Credit is the lifeblood of the economy and a critical lever for wealth building.
For example, building wealth with real estate almost always involves mortgage debt – and that depends on good credit.
Same for small business loans (at least when starting out).
And travel hacking (miles and points fueled by credit cards).
The credit score is the metric for how borrower creditworthiness is judged.
In episode 14, I talk with Louis DeNicola a consumer credit expert and credit writer who works with clients including Experian, Credit Karma, LendingTree, and Nova Credit.
What you’ll learn in this episode:
- How credit scores are calculated and how each major component is weighted
- Why credit scores fluctuate constantly and how lenders and card companies often use proprietary credit scoring models internally
- How to increase and protect your credit score
- What to focus on when auditing your credit report
- The difference between soft vs. hard inquiries and how each impacts your credit
- The optimal “utilization” level (plus a hack for making your utilization appear low)
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Links mentioned in this episode:
- Louis DeNicola
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- HYW private Facebook community
Read this episode as a post:
Andrew Chen 1:45
My guest today is Louis DeNicola. Louis is a consumer credit expert who writes on a freelance basis on consumer credit and personal finance topics and works frequently with financial services companies and financial technology startups to teach people about consumer credit.
He has worked with clients including Experian, Credit Karma, LendingTree, and Nova Credit, and also volunteers as a tax preparer for the IRS’s Volunteer Income Tax Assistance Program.
Louis, thanks so much for joining us today to share your insights all about credit and credit scores.
Louis DeNicola 2:15
Thanks so much for having me. I’m excited.
Andrew Chen 2:17
I’d love to start just by understanding a little bit more about your background. I understand you are a freelance credit writer.
I would love to understand what motivated you to become a credit writer. What’s your industry experience writing about and working on projects related to consumer credit? Just so my audience can get a little bit more familiar with the perspective you bring to the table.
Louis DeNicola 2:37
Yeah. I’m happy to share.
So, there’s no degree you can get in credit.
I actually got started as a personal finance writer about eight years ago, and I was interested in personal finance in general.
I had been tracking my own budget daily. I had been learning about credit cards and credit card rewards.
And I started with a part time job writing for a website all about saving money, spending wisely, budgeting, more general personal finance topics.
I got more into the world of consumer credit when I started working with Credit Karma. That was about five or six years ago. And I came on as a freelancer, and I still freelance with them.
And I just found it really interesting, the system, how it’s set up, and then the impact I could have if I could help people improve their credit.
When you’re writing about frugal living, maybe there’s a coupon app you can share and someone can save $5 here, $10 there. But if you can help them increase their credit scores by 100 points, that might mean they’re saving tens or hundreds or thousands of dollars if they’re taking out a big loan like a mortgage.
So for me, it was that realization that I’m reaching a lot of people with my writing. Maybe if I focus on this credit thing, I can really help them save a lot of money. And then I just found the whole system so interesting.
Andrew Chen 4:02
Awesome. So is it fair to say that the better your credit score is, basically the cheaper things get?
Louis DeNicola 4:09
I think that’s fair, especially if you’re borrowing money, but even if you’re not.
In most states, but not all, your credit history can impact insurance rates. So that would be like your auto insurance or your renter’s insurance or your homeowner’s insurance. So you might be saving money even if you’re not borrowing any money.
And similarly, life can be a little bit more expensive if you have poor credit. So you might need to put down larger deposits when you go to rent an apartment or open a utilities account or get a new phone plan even.
Andrew Chen 4:41
Yeah, that makes a lot of sense. And it’s a big incentive, I think, to really pay attention to your credit score and make sure you try to increase it and protect it.
And so, to that end, can you help us understand, what are the main components and inputs that go into computing your credit score and how are the things weighted? And how ultimately is the score calculated?
Louis DeNicola 5:16
So I think it’s important to remember that, in one sense, you don’t have a single credit score, and in another, you have maybe hundreds of credit scores.
So in the first case, you don’t have a credit score in the sense that there isn’t a score out there hanging over everyone’s head that’s constantly changing as your actions change.
What happens is there’s a credit report. Or generally, if you have one credit report, you might have all three.
There’s TransUnion, Experian, and Equifax, the three major consumer credit bureaus in the U.S. And there’s lots of other credit bureaus, but those are the big three.
