time, every time.
- Keep our oldest credit account open, forever. A no-fee credit card works well for this.
- Keep our credit utilization low by having a lot of available credit.
Focus on building wealth. Pay bills on time. Avoid debt. Creditors will love you. The end.
The tools I used to see our scores for free (this blog has no relationship with these services):