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The following post is by our friends at Credit Karma™, a completely free credit management service that provides free credit scores, financial education, and personalized savings recommendations. They help more than 2 million consumers realize the everyday cost savings of having a good credit score.
We here at Credit Karma believe that to improve your credit health, it is one small yet significant step to check your credit score, and then a giant leap to actually do something to change and better your credit behavior.
So take your first step now and check your credit score free at Credit Karma. Now, are you ready to leap?
Look before you leap
First, here’s a cautionary tale of one consumer’s bumpy road to better credit.
Let’s call her Jane. Jane has an excellent credit score in the high 700s. She has perfect on-time payment history, no major delinquent marks like bankruptcy or delinquency, 4 credit cards, and little overall debt. She wants to push her credit score even higher, so she decides to get a new credit card to increase her total credit.
Within a few months, she applies for several credit cards—a balance transfer card, several rewards card, and a few low interest cards. She settles on a popular travel rewards card that she is approved for, gets a decent credit limit, and goes to work charging small purchases and paying on-time like an excellent credit consumer should do. So far, so good… right?
Jane checks her credit score again. Instead of the near-800 mark she thought she’d be headed for, her credit score plummets 23 points! Her good credit behavior backfired. What happened?
In the search for better credit, Jane didn’t realize that every credit action has an effect on her credit score. While she accessing more credit and increasing her credit lines should have boosted her credit score, the many credit cards she applied for resulted in several hard inquiries that knocked her score back. Multiple hard inquiries x a few points off for each = a significant dent on her credit score, which unfortunately was enough to downgrade her from the excellent credit to good credit bracket.
With her new credit score, Jane will no longer be able to access the best financial offers and premium rates that come with being an excellent credit consumer. Lenders place consumers into credit score buckets—excellent, good, fair, and poor.
Even though Jane is just points away from a 720—the threshold for excellent credit—lenders treat her like any other good credit consumer. She receives the same offers as a consumer with a 680 score, as well as the same rates that are a few percentage points higher than what her former excellent credit self would’ve received. A few percentage points difference can translate into thousands of dollars over the life of a loan.
The moral of the story?
Look before you leap. Meaning, before you begin doing major financial actions, know what you are doing and why. Planning a big financial move in the coming months? Before applying for a car loan, before accessing more credit, before getting a mortgage—check your credit score and have a good understanding of your credit health.
As you work to build and better your credit health, focus on specific and purposeful actions that work for your credit behavior and history. Especially because you don’t want your credit moves to backfire.
Stick along with us on our monthly CreditShout column for help on how to be smarter about your credit, and how to use tools to help you get to better credit.
For example, if Jane had used our Credit Simulator, she would’ve known that multiple credit inquiries would knock her credit score down, particularly in the case of excellent credit consumers. For Jane’s credit file, the addition of a new credit line didn’t vastly outweigh the impact of multiple hard inquiries. Our Credit Simulator allows you to see how specific financial actions—from getting a mortgage to paying off your debts—can directly affect your specific credit score. That might’ve been helpful for Jane before she fell off her excellent credit pedestal.
Join us for our next post, discussing specific actions to take for each credit range from excellent to poor credit.