Credit Scores: What Worked 10 Years Ago vs. What Gets Boomers Approved Now
Your credit score determines if you can buy a house, which rental unit you will live in and how much you will pay on your monthly auto loan. Other factors are also involved, but your credit score carries a lot of weight.
That’s why many people look for ways to increase their credit scores and boost their odds of getting approved for vital financial products like mortgages and credit cards. However, some of the rules have changed.
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Most of the core components have stayed intact. You still need a good payment history and shouldn’t get too deep into debt, but some recent changes may catch boomers off guard.
Authorized Users Have Less Credit Impact
Adding someone as an authorized user to your credit card used to be a cheat code for letting someone build credit even if they didn’t own a credit card or make purchases. This strategy was very popular for parents who would add their children as authorized users. Then, by the time these children were adults who could buy a house, they would have excellent credit scores right out of the gate.
The newer FICO scoring model puts far less weight on authorized user activity. This model prioritizes credit lines that the consumer is legally responsible for covering. Since authorized users are not required to pay off credit card debt for the primary cardholder, being an authorized user doesn’t have as much of an impact.
Being an authorized user can still help a child establish credit history, but it’s not as advantageous as it was in the past. Teens can also open secured credit cards the moment they turn 18 to build credit.
BNPL Accounts Are Becoming Important
Buy now, pay later accounts were relatively new 10 years ago, but they have now become a popular way to buy products and services. Some people turn to these accounts because they have bad credit and are unable to obtain a credit card.
Most BNPL providers do not report your activity to the major credit bureaus, but as reported by FinanceBuzz, that is changing. A few companies have started to report credit for some or all transactions to the major credit bureaus. That means buying products and paying small installments can build your credit and help you qualify for better financing in the future.
Not every BNPL company reports to credit bureaus, so you will have to ask your current provider if they do. You can buy products on your credit card to ensure the activity is reported, but BNPL can serve as an extra on-ramp for building credit.
You Don’t Need a Small Balance
A common belief 10 years ago was that carrying a small credit card balance month-to-month and paying some interest was good for building credit. The argument was that it demonstrated an active credit line, but it’s much better to pay off the entire balance if you can.
Paying your balance in full each month lets you keep more money instead of paying interest. Furthermore, you end up with a 0% credit utilization ratio, which is beneficial for your credit score. This ratio makes up 30% of your FICO score calculation and it measures how much of your credit limit you are currently using.
For instance, if you have a $5,000 credit limit and a $1,000 balance, you have a 20% credit utilization ratio. A ratio between 0% and 30% is typically good for your FICO score but getting it lower and ideally at 0% offers the highest credit score gains.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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