Are You a High Earner with a Below 800 Credit Score?
If you’re like me, you learned about credit scores by piecing different information from different sources together and calling it an understanding. I learned about opening a credit card and paying off the balance every month. Eventually I learned about building credit in order to get more credit…in order to buy a car or house. And after years of having credit, I learned about rewards programs and fraud protection. And now at almost 40, I have an almost complete understanding of how to use my credit. But it was a process and can leave years long negative marks on your credit if you don’t figure it out.
There’s a reason that only 23% of the scorable population has a perfect credit score (over 800). That has a lot to do with an individual's income and accessibility to cash for things such as emergencies. But, it also has a whole lot to do with the fact that we learned all about the periodic table (which I have never used in a day in my adult life) and next to nothing about check writing, financial planning or credit.
When talking with a friend of mine about the house she and her husband are building, she let me in on a “dirty” little secret: she has a low credit score. This is a woman who is an Assistant Vice President at the institution that she works for, she graduated with a 3.7 GPA from an accredited university, and is a complete Type A. She is smart, savvy and a hard worker. So, why is her credit so “bad” that she is worried she isn’t going to be able to co-sign on the mortgage she and her husband applied for? Turns out she made a few mistakes over her credit life that haunt her even today. And here’s the kicker…she has never, not even once, missed a payment.
We will start here.
When an American citizen is born and issued a Social Security number, they are also given a credit score. Now, this score will be around 300 for them until they apply for actual credit at the age of 18, in which time they should strap on their seatbelts, because this will begin a lifelong un-divorcable marriage to their credit score. From the moment a person APPLIES for credit, the grading of their behaviors begins. They should automatically be enrolled in a class at this point, but instead they are left to either google it (which was not available to us “elder-millennials” and older generations as accessibly as it is now), or take pieces of advice from their elders and hope for the best. I, and my bad credit but high income earning friend, had to go the second route and even now, she has trouble. Information can be overwhelming on the internet and sometimes just breaking it down can help people understand better, which is also something your advisor can and should go over with you.
Once you apply and open your credit, your credit score - or - FICO score will begin being reported. FICO stands for the Fair Isaac Corporation, who was a pioneer in developing the method that calculates credit scores based on information from credit reports. In 2006 there was a new scoring model introduced by the three major consumer credit bureaus - Equifax, Experian and TransUnion - to create a “more predictive scoring model that is easy to understand and apply”. Your credit score can be affected depending on which model is being used. Though similar, they do not report the same.
The factors that make up FICO credit scores are:
Payment history: 35 percent
Amounts owed: 30 percent
Length of credit history: 15 percent
Credit mix: 10 percent
New credit: 10 percent
The factors that make up a VantageScore are:
Payment history: 40 percent
Age and type of credit: 21 percent
Percent of credit used: 20 percent
Total balances/debt: 11 percent
Recent credit behavior and inquiries: five percent
Available credit: three percent
You’re being graded on every move you do or do not make with your credit, but some moves are more costly than others. My friend, while always making payments on time, had checked a couple of the important boxes with her credit history. She had a lot of it, opening her first credit card on her 18th birthday and maintaining it throughout her 20s and into her 30s. Never missing a payment once. Something else that happened on a birthday of hers, on her 16th birthday her parents gave her her moms old SUV and then a brand new car of her own for college graduation. And then came the company cars…so she has never once had a car payment, and with that, never a car loan. The only credit she has maintained is credit cards or credit lines. And while she has never missed a payment, she does sometimes make only minimum payments and also gets credit for everything. And I mean it when I say everything.
She has really nice stuff.
Turns out, while you need good credit to buy a house, you don’t have to have such great credit to open more credit lines. There is no minimum score needed to open a credit card. Even people with a score of 301 can still qualify for some credit cards. (Those cards are going to come with high APRs (annual percentage rate) and fees though.)
