What Every Adult (Not Just Young Adults) Needs to Understand About Credit Scores

(The Calculation of Credit Scores may be Nuanced, Subtle, Counter-Intuitive) Dear Readers: Please treat this essay as a post-script to my recent essay targeting young adults and their need to understand credit scores. In part from your feedback to the original essay and in part from recent experience with a change in my own credit score, I firmly believe the topic needs to be understood better by all adults, not just young adults. Moreover, there are elements of the calculation that are subtle, nuanced and counter-intuitive, so much so that I strongly recommend parents and grandparents not only share the original essay with children and grandchildren but also review the material in that essay AND in this essay one-on-one with them. Expecting a child or grandchild to comprehend credit scores and how/why it will affect them without hand-holding is quite likely expecting too much. Without your direct help, children and grandchildren probably won’t “get it”. The day I sent readers the original essay on credit scores was the same day I received a notice of a drop in my credit score. After averaging 808 (exceptional) in May 2021, in August my new number had tumbled to 788 (very good). I had been comfortable, indeed smug, with the 808. When it stumbled I was humbled (sorry, couldn’t resist). In studying the reason for the decline, I started with the two most logical questions: First, was there a monthly payment I’d overlooked or paid late? No. Second, was I borrowing too much and increasing my risk of becoming unable to repay the debts? Nope. I finally figured it out. I was borrowing too little. It was counter-intuitive, but the notice I had received stated: the higher the number (of accounts always paid as agreed) the lower the risk. But between May and August I had canceled a credit card I didn’t really need. I had reduced the number of accounts I had and paid faithfully on time as agreed from four accounts (three credit cards and one mortgage) to three accounts (two credit cards and one mortgage). They had one less “good” account to judge me on, which in their way of thinking made me riskier as a borrower. I needed to borrow more (and continue to repay on time as agreed) to reduce risk. Their reasoning is similar to saying if you always pay cash they won’t have any debts to judge your willingness and ability to repay, and therefore it would make you a riskier borrower. Never mind that you are paying your bills—by using cash only you are not demonstrating you can manage credit as well. Parents and grandparents, I hope this demonstrates the subtlety of the credit score calculation process, and how difficult it might be for the next generation (and perhaps also you) to understand how to manage your credit score to your best advantage. Please consider walking through the credit scoring process together to assure both you and they “get it”. This is one of those opportunities to learn something new and thereby enhance the synapses in your brain