April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
In the U.S., credit scores are a critical part of a person’s financial life — it rules how much you can borrow, what credit cards you can apply for, and even where you can live.
Yet they’re also one of most misunderstood numbers. People often struggle with comprehending why their credit score is too low, or why it dropped by double digits, or why they aren’t able to improve it no matter what they do.
For Financial Literacy Month, MarketWatch spoke to TransUnion’s head of consumer education, Margaret Poe, who helped demystify some of the common issues during a Barron’s Live webinar.
One of the biggest questions people asked: “What the most common mistake people make with their credit scores?”
The answer: Not checking their report or not checking it early enough before they take out a loan, Poe told MarketWatch. “You really don’t want to be at the dealership, and realizing your credit isn’t where you thought it was.”
How often do I have to check my credit score?
Consumers should consider checking their credit score at least once a month, Poe said.
“That’s pretty good like you have a good sense of what’s going on,” she explained. “Typically, credit-card bills and things like this are reported to the bureaus on a monthly basis, and it may be at a different point in the month but typically that’s the reporting cadence. So if you’re also checking once a month, that’s probably great.”
And download the full report for free, she stressed, so that you can go through it line by line to make sure it’s accurate. There are guides online to help you understand the different sections.
Consumers should not obsess over getting a perfect score of 850, Poe said. It may be enough for one to “get your credit score up and enter an excellent range,” she added.
Think twice before closing an old credit card
Two other mistakes people make: Not building credit early enough before deciding to buy a home or a car, or take out a personal loan, and closing an old card because you’re not using it, especially if you’re about to take out a loan.
About the latter: Closing old, unused accounts, or authorized cards on your parent’s account seems like a bit of good house-keeping, but Poe said that consumers should know what happens when they do that in the near-term.
“In some ways, it feels counterintuitive,” she said.
“I remember when I was younger, I looked at my credit history, I was like, ‘Oh, I don’t use that card anymore. It’s all paid off. I want to clean up my credit report,’” she recalled. “I just wanted it to look cleaner, I want there to be fewer things. So I closed the account. Well, that had a slight negative impact for me,” Poe continued.
Her credit score eventually recovered, but consumers should be aware of the immediate consequence of closing an old account.
It’s smart to keep an account on your credit report, even if you’re no longer using it. “It’s OK because it’s showing that positive history, and it extends your total length of credit,” Poe said.
Similarly, certain financial moves like paying off a mortgage, consolidating loans, or paying off a student loan may hit your credit score, but they’re only temporary, Poe said.