And a credit score is simply a computer model. It’s analyzing one of those credit reports and spitting out a score.
The big two scoring companies are FICO. It’s been making credit scores a long time. And then more recently, VantageScore started creating credit scores as well.
Both of these scoring companies create credit scoring models that are like computer programs. And those models analyze one of your credit reports, and that creates a score.
So there are dozens of FICO scoring models. There’s four VantageScore models. Each one of those might return a different score depending on which credit report it’s analyzing.
I think I got a little bit off track there, but I just wanted to set that framework of thinking about the world of credit as it’s not like you have a score that’s going up and down at the background. A score gets generated based on one of your credit reports when it’s requested.
Andrew Chen 6:50
I see. So that happens on the fly?
Louis DeNicola 6:52
Yeah. So it happens when it’s requested. Someone buys your credit report and they can choose to buy a score along with it or multiple scores along with it.
Andrew Chen 7:02
Interesting. Got it. So when it’s computed, what are the inputs and how are they weighted?
Louis DeNicola 7:08
So if you’re thinking about trying to improve your credit scores, what you really should be focused on is that underlying information, the credit reports. And the big part of that is your payment history.
So most generic credit scores, and that’s the name given for the credit scores that are created for multiple types of financial products, they’re trying to predict whether or not you’re going to be 90 days late on a payment in the future.
And a really good predictor is whether or not you’ve been late on a payment in the past. So if you can pay all your bills on time, that’s really going to help your credit.
If you’re late on a payment, even one that doesn’t traditionally wind up on your credit reports, something like a mobile phone payment. Although there are ways to get it on your reports now. If you’re late and you fall behind and you keep falling behind, eventually you might get sent to collections.
So even though that positive on time payment isn’t helping your credit, stopping to make payments could really hurt it.
So number one is you’re focusing on making sure you’re making your payments on time. And then number two is keeping your credit card balances low relative to your credit limit. And this is known as utilization.
And there’s different rules of thumb that you can follow, but basically you want to keep your credit balance low relative to the credit limit. And then there are some tricks and hacks we can get into about how you can do that while also maximizing rewards, playing the system a little bit.
Andrew Chen 8:39
Got it. So are there other major input factors besides paying on time, having low utilization, which are the big strategies?
Louis DeNicola 8:49
Yeah. There are definitely other factors.
The age of your credit history is certainly important. And that can take into account the age of your oldest accounts, the average age of the accounts in your credit report. So if you’re opening lots of new accounts, that might drop your average age and hurt your scores a little bit.
When you’re applying for new accounts, there’s potentially a hard inquiry. It’s added to your credit report, which just simply means that a creditor has reviewed your credit report.
It might be extending your credit. And sometimes that can hurt your score a little bit.
Having a mix of experience with different types of accounts could help your scores.
And there’s a FICO score that’s created specifically for auto lenders. So having an auto loan that you’ve paid off in full, on time in the past could help that score.
But in general, having a mix of experience with credit cards and installment loans could be good for your scores as well. It’s just not quite as important as that utilization and credit history.
Andrew Chen 9:49
Got it. Is there a ballpark for how to think about how much each of these components that you just mentioned are actually weighted? So that folks have an idea.
If I’m going to really focus my time or energy, where am I going to get the most bang for buck in terms of maximizing my credit score?
Louis DeNicola 10:08
If you go to myFICO, the website, they do have a FICO pie chart, which breaks down the average weighting for different factors. And then VantageScore also has a chart that shows the average impact on different factors.
So payment history, you might see, is worth about 35% of your score. Or credit usage involves more than just utilization rate. The credit usage is worth 30% of your score.
So that’s why I say those two are the most important factors. Combined, that’s 65%.
It’s important to remember that these are averages and that that’s not the case necessarily for you as an individual.
So if you’re brand new to credit and you’re opening your first credit card, taking out your first loan, maybe applying for a lot of loans right away and getting a lot of hard inquiries might be especially bad because you don’t have this long credit history like the average person does.
So just keep in mind that those are averages. And that’s why it’s not really right to say credit history is 35% of your score exactly. But those are ballparks you can use.
Andrew Chen 11:20
Got it. So you shouldn’t look at overall. You should think about overall as an input, but your particular circumstance and the breakdown might be different.
