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schedule 9 min read | November 8, 2019

6 Scary Facts about Credit and How to Protect Your Credit History

Written by CreditFresh

These frightening facts about credit have real-life financial consequences scarier than any ghost story. Read them only if you dare!

As they normally do on Halloween, the streets filled up with all kinds of creatures that go bump in the night.

But these trick-or-treating ghouls and goblins were the least terrifying things tormenting the nation this past October.

Bad financial habits rival any monster you may have encountered because — unlike Halloween costumes taken off after the witching hour — they may haunt you long after they wear out their welcome.

Today, we’re putting your courage to the test by sharing six chilling facts about credit.

1. More Than Half of Americans Don’t Check Their Credit

With a crystal ball and a deck of tarot cards, you have a half-way decent fortune teller costume, but none of these accessories will give you perfectly clear insights into the state of your credit history.

Checking your reports is the best way to know your score, yet a lot of people put off this important task. A poll conducted by Lexington Law shows that 54 percent of the Americans they polled say they don’t check their scores.

The reasons why they turn a blind eye may vary. Some may believe checking their reports will cause their score to dip, which, according to Equifax, it doesn’t.

If you shield your eyes during a scary movie, you may be familiar with another reason why people avoid looking at their reports — they may simply be afraid of what they might see!

woman in black dress with white cuffs holding small pumpkin in both hands outside

While it may be uncomfortable to confront the reality of poor credit history, simply ignoring it won’t help your financial situation.

Whatever your score may be, it’s always a good idea to be in the full possession of facts. It lets you know what your score is in case you need a loan, and it can help you catch errors that may be dragging down your score.

Each year, everyone gets one free report from each of the major credit reporting agencies. That gives you three chances to check in with your file.

You may be able to check your credit for free more often if you are:

  • Denied a loan due to information on your report
  • Unemployed and looking for work within 60 days of losing your job
  • On welfare
  • A victim of fraud or identity theft

Between your annual free check and these other occasions, you have plenty of opportunities to make sure everything’s on track. It could make sense for you to spread out these checks over the year, so that you have a fair idea of the status of your credit throughout the year.

2. 37 Percent of Americans Don’t Understand How Their Credit is Determined

When it comes to understanding credit history, you may already know that your score plays an important role in your finances.

Generally, a good history may be able to open some financial doors when it comes to loans, possibly allowing you to get loans with higher credit limits and lower interest rates.

With a bad history, you may notice these doors are closed. It can make things a little more challenging, and you may end up receiving lower credit limits with higher interest rates.

But what about moving beyond the basics — do you know how you end up with a good or bad score?

For 37 percent of Americans that were polled in an online survey, the answer might as well be hocus-pocus. That’s how many people who were surveyed said they have no idea what factors make up their credit scores.

Although it may seem like credit bureaus conjure up this number with black magic, there’s a method underlying their process. Credit bureaus exchange spells for scoring models to determine how likely you’ll pay back a loan.

While there are several scoring models in use, FICO (short for the Fair Isaac Corporation) is one of the most popular ones used today. To calculate your score, FICO uses the information in at the following five categories:

  • Payment History
  • Amounts Owed
  • Length of History
  • Credit Mix
  • New Credit

As you might suspect, payment history and amounts owed are two of the biggest factors FICO considers. Paying your bills on time and carrying a low balance on your various credit accounts may go a long way to building a positive credit history.

However, these are just two out of five factors that impact your history. Having a balanced approach that considers all five factors will have the biggest impact.

Learning what forms of credit are reported to credit bureaus and how different types of loans may affect your credit score will also help you understand how to properly use these products.

3. The Average Person Under 38 May Have Subprime Credit

This year, in the second quarter of 2019, the average American credit score soared to new heights at 703, which may indicate good things about the country’s overall financial health.

Nevertheless, some pockets of the population lag behind the rest. Millennials and their younger siblings in Generation Z had the lowest average scores of any other generation in the fourth quarter of 2018.

If you’re superstitious, as some people tend to be around Halloween, you might say these generations are under a curse.

Some of the oldest millennials — born in 1981 — started their careers during the 2008 recession, and their experiences during the financial crisis had a huge impact on their lives and financial profiles.

line of young people in casual clothing looking at their phones in front of a blank wall outside

They also shoulder some of the biggest student loan debt in the country. It’s a mantle they’ve passed on to Gen Z-ers as if by handing off a baton in a relay race to debt.

Generation Z may be young, but its eldest members are just entering college or leaving it to enter the workforce for the first time. Their experiences watching their parents and older siblings struggle to find jobs during the Great Recession shows in how they’re searching for work and managing their money.

This leads us to one of the more unassuming facts about credit. The country’s youngest borrowers had an average FICO score of 665 in the fourth quarter of 2018. This means they have a fair rating, which, according to Experian, may label them as a subprime borrower.

If you are a subprime borrower, you may find it hard to get a personal line of credit, and it may impact the rates and terms you do manage to get once you are approved.

