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I pay my bills on time. Why is my credit score falling?

Susan Tompor

Who would have imagined a day when a credit score could be as mystifying as an SAT or ACT score? But if you're looking for an elite credit card with amazing rewards or the best rate on a mortgage, you're hyper-focused on getting the best credit score. Sort of like trying to get into college. 

But instead of improving over time, consumer knowledge about credit scores is at the lowest level in eight years, according to the ninth annual credit score survey by the Consumer Federation of America and VantageScore Solutions.  

Only two-thirds of consumers surveyed knew, for example, that keeping a low credit card balance helps raise a low credit score or maintain a high one, according to the survey. That's down from 85% who scored correctly in 2012. 

The credit score's main purpose: Give lenders a way to measure the risk that an individual consumer will not repay the loan. 

Experian says its annual State of Credit report indicates that consumers age 18 to 21 have increased their credit scores by 23 points on average, compared with the same age group 10 years ago. File photo: Actor Hill Harper (center) is filmed talking about credit scores as part of a new program called Experian Boost at his business the Roasting Plant Coffee in downtown Detroit on May 1, 2019.

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One reader wrote me the other day perplexed by why his score fell more than 30 points to below 770 – still an above-average credit score – after he took on some "same as cash" offers that need to be paid in full during a certain time frame.

"For me, it's a matter of pride," said George Feld of Sterling Heights, Mich., a Detroit suburb. "It bothers me that you don't get credit for managing your money well." 

He used the financing deals to buy a refrigerator and a dishwasher. He also turned in a leased vehicle and leased a 2019 Lincoln. 

He plans to pay the financing deals off, and has never missed paying off the balance before the promotion expires.

Even so, such plans can be tricky. Some consumers don't understand that they can be charged interest retroactively for the entire deferred interest period if they do not pay off the balance by the end of the period of a deferred interest credit card promotion.

Many consumers correctly know that overall missed payments on any credit card can hurt a score. But even then, only 86% of consumers knew that missed payments are used to calculate credit scores, compared with 94% in 2012, according to the latest survey. (You can take the quiz at creditscorequiz.org.)

Why the lower credit scores? 

Credit scores can fall, temporarily at least, when you take on new credit, and taking out more than one new loan would impact a score. The trick here: You need to make a series of on-time payments to recover after taking on new debt. 

Important points to know: Having a good income and paying off the entire balance on one's credit cards every month aren't factors that are calculated as part of credit scores, said Chi Chi Wu, staff attorney of the National Consumer Law Center in testimony in Boston.

"Lenders do consider consumer income, of course, but not as part of the credit score," she said. 

Many people have room to raise their scores. 

The average credit score nationwide was 680 as of the second quarter of 2018, based on Experian's VantageScore.

In Michigan, the average was 682. On average, Michigan consumers have 2.9 bank-branded credit cards and their average balances on credit cards was $5,730. On average, they're using 29% of their available lines of credit. Michigan consumers have on average 2.7 retail-related credit cards with an average retail debt of $1,805. Their average mortgage debt is $138,050. 

Here's a look at other credit score puzzles: 

Pay bills on time but score falls? 

Everyone has a unique credit file. But one thing many people do not realize is that your score is likely to be hurt if you're charging 40% or 50% or more of your available line of credit. 

You'd be surprised at what can happen when you charge too much.

My score, for example, dropped 5 points recently because I used one bank-issued credit card fairly heavily on vacation and the rest of the month. My previous usage was 12.3% and it went up to 28.28%. I also had opened a new credit card at a store the month before, yes, to get one of those discounts. 

All this sort of stuff can cause you to scratch your head. It's bad that I'm using my credit card? Or opening a new one to save money?

Well, in some cases, yes. It's all relative. 

If a person has a high score but then uses all of the available credit, the consumer might see a score drop by 40 points to 60 points, according to Jeff Richardson, vice president and group head of marketing and communications for VantageScore Solutions, a credit-scoring system created by the three major credit bureaus, Equifax, Experian and TransUnion.

"The exact percentage of impact will vary from one person to the next but keeping credit card utilization lower than 30% is considered a best practice," he said.

So if you want to help raise your score, it's a good idea to keep the balance under 25% of the credit limit. It is fine – and a good idea – to pay off that credit card every month. Many consumers wrongly continue to think that they must carry a credit card balance in order to improve their credit score.

"The overarching lesson here is that if you plan on financing a large ticket item (auto, home, large installment loan) don’t ramp up utilization or apply for new credit cards," Richardson said.

"That drop could prevent you from either getting approved or getting the best terms."

Most people, of course, couldn't tell you what's 25% of their available credit limit. They might know the full limit on a card but not the limit that you shouldn't go above.  

For many consumers, the logic is counter-intuitive. After all, if you've got a $10,000 credit limit, you might think the lender is fine if you borrow close to that limit. Not so. 

"In general, the higher the percentage of credit line that is drawn down, the lower one's credit scores," according to a report by the Consumer Federation of America and VantageScore Solutions. 

I got a new card; my score dropped

"Scores decline after a consumer opens up a new account because, all things being equal, a person seeking credit is slightly more risky than someone not seeking new credit," Richardson said.

The initial impact, though, could be minimal. The inquiry by a potential credit card issuer or lender would cause the score to decline by a few points, Richardson said. Then once new account is opened, the score would drop too.

All told, Richardson said, that drop shouldn't be more than 20 points to 30 points.

A key concern: Is the borrower taking on more debt as part of normal spending? Or are we looking now at someone who is bulking up on credit because he or she is having trouble making ends meet? 

"By paying on time," Richardson said, "the score will most likely actually rise from where it was originally."

Will renting boost my credit score?

Maybe yes, maybe no. Paying all bills on time is clearly important. Yet not all bills are treated equally when it comes to credit scoring.

Only 17% of multifamily rental property executives said they report rent payments, according to research by TransUnion, indicating that property managers have been slow to adopt to the process of reporting their data to credit bureaus. 

Yet, based on a new TransUnion survey, seven out of 10 renters say they would be more likely to pay the rent on time if their payments were reported. The online survey took place in May and included 1,330 responses from renters who are 18 or older. 

Someone who never had a credit card and doesn't have much of a credit history could even become "scorable" following a year of rent payment reporting, TransUnion said.

A consumer who has subprime credit and makes timely rental payments could see their credit score go up as much as 26 points in the same time. 

TransUnion wants to motivate property managers to implement reporting of rent payments, as a way to attract more reliable renters as well. 

TransUnion ResidentCredit accepts and discloses both positive and negative data. As a result, landlords could see delinquencies in real time as they screen applicants – not just as collections or public records.

So if you're renting, don't just assume that rental payments will be reported to a credit bureau. Ask about the policies before you sign a lease.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow her on Twitter @tompor.

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This article originally appeared on Detroit Free Press: I pay my bills on time. Why is my credit score falling?