Credit Tips and Trends

Credit.com recently had the opportunity to sit down with Experian Director of Consumer Education and Awareness Rod Griffin. Rod helps Experian help consumers better understand and manage their personal finances and protect themselves from fraud and identity theft. In April 2016, The Institute for Financial Literacy named Rod its “Educator of the Year.”

Our goal was to pick Rod’s brain about the current state of credit as he and Experian see it and to chat about Experian’s new Experian Boost solution.

This is a summary of our conversation.

Credit.com: In your release for Experian Boost, Experian reports that 100 million plus Americans don’t have access to credit today. How is that possible with the average credit score on the rise in America?

Rod: Even though consumers with credit are trending to better scores, many people still don’t have access to credit. The two are not the same. What we see at Experian is that limited credit histories and low credit scores are two of the key barriers to credit access for many consumers today.

Lenders rely heavily on credit reports and credit scores. However, traditional reports and scores might not tell the whole financial story if a consumer has what’s considered a “thin file” of less than five tradelines included on their credit report. Having too little information upon which to base a lending decision can lead to a rejected credit application or approval only with high-interest rates and fees.

Credit.com: Help readers understand what you mean by “five tradelines” on a credit report?

Rod: A tradeline is industry lingo for an account entry in a credit report. Account information includes the name of the lender, the type of account, details about the account balance, credit limit or principal loan amount, and the dates it was opened and closed, and most important the payment history of the account. The entry will show both the current payment status and whether or not there were late payments in the past.

At least five accounts on a report show credit lenders that the consumer has a good mix of accounts and enough credit history to have some insight into their creditworthiness.

Fewer than five accounts result in what the credit industry calls a thin file. Someone with a thin file is probably new to credit and doesn’t have much of a credit history. Creditors see people with thin files as potential risks solely because the consumer doesn’t have much history to determine whether he or she is a good credit.

Credit.com: At Credit.com, we talk all the time about the five factors that go into a credit score—payment history, debt usage, credit age, account mix and credit inquiries? Those five accounts fall into account mix as you mentioned.

Are there “hidden” aspects to account mix or the other factors of payment history, debt usage, credit age and credit inquiries that consumers may not know about that they need to understand?

Rod: There is nothing “hidden” with credit scores or your credit report. There are a few things people may not think about, though. The five factors you mentioned are the most impactful to a credit score. While people are generally aware the missing payments is bad, they often don’t understand several of the other key elements that can hurt—or help—your credit scores. Utilization rate, having a short credit history or a history with very few accounts, and applying for too much credit in a short time are a few that are often not top of mind for consumers.

Credit utilization rate, or what you call debt usage, is simply your total credit card balances compared to the total available credit limits for your credit cards. In credit reporting language, a credit card is called a revolving account because you can carry your balance from one month to another—or “revolve” the balance.

Number and age of accounts—or tradelines—is how many credit accounts someone has and how long they have been open and active. As I mentioned, having at least five accounts on a report shows credit lenders that someone has a good mix of accounts and some credit history. The longer the accounts are open, the more history there is to show you are a good credit risk. Time is a critical factor in credit scores. However, you can still have strong credit scores with a relatively short credit history.

Credit mix goes hand-in-hand with number of accounts. Creditors want to see that someone has a variety of types of credit being used. Credit cards, or revolving accounts, are the first type. You may carry a balance from month to month. However, it’s best to pay the balance in full each month. Installment accounts are the next type. Those are loans, like a car loan, in which you pay a specific amount each month for a set term until the loan is paid in full. The last would be a mortgage, which is typically the largest loan a person will ever have. You don’t need to have all of them, and you can’t add them all overnight. Instead, that mix builds and grows over time.