Louis DeNicola 11:31
Yeah, definitely. Again, these are complex computer models. And they’re black boxes in a sense that the companies aren’t giving us all the secret sauce, but they are showing us some percentages for the average consumer to help teach people what hurts and what helps with their credit.
Andrew Chen 11:49
On the average, what is the optimal utilization rate that folks should target?
Louis DeNicola 11:57
Really optimal is 1%. And it’s one of those things that it is that because the data says that’s who is least likely to pay late is people who have 1% utilization.
And if you think about it, it makes sense in that you’re using your credits. You have experience. You have this history of paying a bill on time.
If you didn’t use your credit card at all, you might have 0% utilization, but you also don’t have any experience paying on time. But you’re not using more credit than that.
1% might be optimal, but you might not see a shift in your score if you go from 1% to 5% to 7%. There isn’t necessarily a direct correlation with a score increase of a point or two.
Andrew Chen 12:45
Got it. Would you then recommend a forward planning financial optimizer to actually overshoot for seeking credit 20x or 30x what they actually need, knowing that they really only will, on an ongoing basis, use single digit percentage of their credit allowance?
Louis DeNicola 13:14
So there’s a few things to keep in mind here that are important.
One is utilization really has to do with revolving accounts. So credit cards versus an installment loan, like a personal loan, they pay off in monthly payments.
Definitely don’t go taking out a bunch of personal loans and paying interest just because you think it might help your credit. You shouldn’t be paying interest just to help your credit.
For the most part, let’s focus on credit cards with utilization. And again, it goes back to the system where if you understand the system, you have a better idea of how to increase your credit scores.
So again, it’s all based on that credit report. Your utilization is calculated based on the credit report. What does it say your balance is and what does it say your credit limit is for that account?
And the balance that gets reported is usually the balance that’s sent to the credit bureaus by your credit card issuer around the end of your statement cycle.
So, say you can use your credit card from the 1st until the 30th. Then all the charges from that period, the credit card company sends you a bill. That bill is due usually 21-23 days later.
But that balance in your credit report is from that day 30 when the statement closes.
So what you could do, if you have the means, you can just pay down your balance before the end of your statement period, and then the balance on your card is a lot lower.
And the balance that the card issuer sends the credit bureau is then lower. Your utilization is lower. And really what you’ve done is just paid your bill a week early.
Again, if you have the means, that’s great. If you’re using your credit card for everything because you really want points and you’re worried about utilization, that’s a nice way to get all the points you can but also keep your utilization low.
And maybe not do it the day before because the exact date can vary depending on the card issuer from one month to the next. But a week before, a couple of days before, just pay that balance down.
And there’s even some card issuers like Citi. You can set up automatic payments where it splits your payment in half, and halfway through the period, it’ll send a payment for half the balance.
So those are just ways you can keep your balance a little bit lower.
Andrew Chen 15:43
Oh, that’s brilliant.
Louis DeNicola 15:44
And it lowers utilization.
Andrew Chen 15:46
Even if you don’t change anything about how you spend, you can actually make your utilization lower just by timing the payment.
Louis DeNicola 15:55
Exactly. So your utilization is based on a calculation of what’s on your credit report, not the balance on your credit card today.
Andrew Chen 16:03
Got it. Do you recommend that people try to seek really large credit limits from their credit card even if they know they will never really need that much to also make sure their utilization is low?
Louis DeNicola 16:26
I’d say if you’re pretty good at controlling your spending, if you don’t see that credit limit as “Here’s how much I can go spend,” then there isn’t much of a downside in having a higher credit limit.
If that’s going to tempt you to spend more money and then revolve the credit card balance, definitely keep those limits lower. It’s just going to be better for your overall financial health.
But if you’re just focusing on credit scores and improving that, higher credit limits could help you.
Andrew Chen 16:54
Got it. Yeah, definitely don’t spend it just because you have it.
One question I also have that you mentioned is there’s this balance between seeking things like credit card reward points. But when you open a credit card, it’s going to drag down your average credit history because each new one starts the clock at zero and you’re averaging across.
At least at the high level, what’s the right way to think about how you should balance strategically between trying to keep your credit history long and going after those reward points, which can actually be quite valuable?