And my girl loves to shop. Again, she has really nice stuff. She let me know when we were talking that she has credit cards to literally every place she shops. Target? Check. Quik Trip? There too. But she will also borrow to purchase new furniture, upgrades to her home, vacations, basically anything we would advise a client to save up cash for, she was borrowing for. So while she never missed a payment, and never maxed out a card, and even paid more than the minimum balance on all of her cards, she was never getting ahead of her debt owed total balance because she would open and borrow as quickly as she was paying off. She only appeased parts of the total score. She didn’t know it mattered. And she couldn't understand why she was continuously being given low scores when she was paying things off and on time.
Again, she is a smart, successful business woman. She is a high income earner and she and her husband don’t have children. They should have money and along with it a decent credit score. However, when she was younger, she rented from a friend of the family and then moved in with her husband into his townhome. Her inexperience with borrowing for a car or a home, being a scholarship student in college, and the need having not shown up until now, she didn’t realize just how “bad” her credit was because of her lack of long-term loans.
And I don’t think she is alone in her misunderstanding. Look at these average scores divided up into age groups:
Average Credit Score by Age:
Average FICO Score
679
686
705
740
759
Age
18-24
25-40
41-56
57-75
Above 75
The people with the scores closest to perfect are basically past retirement age. Most of us have had a car or a mortgage by the time we are SEVENTY FIVE years old. The largest jump in FICO scores happens from consumers 50s-60s, being 703 between the ages of 50 and 59. Those from 60-69 have an average score of 733. This is also when the average household income tends to peak, most likely allowing them to pay off those debts a little easier than before. The amount of credit that one has at an older age tends to be a lot more than when they were in their 30s, but they are more than likely not using very much of it anymore as their homes become paid off and their responsibilities lessen. The second largest impact after payment history is the amount of credit a consumer uses relative to their overall credit limit.
What I am telling you is that if you are in your thirties or forties, you are a medium to high earner and you pay your bills on time, you probably don’t have a perfect credit score. And you’re not alone. FICO scores do begin to rise in consumers' 30s, and even more so in their 40s, but this is also a time where many of us are just winding down from the whirlwind of adulthood. At 39, I have had multiple mortgages, car loans, opened a business, birthed two children, gone through a pandemic and we are this close to an official recession. All in the past FIVE years, and my credit has been affected by each of those events.
Here was my advice to my friend:
Stop opening so many accounts. Well, first I told her that she needs to wait like a year before they start worrying about moving. She can right the ship within that time and a new house will only come with new appliances, furniture, etc. that she normally would open a credit line for. Either use a place you already have credit at, or pay cash! Or, if you have to, use a card that offers different rewards to borrow from until you can repay. That way at least you’re earning something consistent that you know you will use.
She can keep balances, but keep them low. You want your available credit to be a much larger amount than your used credit on every card/account. On the cards that they have that she and her husband use often and pay off each month, she can call and ask their credit limit be raised, upping the available credit amount. But paying off the balances each month will help get the best scores.
Get an in-depth print out of her credit report going back 7 years. If she even suspects that she spots an error, she needs to dispute it. The worst that can happen is it turns out to be an old account she forgot about.
Pay off everything that has a balance as soon as possible. She has a savings account and should put some of that cash into paying off her debts. If you don’t have the cash on hand, you may benefit from a personal loan in order to pay balances off of credit cards.
Don’t cancel the cards she doesn’t use as much. The average age of your credit history makes up 15% of your score, so keeping them open will extend their age. I told her to set up auto payments on these cards for a utility bill and auto payments from her bank to pay it in full each month. Set it and forget it.
As my dear friend is learning, having a good credit score is more than just paying on time. I do, however, have to applaud her because she was at least checking her score this whole time, while 54% of American adults never do. It is recommended to check your credit score once a month, but even once or twice a year is better than never. If you have more questions on how to up or maintain your credit, make an appointment with us to go over your debt and best practices for your lifestyle.
-Sylvia McCormick Burns (Co-Founder Oakview Wealth Solutions)