I’m a big fan of setting goals. I did well in school, getting a solid balance of As and Bs rather than all As, mind you. For the pure fun of some healthy competition in my writing career, I monitor how my pieces fare in comparison to those of my contemporaries.
So I prepared myself for the figures when it came time to open my Credit Sesame account. That’s especially true now that my wife and I have paid off our credit card and reached our stretch goal of paying off $100,000 in student debt last year. But since we recently purchased a home with a 15-year mortgage, debt is still an issue. Perhaps there would be a wash?
I had heard that paying off debt could have a bad impact on one’s credit rating. By the way, that is a myth. Your credit score will benefit from debt elimination. But closing accounts can be painful. That is what took place to me.
I hope you can gain some insight from my experience if you find yourself in a similar scenario, paying off debt while unsure of how your choices today will affect your ability to obtain finance in the future.
Evaluation of My Credit, from A to F
To the best of my knowledge, seventh-grade gym class produced my lowest grade ever. I failed a written exam on the rules of football because I didn’t study for it, believed a touchdown was worth seven points, and thought gym was a meaningless class (I’m a die-hard nerd). In a somber discussion in the library, my P.E. teacher described this appalling performance to my parents.
A big fat D, talk about embarrassed. For many years, that grade served as my lowest point.
Until I accessed my Credit Sesame account this spring and discovered something even worse: a huge red F.
This is what I observed after logging in.
Metric: History of Payment (influences 35 percent of score). This one is easy because it only evaluates my ability to accomplish the fundamental monthly objective of making on-time payments on any outstanding debt. My wife and I are fortunate to only have a mortgage and have solid jobs, so we can cross this off the list each month. Sending a significant portion of our salary out the door is not simple, but knowing that we will soon own our home outright makes the effort worthwhile. Additionally, it equates to the “A” rating you see here.
Nothing is being done. The goal here is to just keep at it and remember to transfer money when the calendar says to do so with a good rating and no late payments.
Credit Usage Metric (influences 30 percent of score). If there is ever going to be a financial trough for my family, this is it. Although it appears to be in pretty bad shape, in our opinion it shows that we are making progress. This is due to the fact that this one reflects how much of our available credit we actually use. We decided to rip up the cards and shut our credit accounts. For us, that is what works best. We have a mortgage, but since it isn’t revolving debt, it doesn’t count against the credit usage element of my credit score. Because we opt not to have any accounts, the credit reporting companies cannot commend us for maintaining low balances. We requested less debt, thus we received a failing grade for usage.
Nothing is being done. The Credit Sesame dashboard correctly notes that having no credit available lowers our credit scores. Maintaining an open but unused credit card account can improve your score. My family made the decision to forgo getting a credit card since we only want to utilize cash to cover bills. We feel completely at ease with this choice. We’ve used credit cards before and later regretted it. Credit card alternatives are constantly available to us, including secured credit cards that are recommended on my dashboard.
Credit Age is a metric (influences 15 percent of score). Here’s yet another depressing grade. This D represents the fact that our mortgage is only a little over a year old. According to Credit Sesame, anything less than two years is insufficient for lenders and creditors to assess your long-term track record with debt. Keep a credit account open for a long time if you want to turn this one around. I predict that when we become long-term homeowners, this grade will gradually rise.
I have cancelled and paid off student loan accounts that are now in excellent standing. For ten years after the date they were closed, the accounts should continue to appear on my credit report and affect my credit score. My lenders only report to one or two of the three major credit reporting agencies, which is most likely the cause of why I don’t see the loans reflected in my Credit Sesame Credit Age (Equifax, Experian and TransUnion). Information from my TransUnion file is reflected in my Credit Sesame dashboard.
Be patient as an action item. Only by allowing time to pass can the passage of time be demonstrated. I am aware that those mortgage payments will eventually result in both a paid-off home and a higher Credit Age calculation.
Account Mix Metric (influences 10 percent of score). We would refer to this category as “diversification” in the business sector. We only have a mortgage, therefore there is essentially no diversity in our portfolio. This grade would be higher if I had more than one credit product in my file.
Nothing needs to be done. We intend to maintain minimal diversity because our objective is to construct assets based on cash and investments rather than debt. However, as the Credit Score Analysis makes clear, such goals may not be in line with those of creditors and lenders, who would rather see a variety of debt assets before giving credit. I would be more able to address this issue if we kept our mortgage and credit card accounts open.
Credit inquiries are the metric (influences 10 percent of score). Hurray! One more A! This means we aren’t constantly looking for credit, which can make lenders suspicious. (Incidentally, we would suspect fraud if we detected activity here.) Credit Sesame agrees that this is a fantastic time to apply for a new credit card or loan because we have a perfect score in this area, as you can see in the image.
Nothing needs to be done. The mortgage will continue to be our only debt. There is always a chance that inquiries will momentarily reduce your score by a few points. If you don’t require credit, there is no reason for you to apply.
Understanding the Numbers
I’ll admit that my credit score is really unimpressive. Yes, my credit consumption received a failing grade, but overall, I have a solid record. Credit The Credit Score Analysis from Sesame is a useful teaching resource. It provides members with free access to their credit scores and explains in detail what I need to do to raise my score. It’s a good tool for keeping an eye out for any fraudulent use of credit accounts.
My wife and I intend to continue making mortgage payments with an eye toward increasing our savings and assets for our retirement, individual objectives, and the long-term education of our children. We’ll utilize the Credit Score Analysis to track our development—or, depending on the grade, our lack thereof—as long as we have debt.