Louis DeNicola 17:31
Sure. I have a few rewards credit cards of my own. And maybe I’ll open another one or two every year.
And I think it’s short term/long term thinking in the sense of in the short term, yeah, you’re getting those rewards and they’re really valuable long term. Maybe this impacts your score. And then suddenly you’re paying a little bit more in a mortgage and that costs you a whole lot more than you got in rewards.
One thing you can do is keep cards open that don’t have annual fees. And then over time, even if you’re opening a few cards every year, you are building up that credit history. So you’re bringing down the averages, but it will be impacted less because you have a lot of these older accounts.
Another thing is remember that the age of accounts is a pretty minor scoring factor compared to some of the other ones, though it could still have a significant impact on your scores, especially if you’re right in between different score tiers and you really need those extra points.
But with that in mind, if you’re planning on buying a home in the next year or two, maybe just step back the credit card rewards game for a little bit. That’s a nice balance in my mind.
Just take a step back. There’s going to be plenty of credit card rewards in a few years.
Andrew Chen 18:54
Perfect. To your mind, what’s a good credit score range?
Louis DeNicola 19:02
The general rule of thumb is a good score starts in the high 600’s. The higher you go, the better.
So most of these scores go to 850. There are credit scores that have different ranges, but a lot of them go 300-850.
So if you’re in the high 600’s, low 700’s, you’re probably in the good range. You might want to be in the high or mid-700’s to be in more of an excellent range and start getting the best offers.
The difference between an 840 and an 850, you’re probably not going to see a difference. There is a point where once you’re above 760, 780, you’re already getting the best offers from your credit score. The other factors can impact your offers as well.
I was going to point out, again, there’s all these nuances in the sense that different creditors though are looking at different factors and they’re also looking at targeting people with different scores.
Maybe one lender says, “We won’t take anyone with a score below 620.” And a different lender says, “Oh, no. We’ll take you if you have a 580 or above.” So those cut-offs can change.
Andrew Chen 20:19
That 760-770 range and above that you said will open up the best offers, is that true for all the different types of credit you might seek?
So regardless if you’re looking for mortgage, auto loan, credit card, personal loan, home equity loan, is that the bar for everything or do these different credit types actually demand different levels or high watermark in order to get the best offer?
Louis DeNicola 20:47
As I said, it’s going to be based on, even beyond just the different types of credit, the different creditors within that field. And so maybe you do need a 780 or an 800 or above to get the best offers.
Also, with a lot of the major credit card issuers, they might use a FICO score or VantageScore as part of their own internal scoring. So it’s not like your FICO score determines your offer. That might be a piece because these companies are big enough that they create custom scoring models.
And we don’t know what their custom scoring models are. They’re custom. They’re proprietary information.
So a higher credit score is better than a lower one, but it’s hard to say where the cut-off is. And so I think it is fair to say that it’s going to vary by industry and by lender.
Andrew Chen 21:40
Got it. Cool. Good to know.
So let’s say I’m early in my career and I really want to build my credit. I know I have good habits and maybe I make a good income, so I’m pretty confident I can do it.
And I start doing the actions you suggested: keep utilization low, pay on time, all the other good things you mentioned.
How long does it actually take to start moving your credit score upward?
Louis DeNicola 22:06
That’s a good question. There are a lot of factors.
So you might be new in your career, but maybe you’ve had student loans that have been on your credit report for five or six years now, if you’re just a year or two out of school.
So in that sense, you surely have a decent length of credit history already. Or maybe your parent added you as an authorized user when they were younger.
That was actually the case for me. I have a credit card account on my credit report from when I was, I think, three years old because a banker had told my mom that “You should add him as an authorized user. It’ll be good for his credit.”
Andrew Chen 22:40
Louis DeNicola 22:41
So thanks, Mom.
So there are definitely personal factors that will impact that. I can’t give you a specific timeline.
But another thing to keep in mind: credit worthiness. That score is one piece of it.
So if you have a really great income and you have a good credit history, even if it’s a short one, lenders might be willing to work with you, even more so than if you had a low income and an excellent score but only a few months of credit history. Then they might be a little bit more wary.
Andrew Chen 23:14
Oh, that’s interesting. So these other factors come into play. At least at a broad level, should folks be thinking about the ability to move their score in terms of weeks, months, years?
