Randy had an 850 credit score. According to FICO, the most popular scoring model, that’s as good as it gets.<\/p>\n
Still, a line on his credit report said he could lower his utilization rate, so he promptly paid off the remainder of his car loan with one $6,000 payment, and then his score sank 30 points. (Randy has been a target of identity theft and asked to omit his last name for privacy concerns.)<\/p>\n
Most people assume that wiping out those auto payments couldn’t hurt, but that’s a mistake.<\/p>\n
More from Personal Finance:<\/strong> When it comes to credit scores, there are a few things many borrowers often get wrong, experts say. Here are the top misconceptions and why it’s so hard to set the record straight.<\/p>\n Your credit score \u2014 the three-digit number that determines the interest rate you’ll pay for credit cards, car loans and mortgages \u2014 is based on a number of factors but most importantly, it’s a measure of how much you are borrowing and how responsible you are when it comes to making payments. \u00a0<\/p>\n Having an excellent score doesn’t mean you have zero debt but rather a proven track record of managing a mix of outstanding loans. In fact, consumers with the highest scores owe an average of $150,270, including mortgages, according to a recent\u00a0LendingTree analysis<\/a>\u00a0of 100,000 credit reports.<\/p>\n<\/div>\n The borrowers with a\u00a0credit score\u00a0of 800 or higher, such as Randy, pay their bills on time, every time, LendingTree found.\u00a0<\/p>\n To that end, having a four-year auto loan in good standing was working to Randy’s advantage.<\/p>\n “Lenders also want to see that you’ve been responsible for a long time,” said Matt Schulz,\u00a0LendingTree’s\u00a0chief credit analyst.\u00a0<\/p>\n The length of your credit history is another one of the most important factors in a credit score because it gives lenders a better look at your background when it comes to repayments.<\/p>\n Since Randy had already paid off his mortgage and has no student debt, that auto loan was key to show a diversified mix of accounts.<\/p>\n “Your credit mix should involve more than just having multiple credit cards,” Schulz said. “The ideal credit mix is a blend of installment loans, such as\u00a0auto loans,\u00a0student loans\u00a0and mortgages, with revolving credit, such as bank credit cards.”\u00a0<\/p>\n “The more different types of loans that you’ve proven you can handle successfully, the better your score will be.”<\/p>\n<\/div>\n The total amount of credit and loans you’re using compared to your total credit limit, also known as your utilization rate, is another important aspect of a great credit score.\u00a0<\/p>\n As a general rule, it’s important to\u00a0keep revolving debt below 30% of available credit<\/a>\u00a0to limit the effect that high balances can have.<\/p>\n Only about 1.6% of the\u00a0232 million U.S. consumers<\/a>\u00a0with a\u00a0credit score\u00a0have a perfect 850, according to\u00a0FICO’s most recent statistics.\u00a0<\/p>\n Aside from bragging rights, you won’t gain much of an advantage by being in this elite group.<\/p>\n “Typically, lenders do not require individuals to have the highest credit score possible to secure the best loan features,” said Tom Quinn, vice president of FICO Scores. “Instead, they set a high-end cutoff, that is typically in the upper 700’s, where applicants scoring above that cutoff qualify as a good credit score and get the most favorable terms.”<\/p>\n<\/div>\n Each lender sets their own credit score thresholds for who they consider the most creditworthy.\u00a0As long as you fall within these ranges, you are likely to be approved for a loan and qualify for the best rates the issuer has to offer, Schulz added.<\/p>\n “Anything over 800 is gravy,” Schulz\u00a0said, and “in some cases, the difference between 760 and 800 may not be that significant.”<\/p>\n Most credit card issuers now provide free credit score<\/a> access to their cardholders, making it easier than ever to check and monitor your score.<\/p>\n Subscribe to CNBC on YouTube.<\/strong><\/em><\/a><\/p>\n<\/div>\n<\/div>\n
Here’s the best way to pay down high-interest debt<\/a>
63% of Americans are living paycheck to paycheck<\/a>
‘Risky behaviors’ are causing credit scores to level off<\/a><\/p>\nMisconception No. 1: Debt is bad<\/strong><\/h3>\n
![\"How](\"https:\/\/image.cnbcfm.com\/api\/v1\/image\/107131219-1665165518707-Lynnette_Site_thumb.png?v=1665667679&w=750&h=422&vtcrop=y\")
Misconception No. 2: All debt is the same<\/strong><\/h3>\n
![\"Your](\"https:\/\/image.cnbcfm.com\/api\/v1\/image\/107082627-GettyImages-1311362808.jpg?v=1656520877&w=750&h=422&vtcrop=y\")
Misconception No. 3: You need a perfect score<\/strong><\/h3>\n