Another often misunderstood element in credit scores is recent credit activity. This could be looked at as credit history’s “trending topic” cousin. With recent credit, you want to be mindful of paying down debt, having new information added, having old things fall off a report and of hard inquiries. Making on-time payments, reducing debt and applying for credit only when needed can help your credit scores over time. On the flip side, if you’re increasing your credit card balances, missing payments or applying for a lot of new accounts, that looks like you’re reckless and potentially a bad credit risk. Hard inquiries are a record that you’ve applied for new credit, so they can have a small negative impact on your credit scores. There is a lot of focus on inquiries, but they actually have the least impact on your credit scores. Still, it’s a good idea to be careful about applying for a lot of new credit all at once.

Negative information on your report is by far the most important factor in your credit scores. Late payments, collection accounts, charge-offs and settled accounts all look bad and can persist on your credit report for up to seven years. Bankruptcies can remain for a decade. Catch up on late payments and always pay the minimum due on time to help your restore your creditworthiness.

Credit.com: What trends does Experian see trends where credit is concerned?

Rod: One trend that’s on the rise is the use of what’s called “alternative data” to help determine a consumer’s creditworthiness. Alternative data includes information that’s not traditionally included in a credit report, such as rent payments, telco payments and more.

When added to a credit report, this information helps creditors evaluate the potential creditworthiness of consumers who fall into that “thin file” category.

Experian is always exploring new types of data to help improve financial access for consumers. Experian Boost™ is the latest example of this.

Credit.com: So, just what is Experian Boost?

Rod: Experian Boost is launching this year in the Spring. It’s a platform that consumers can use to add telco and utility payments to their Experian credit report. It actually connects your online bank account to your Experian credit report, so you can have Experian add your on-time payments on your credit report.

Boost helps those with thin files improve their FICO® Score almost instantly. Anyone with a lower score, say between 580 and 669, can really benefit from increasing their scores quickly. That can give them access to lower interest rates and broader financial inclusion.

The example we share is that someone with a FICO ® Score of 720 can pay $4,020 less for a $10,000, 5-year auto loan. That saves them $67 a month more than someone with a score of 500.

Credit.com: So, other than not using Experian Boost, of course, what’s the biggest mistake people with low credit scores make?

Rod: The biggest mistakes consumers with low credit scores make are:

Continually failing to make payments on time and
Continually increasing their credit card balances

Late payments and high debt usage rates have serious negative consequences on a consumer’s credit score.

Credit.com: Doing that is easier if you have a solid income and good credit usage habits, what do people who are struggling to keep up and/or are living paycheck to paycheck supposed to do? Are there specific tips and tricks that the hardest working Americans can use to help their credit scores in addition to getting their free score and report card on Credit.com?

Always make your payments on time no matter what. Making payments on time every time is the best way to maintain or improve credit scores. If you’re struggling to do that, try to create a budget and catch up on late payments and work to reduce your balances so you can make your payments on time.

Additionally, consumers with thin credit files or low credit scores can benefit from Experian Boost by creating a free account and ensuring they’re paying utility and telecom bills on time.

Experian Boost can also be a helpful tool for people who are living paycheck to paycheck but are still able to pay their telco and utility bills on time. Boost is the first and only opportunity consumers have had to proactively add positive payment histories to their credit file.

We expect two out of three consumers to see an improvement in their credit score and 10% of consumers without a credit score to become scoreable with Boost.

This is exciting because improved credit scores can help people break the cycle of high-cost, predatory lending. It can reduce their costs through lower security deposits, better credit terms, and access to better financial tools.

Credit.com: In addition to the free credit report card, which includes a grade and recommendations for payment history, debt usage, credit age, account mix, and credit inquiries, and free Experian score that people can get on Credit.com, what do you want consumers to know about their credit scores?

It’s important for people to understand the difference between credit scores and credit reports. Think of your credit report like a school paper.

The credit score is like a grade on the paper. You don’t get a grade until you turn in the paper, and similarly, a credit score is not calculated until a lender requests your credit report.

The lender is a bit like the teacher. Each teacher determines how your paper is reviewed, the grading scale used and what constitutes a passing grade. Lenders determine what scores to use to analyze the information in your report and what score you need to qualify for a loan.

If you take care of your credit report, you’ll have good credit scores.

Credit.com Thank you, Rod. We appreciate your expert insights.

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