Louis DeNicola 23:32
Well, your score could change day to day as your credit report is updated. But if you’re looking at significant moves, you’re probably looking at months to years.
Something like a hard inquiry when you apply for credit and your credit gets checked, that might drain your score by a couple of points. And then that impact fades over time. So maybe over two or three months, the impact might fade.
For a more serious derogatory mark, what they call a negative mark in credit, maybe you had a late payment. And so now we’re talking about recovering from a mistake.
That’s the same as building credit in the sense of this timeline impacting the score. And maybe that’s a few years to recover.
Andrew Chen 24:15
Oh, wow. Okay.
So let’s say this young person successfully builds up their credit over some period of months or years. Now they have a good credit score.
Are there any special additional actions they need to take to protect that score, or is it just pretty much doing the same thing they were doing to build up the score in the first place?
Louis DeNicola 24:43
For the most part, it’s the same thing they were doing to build up their score.
You want to have a few accounts in your credit history. So if you only have one credit card, maybe you want to have three or four accounts total in your credit history. That doesn’t necessarily mean three or four open accounts.
So if you have some student loans, you pay it off. They might stay on your credit report for another 10 years.
And then you have two credit cards: one you use for rewards and one you use as a backup emergency. Well, now you have three accounts on your credit history, or maybe more, depending on how you got your student loans.
But you have a fuller file. And so that could be good for your score.
But for the most part, it’s just sticking with it. It’s the on time payments, low utilization. That age is just going to grow as time goes by.
Andrew Chen 25:30
Got it. You mentioned 10 years. Is that how long a closed account stays on your score?
So if I did a good job and paid off my student loans or paid off my mortgage, then 10 years later, I won’t get the benefit of that anymore?
Louis DeNicola 25:44
Yeah. A closed account that was in good standing when it was closed will stay in a report for 10 years. So in one sense, yeah, that means you won’t get the benefit anymore after 10 years.
That also means, though, if you have a credit card that has a big annual fee, don’t be scared to close it. If that annual fee really isn’t worth it, it will lower your available credit. So maybe your utilization will go up and that can certainly impact your score.
But that account is going to stay on your credit history for another 10 years and continue to impact the average age of all your accounts. So it can still also help your score throughout those 10 years.
Andrew Chen 26:22
I see. So, most of my audience knows that you can get one free credit report each year from each of the major agencies at annualcreditreport.com. And it sounds like there are also other places where you can pull your credit report.
And for folks who are pulling their credit report regularly to check and make sure that their credit score and their report is accurate, what should folks be paying attention to in the report to stay vigilant about accuracy and fraud and things like that?
Louis DeNicola 26:51
Good question because fraud is a big problem.
You can get a free credit report once every 12 months from each of the bureaus at annualcreditreport.com.
You can also get access to your credit reports throughout the year, either by paying for it or there are free services. Experian gives you free access to an Experian credit report. And Credit Karma will give you access to your Equifax and TransUnion credit reports.
And as a disclosure, I write for both of those companies.
What you’re going to be looking for is a mistake. And that could be something like a name that isn’t yours appearing in the top of the credit report where there’s personal identification information. It could be an account you just don’t recognize.
So maybe a credit card or a loan was taken out. It appears in your credit report and you didn’t open it. And so something like that, that could be an indication of fraud.
And when that happens, you want to reach out to the creditor, maybe the credit card issuer or the lender. Ask about this account. Let them know you didn’t open it and ask them to close the account.
If it’s still appearing in your credit reports, contact the credit bureaus.
And you can even file a dispute online with each of the bureaus, letting them know that “This wasn’t my account. It’s not correct. It shouldn’t be on my credit report because I didn’t open it.”
And they should remove it.
Andrew Chen 28:10
Does it always get removed?
If you see something you don’t recognize, an unfamiliar account or name, how does the credit card company or lender or credit bureau know you’re telling the truth, so they’d give you the benefit of the doubt and actually wipe it from your report?
And do they do it 100% of the time?
Louis DeNicola 28:36
I’m not sure about 100% of the time.
When there’s fraud, you can, maybe as a first step, go to the FTC or local police department and file a police report.