4. Nearly Half of All Surveyed Americans Pay Bills Late

Next in our terrifying tour of facts about credit is something many of us have done at least once. And, as one survey shows, something that many of us do often.

According to a 2018 report by the Aite Group, 46 percent of Americans regularly pay their bills late. 23 percent of these tardy spenders pay within the first 30 days after their due date, while 18 percent sometimes pay beyond those 30 days.

Frequently paying bills 30 days after the due date may harm your finances. If you manage to pay your bill before 30 days are up, it may not have an impact on your history.

However, missing a payment by more than 30 days may show up in your credit report if your financial institution shares your payment activity with a credit bureau. The impact of making a bill payment part the 30 day mark depends on what’s already in your file.

What’s Stopping You from Making On-Time Payments?

Sometimes the reasons why you’re late may be outside of your control — an illness, family crisis, or a loss of pay may make covering your expenses a challenge — while other times, it may simply be because you forget about important due dates.

woman in orange knitted sweater holding pencil in right hand against open date book on lap

If you forget to send off payments, setting up a schedule with reminders about due dates may help jog your memory when it counts.

If you struggle to handle unexpected emergencies, spend some time with your budget to see how you can put more away more money towards emergency savings. A well-stocked savings account may help you avoid these financial emergencies and other challenges.

For 17 percent of those surveyed by the Aite Group, unexpected bills are a financial hardship they would only be able to pay with credit or a loan.

5. One in Five Americans Use Credit to Pay for Basic Living Expenses

Using a personal line of credit in an unexpected emergency is one thing. Using it for everyday spending is another beast altogether.

An Ascent study on credit shows one in five respondents depend on credit to cover basic living expenses.

If you ever realize you can't pay all your bills, get in touch with the company you owe right away. It takes a lot of courage to let them know you can’t afford to pay them on time, but the momentary discomfort you feel may pay off.

Some companies understand that things don’t always go according to plan, and in some circumstances they may help you by setting up a payment arrangement that suits your current capabilities if this is a one-off situation and you’re typically a customer in good standing.

They can’t extend these flexible terms if they don’t know you’re struggling with your bills, so don’t keep silent. Informing them of your situation may help you work together to find an outcome that works for everyone. You might be able to adjust due dates, or even lower how much you have to pay.

Once you manage to pay off these bills, take some time to review your finances and uncover the reason why you ran into this problem.

Checking in with your budget may help you find problematic spending habits that tie up your income needlessly. If you manage to kick these habits, you could free up more cash to put towards your bills.

6. Nearly 40 Percent of Americans Carry a Balance on a Credit Card

How often do you carry a balance on your credit card? If money is unexpectedly tight one month, paying all your bills by the due day may be a challenge. Relying on your credit card’s minimum payment and carrying over a balance may take some of the pressure off your finances, although this is not a recommended approach for typical months.

If you’re experiencing this circumstance, as long as you pay the minimum amount due by the due date, you’ll avoid late fees and other delinquent penalties.

You also may give yourself some wiggle room as you recover from whatever financial setback may have prevented you from paying off the full balance. As a minimal percentage of your overall balance, a minimum payment leaves you with more cash to put towards other bills without jeopardizing your account.

While it’s a convenient backup in times of emergency, it’s not a sustainable way to pay your bills. A minimum payment is a money vampire, subtly draining your money over time.

The minimum payment may seem like the cheaper option in the short-term, but it only postpones the day when you pay off the balance and may tack on a ton of additional interest. And if that day is a long way off, that balance may be a lot larger than the original charges.

This is because most revolving credit accrues interest when you carry over a balance from month-to-month. You may even have to pay a financing fee on top of it. Eventually, these extra charges add up until you’re paying a lot more for whatever you originally purchased with credit.

But don’t take our word for it. Use this minimum payment calculator to see how long it will take you to pay off your remaining balance as well as how much added interest you’ll end up paying.

Don’t get hoodwinked by the smaller minimum payment. If you have the money to spare, always pay off your full balance. Barring that, pay as much as you can to lower your balance as much as possible.

A minimum payment may be available on a line of credit in addition to the plastic you keep in your wallet, but the same rule of thumb applies.

If you have any questions about how a specific financial institution handles minimum payments, read their FAQ section for more information.

person in white sheet holding pumpkin container in right hand outside


Paralyzed with Financial Fear? Don’t Be!

It’s true, bad finances are scarier than any ghost or goblin that might have come trick or treating at your door this Halloween. Rather than taking their dues in the form of candy and chocolate, bad habits may undo all the work you’ve done to impact up your credit history.

There is no magic spell that instantly resurrects a bad score, so it may take some time to help impact your history positively again. But with the right attitude, tools, and habits, you may be able to start adding positive entries to your file.

Don’t worry if these credit score facts made your heart skip a beat. Now that you know to look out for these bad habits, you’ll have a better time eliminating them from your lifestyle. Take some time between carving pumpkins and spreading fake spiderwebs to find out how.

Happy Halloween!

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.

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