Ask Chuck: How do I manage my credit score?

Dear Chuck,

We’ve made financial mistakes in the past and want to improve our credit score in the New Year. What steps should we take, and what should we avoid?

Managing Our Credit Score

Dear Managing Our Credit Score,

This is a great goal for the New Year, and it will impact almost every area of your finances!

Recently, my 89-year-old father and I were comparing our credit scores. I was pretty proud of mine until he told me his. His was nearly perfect, which is a rare feat! I wondered, “How in the world was his score better?” 

He knew a trick that I had not implemented: improving his credit utilization ratio. By reducing the limits of available funds on his credit cards, his credit utilization ratio proved better than mine. In other words, if you have very little debt and very reasonable limits on your available debt, your score improves. I knew that principle, but I had not acted on it yet.   

Managing your credit score

Your credit score is a three-digit number that grades your credit and bill payment history. Scores range from 300 to 850. These are calculated by the three major consumer credit bureaus — Equifax, Experian, and TransUnion — using information from lenders, credit card issuers, and other financial institutions. Higher scores demonstrate a lower risk to lenders. Scores of 800–850 are exceptional, 740–799 are very good, 670-739 are good, 580–669 are fair, and 300–579 are poor. My Dad’s score, by the way, was 842. 

Your credit score is basically your financial reputation. Lenders determine the risk of repayment based on credit reports. Higher scores reduce borrowing costs over your lifetime because lower interest rates are granted. Scores affect a mortgage’s APR (annual percentage rate), interest rates on loans, and the cost of car and home insurance; they also determine whether a landlord will rent to you.

Some factors used in scoring include:

• Late payments — how recent and how late; defaults.
• Credit utilization — the percentage of available credit you are using.
• Length of credit — when credit was first used and the average age of accounts.
• Credit mix — types of debt used.
• Number of credit applications within the past year.

Emergencies can destroy credit scores. Business failure, job loss, or medical emergencies present costs that many cannot cover in a reasonable time. Unfortunately, your credit report can be damaged for years. Bankruptcies remain on record for seven years (Chapter 13) or 10 years (Chapter 11). With time, you can improve your score, so do not lose hope. Follow these tips:

• Pay your bills on time; never make late payments.
• Keep credit card balances low; try to pay off loans quickly.
• Maintain a zero balance on credit accounts; this saves lots of money too.
• Lower credit limits; reduce the amounts lenders are willing to loan to you.
• Open new credit only if necessary; most often, you do not need a new credit account. 

Canceling cards without reason can actually hurt your score. In some cases, an old card on file, even if not used anymore, demonstrates your experience in borrowing. Tuck it away in a safe place, and simply do not use it.

Check, freeze, and unfreeze reports

Check your credit reports annually. Put a reminder on your calendar, and do not neglect to do it. Errors are common, and you must act to fix them. AnnualCreditReport.com grants access to a free report each year.

It’s important to freeze your credit reports to protect you from thieves opening new accounts in your name. When frozen, your information will not be given out for credit approval. You have to unfreeze it if you need to allow access to your report. You can do this yourself. 

TransUnion (888-909-8872)

Experian (888-397-3742) 

Equifax (888-298-0045)

Work to repair your credit score on your own. There are many credit repair companies and free credit report companies that are scams. Here are common red flags:

• Payment is required upfront
• Sounds too good to be true
• Cannot or will not answer questions
• Will not disclose contact information
• Suggest you can/should act in dishonest ways

For those with no credit history

Those with no credit history should consider a secured credit card through a bank or credit union. A deposit is held as collateral until the account is closed. Try to avoid annual fees and read the fine print to understand the contract.

Credit-builder loans are offered by credit unions, banks, and some online lenders. The money you agree to borrow (typically $300 to $1,000) is deposited into a bank account and held by the lender. Monthly principal and interest payments are required, which build a nest egg while also building credit. Once the loan is repaid in full, the funds are then yours. Make sure they report payments to the three major consumer credit bureaus before applying.

Truth and borrowing

The Bible shows the way to an excellent credit score. Borrowing is not prohibited. God simply lays down clear guidelines for our protection: 1. credit should never be normal for God’s people; 2. credit should never be long-term; 3. never sign surety (an obligation to pay) without an absolutely certain way to pay.

Your stewardship score is much more valuable than your credit score. Paying off a lot of debt quickly can negatively impact your credit score. But it’s more important to live in the freedom of being out of debt than to have a perfect credit score. “You were bought at a price; do not become bondservants of men” (1 Corinthians 7:23 ESV).

Do these things, and you likely will never really need to worry about your credit score. In the meantime, take care of your finances so if you ever do have to borrow, you can qualify for the very best repayment terms. Hopefully, one day you may have a higher credit score than my Dad. 

If credit card debt is a source of financial pain for you, consider contacting Christian Credit Counselors. They are a trusted source of help toward financial freedom.

Note: Since I answered this question in a lengthy Lifeway article in 2021, I refer to much of that original content in my reply above.