And get something official in that sense, saying that “I’m going on record. This was not mine. It was fraud.”
Hopefully, the creditor is going to believe you and take actions to close that account.
The credit bureaus, when you reach out to them and dispute something, they’re going to go reach back to that creditor and ask to try to verify the information.
And so, in that case, if the creditor has closed the account and understands that as fraud, that should come through the system, be verified as a fraudulent account, and removed.
Andrew Chen 29:22
Got it. Okay, cool.
We’ve talked earlier a little bit about soft and hard pulls.
And for folks who don’t know or understand the precise differences between those, could you help us understand what situations does each occur? What is the difference? How does each impact your credit?
Louis DeNicola 29:46
Sure. So, soft pulls and hard pulls or soft inquiries and hard inquiries, they’re references to when your credit was checked, so when someone accessed your credit report.
People sometimes say, “Be careful when you’re applying for a new credit because that can lead to a hard inquiry and that can hurt your credit scores.”
A hard pull is when someone pulls your credit for a credit-based decision. So a creditor is pulling your report before issuing you a new loan or line of credit, a credit card, something like that.
And so the hard inquiries are the ones that usually result from you applying for something. You applied online or at a bank. And they’re the ones that can impact your scores, hard inquiries.
And they can appear on your credit reports. Well, the credit bureaus will delete them after two years, depending on the scoring model.
A FICO score might consider a hard inquiry for up to 12 months, and VantageScore might consider them for 24. And there’s some nuances there that we can get into as well.
But then a soft inquiry is everything else. So if you check your own credit, that’s not going to impact your score.
If you have a credit card, there’s a good chance that your lender pulls your credit as part of an account maintenance. So it periodically, maybe even monthly, pulls your credit report.
If it sees that suddenly you’ve taken on a ton of debt, it might lower your credit limit as a result. Or if it sees that you’ve been paying on time for the last year and a half, and you self-report to the credit card issuer that your income has increased, maybe that’s going to increase your credit limit on that card.
So as part of account maintenance, your credit gets pulled all the time. Those are soft inquiries.
Credit bureaus create marketing lists for companies. So they’ll create lists and sell them. Companies will send out mailers.
That’s why you get those pre-approved offers in the mail for you. You’ve been pre-approved for this credit card or this loan. Those are soft inquiries.
So basically anything that’s not part of that lending decision when you applied is, for the most part, a soft inquiry.
And not only do those not impact your credit scores. They don’t show up on credit reports that other creditors receive.
So when Chase pulls your credit report because you apply for a Chase credit card, they don’t see those soft inquiries. When you pull your own credit, you will be able to see them though.
Andrew Chen 32:20
I see. So it sounds like hard inquiries are where you are actively seeking for some credit for the most part.
And soft inquiries could be you just checking to see whether your report is accurate, as well as creditors or even potential creditors doing maintenance type of things that you may not even know about. They may just be happening in the background.
Louis DeNicola 32:40
Yeah, maintenance or marketing. And there are some gray areas.
So sometimes when you apply for housing, they check your credit. That could be a softer inquiry, maybe a hard inquiry.
Also, now there’s credit cards and loans you can sometimes get pre-approved or pre-qualified online. You can do that with a soft pull.
So you can see that “I have a pretty good chance of getting approved because I was pre-approved. It’s not a guarantee, but I have a pretty good chance. So I’m going to go ahead and apply.”
Except that they’re going to do a hard inquiry now.
Now, if you get denied on their pre-approval, don’t apply because there’s a good chance you’ll get denied. But now you’ve only had that soft inquiry. There’s no impact on your credit scores.
Andrew Chen 33:21
And a related concept here is around freezing or locking credit. When I applied for credit cards in the past, I’ve always had to unlock or unfreeze my credit, so they can actually make the hard inquiry.
But I assume that during normal periods when I’m not applying for anything and the thing is frozen or locked, that creditors and lenders can still do the soft inquiries. Is that correct?
Louis DeNicola 33:50
Yeah. That’s correct.
Andrew Chen 33:52
Got it. And I guess to that point, what is the difference that consumers should be thinking about between freezing versus locking? And when should you do one versus the other?
Louis DeNicola 34:07
I do want to touch on one point before we get into that, and that is around hard inquiries.
