Want credit-score ‘insurance’? Just pay down your bill
(This column was released for publication on Sept. 16, 2020.)
Darren in Brusly, La., is worried for his job in the coronavirus pandemic and is hoping to “protect” his credit score “in case anything bad happens” at work.
He wrote me asking if there was any way to pay the keepers of credit scores “for something like insurance” to protect the 750 mark he says he has worked hard for years to achieve.
That score falls in the “very good” range – which runs from the 740-799 level on the Fair Isaac (FICO) scoring system – but means it wouldn’t take much for him to fall down to simply having a “good” score (670-739). A lower score could make it harder for Darren to access credit that could help tide him over if he is out of work for a time.
There is nothing actually marketed as “credit-score insurance,” of course, but he certainly could pay some money to protect and/or improve his credit score, just by making bigger payments to the companies he owes money to now.
Paying down a revolving balance by $500, for example, improves the average credit score by seven points in a month, according to a recently released report from CompareCards.com by LendingTree. That’s an average, of course; the data shows that someone with a low score and a higher debt level could see improvement of nearly 13.5 points, while a consumer with a very good score (like Darren’s) and lower debt may come away with a smaller benefit.
Matt Schulz, chief industry analyst for the site, said during an interview for “Money Life with Chuck Jaffe” that the formula also can be flipped to see roughly how an increase in spending can work against you, meaning that if Darren were to simply tap into $500 of his available credit, he could expect his credit score to fall by about seven points, pushing him to the brink of falling one level down the scale.
“Even folks at the top of the scale … can increase their score by a couple of points by paying off $500,” says Schulz, “so depending on where you fall — if that two to five points makes the difference between being ‘good’ and ‘very good’ or ‘very good’ and ‘great’ — it can make a significant difference in the loan that you’re applying for.”
Darren’s question may be the strangest I have received over the years about credit scores and reports, but the unusual times we’re living in have been cause for some weird credit advice to feel normal.
Here comes some more of that, because Darren noted in his e-mail that he is saving and trying to prepare for the emergency that could be created by job loss.
That’s a common behavior these days, as the August Savings Index from MagnifyMoney.com, another site from the LendingTree family, showed that 39 percent of consumers saved money last month, with people who were laid off or furloughed due to the pandemic saving more than those whose income was not impacted.
Setting that money aside – and the furloughed workers may be stashing some of their unemployment benefits – is smart, but you could make a case right now that they would be better off paying down their debt to improve their credit score, in the hope that if they will have to borrow money in the coming months that they can get it at a better, lower rate.
Standard advice is to avoid going into debt during crisis times; amassing savings helps consumers hold the line on borrowing.
But if the worker is carrying high-rate credit-card debt, they may be better off paying that down while still employed, improving their credit score in the process and then using that better score to secure better rates that they can borrow against if trouble comes.
Say you’re paying off $5,000 on a credit-card account at 16 percent. The idea is to minimize or remove that debt, improve your credit score and then arrange a personal loan or line of credit where the rate is much lower. Even if that is accessed and the debt winds up being run back up to $5,000 or beyond, the lower interest rate still represents improvement.
Likewise, tough times have lenders cleaning up their books, cutting card offers and closing accounts that they’re not profiting from.
The first issues cut – as many consumers have learned the hard way in recent months – are the ones rarely used.
But credit scores depend heavily on “credit utilization” – the percentage of available credit that a consumer is accessing – and when a card account is closed, the consumer’s total available credit is reduced, and their score can come down as a result.
Thus, consumers should be using all of their cards now, not for spending more money but simply to keep accounts active. If you have a card used primarily when you travel, for example, but you haven’t gone anywhere and don’t expect to during pandemic, bring out the card and make a random purchase with it. Likewise, use the card you save for emergencies, your back-up card, anything where maintaining access is in your best interest.
Finally, one other way to get some credit-score help now is to take advantage of Experian Boost, a free service that looks at payment history on bills that aren’t covered by a credit report, such as utilities, cell-phone companies and more. A good payment history earns extra points; it’s available at Experian.com/boost.
Even if it doesn’t help you – perhaps your consumer history is short or spotty – applying for Boost won’t hurt you. That’s the same for all of these unusual credit strategies for pandemic times; they only go so far toward easing your financial pain, but they won’t add to it, and even that knowledge can be a financial comfort right now.
Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at firstname.lastname@example.org and tune in at moneylifeshow.com.
Copyright, 2020, J Features