The credit scoring models do allow you to rate shop. They understand that when you go and apply for 10 different car loans, it’s because you’re trying to get the best loan, not because you’re buying 10 different cars.
So the models will do something called deduplication. And so they’ll consider multiple hard inquiries for the same type of loan as one hard inquiry for credit scoring purposes.
You’ll still see all the hard inquiries on your report, but when the score is calculated, it goes through that computer model. It only counts as one hard inquiry.
The timeline and the rules vary depending on the credit model. But for the most part, if you’re rate shopping within a 14-day window, that’s not going to impact your credit any more than one inquiry would for a student loan or a mortgage or an auto loan.
Credit card multiple inquiries can impact FICO scores, but VantageScore will also deduplicate them. So it does vary.
But I don’t want to scare people that you should be shopping around and trying to get the best rate.
Andrew Chen 35:18
Oh, super interesting. So is that just time-based? If you’re having hard inquiries done for the same type of credit but within a shortened time period, is that basically how they tell?
Louis DeNicola 35:32
Yeah. So it’s within a window. And that can range from 14-45 days, I believe, depending on the scoring model.
Andrew Chen 35:38
I see. Is there a strategy in there then if you’re applying for a few credit cards at once, maybe because there’s really good point incentive bonuses?
That maybe you should actually consider applying for them within a shortened period, assuming you can meet all the spending requirements, just so that you can minimize the number of hard inquiries? Or does it really not matter much at the end of the day?
Louis DeNicola 36:06
Yes, but it’s a little bit different than what you just asked.
And it used to be the case. I’m not sure if this is still the case that sometimes when you would apply for two credit cards for the same issuer on the same day, they would only do one pull and they would use that same pull to approve or deny you for the credit cards.
And the important part there is that it only resulted in one hard inquiry. If you applied for multiple cards from multiple issuers, that would still result in multiple hard inquiries.
Now, VantageScore, which dedupes credit cards, might consider that one for scoring purposes. But a FICO score, which doesn’t dedupe credit card inquiries, would still count that as multiple inquiries. So it could increase the negative impact on a FICO score.
Andrew Chen 36:50
I see. So the general deduping that you were referring to, it sounds like then it’s more for when you actually are truly rate shopping for a car, for a home, things like that?
Louis DeNicola 37:02
Yeah. And it just depends on that scoring model and the terms that they created.
Andrew Chen 37:08
So, on the subject of freezing versus locking, what’s the difference? How should folks think about them and when they should do one versus the other?
Louis DeNicola 37:19
In both cases, what you’re basically doing is saying, “I don’t want anyone to access my credit report.”
And as you pointed out, your current creditors can still get access. You can still wind up on these pre-screened lists. But no one’s going to be able to open your account unless you unlock or unfreeze your credit.
The big difference between the two is a credit freeze is actually part of federal law. So under federal law, you’re allowed to freeze and unfreeze your credit reports for free now.
And there used to be a fee, or potentially be a fee. Now the credit bureaus have to do it for free.
And technically, they have a little bit of time to freeze or unfreeze. It depends on the method that you’re requesting. I think it’s an hour if you request it online and maybe a few days if you send a mail request to freeze or unfreeze your report.
A credit lock is really just tools created by the credit bureaus. So in effect, they might be very similar in that they’re keeping people from accessing your credit report unless you unlock it.
Some of them are offered for free, sometimes as a monthly subscription to have this access to lock it.
Usually, you get like the ability to do this with a mobile app to lock or unlock your credit. I believe TransUnion lets you freeze or unfreeze your credit with a mobile app as well.
But I think for the most part, unless you want that instant access, sometimes it’s a little bit easier to lock or unlock because you don’t need to go through a verification process.
But if you’re paying a fee to do locking and locking, you might want to go for their freezing or unfreezing for free instead.
Andrew Chen 39:09
Got it. So it sounds like they’re functionally the same, but when you lock, it might be a little bit easier, maybe faster to do, maybe instantaneous even, but it might cost a fee. Is that basically the way to think about it?
Louis DeNicola 39:21
Yeah, basically. It’s a little bit different for each bureau and it’s also changed over time. They’re competing with one another to offer different services.
Andrew Chen 39:29
Got it. Cool.
So when I think about the big classes of credit, like for home, auto, student loans, credit cards, things like that, do these different types of debt or others have a different type of impact on your credit score, such that, for example, if I pay on time my mortgage, maybe that counts for more than if I pay on time for my student loan?
Or if I pay on time for my credit card, that counts more than something else? What’s the right way to think about the importance of these different buckets of debt?
Louis DeNicola 40:10
There are differences in the sense that some accounts are considered installment accounts. Some accounts are revolving accounts.
But a late payment is a late payment, no matter if you’re $5 late on a credit card or $1000 late on a mortgage. The fact that there is that late payment can hurt your score.
Again, though, there’s a lot of creditors that are using custom models. They’re looking at things beyond just the score.
So if you have a history of being late whenever there’s a big bill, maybe a creditor has that built into their custom model that they don’t want to lend you a lot of money because they know you’re not so great at large monthly payments.
But I would try to make at least all your minimum payments on time, of course. I know that’s not always a realistic answer.
I would say the one saving grace to keep in mind with late payments is you need to actually be 30 days late before a creditor can report that as a late payment to the credit bureaus.
So the creditors use codes when they send updates to the bureaus. And there’s a code for 30 or more days late. There isn’t a code for 1-29 days late.
So if your credit card bill is due today and you can’t pay it, you might get a late fee. Maybe you’ll start getting interest charges. But you’re not going to get a late payment until 30 days later.
So maybe you could look at a student loan service where it gives you a 15-day grace period. Your credit card doesn’t. So maybe you want to pay your credit card one now.
You get paid next week. You could pay your installment loan then. There was a grace period, so there’s no late fee.
You could maybe start playing games like that.
Andrew Chen 41:57
Got it. But I guess it sounds like at the end of the day, paying on time versus paying late is what matters. There’s not one bucket of debt that is weighted more importantly than the others.
If you’re late, you’re late. If you’re on time, you’re on time. Is that correct?
Louis DeNicola 42:16
Yeah. And maybe you’re looking at some of those industry-specific credit models that we talked about before. So if you have a late payment on auto loan, that might hurt your auto credit score a little bit more than a late payment on a different type of loan.
Andrew Chen 42:31
For sure. When it comes to credit cards, do you have any rules of thumb regarding the optimal number of cards that’s good to have open to be most beneficial to your credit score?
Louis DeNicola 42:46
I don’t know what I’m at right now. Maybe 12 credit cards.
Aside from you don’t want to only have one account on your credit history, that’s okay, but if you could have a few accounts on that credit history, not just credit cards but overall accounts, that might be a little bit better. So that you have a thick file versus a thin file, as they call it.
But in terms of six versus eight cards, I don’t personally think it makes that much of a difference in terms of number of accounts. But again, you have things like utilization come into that, the age of accounts. There’s all of these factors that could go into it.
Andrew Chen 43:27
Okay, cool. Are there any other tips or strategies that you would urge listeners to keep in mind when it comes to building and maintaining strong credit?
Louis DeNicola 43:38
That big one there, especially it sounds like your audience might be interested in rewards credit cards, is if you’re going to be putting all your purchases on a rewards credit card, pay attention to that balance.
And if you could pay it ahead of time, that can help your utilization. If you don’t do that, it’s not the end of the world because utilization is a snapshot for FICO scores.
So if your utilization is at 100% this month, your score might really dip. And then if it’s at 1% next month or 0% next month, your score will shoot back up. So it doesn’t have a memory to it, at least for FICO scores.
So you don’t need to overthink it too much. But if you’re trying to optimize scores, you could pay a little bit early. It sounds like that might be the big one for your audience.
Andrew Chen 44:25
Got it. Cool. Well, thanks so much for sharing all your insights and wisdom with us, Louis.
Where can people find out more about you, your work, your services, things like that?
Louis DeNicola 44:34
Yeah. Thanks so much for having me.
I have a website, but really a good way to connect with me is LinkedIn. I check that fairly often.
And you can find links to some of my stories there and a little bit more about the work I do with my clients.
Andrew Chen 44:48
Okay, perfect. Thanks so much. Take care.
Louis DeNicola 44:50
Andrew Chen 44:51
All right. That’s a wrap. I hope you enjoyed today’s guest interview and got a lot of value and insights from it.
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