What About Those with Credit Scores in the Middle? Taking the Minimum Payment to the Max

Findings:
January 2006

• Consumers with high credit scores carry the highest levels of debt
• Consumers with the lowest credit scores use 10% more of their available credit than those with the highest scores
• The number of late payments for consumers with low credit scores averages 1,000 times higher than those with high credit scores

Once Upon a Credit Score

They have the best of scores, they have the worst of scores…they have PLUS Credit Scores^SM that fall anywhere between 330 and 830. But what’s really going on with consumers behind the three digits of their credit scores? And are there any major differences between those with credit scores on opposite ends of the spectrum? That’s what the Experian National Score Index hoped to find out with this month’s study, which compared the data of over 1.3 million consumers in over 30 categories.

The Big Five

A comparison of five key categories impacting credit scores reveals several interesting differences between consumers in the two groups studied:

*Data as of November 2005

The first thing that jumps out is that consumers in Group Two pay an average monthly payment that’s nearly 2 ½ times more than those in Group One, and that their debt for revolving & installment accounts is over twice the debt of consumers in the first group. (Examples of revolving accounts are credit card accounts or department store charge cards, while installment accounts include auto loans, student loans, etc.) But the more telling statistic is that, even though the average dollar amount of debt for consumers in Group Two is higher, they use a lower percentage of their available credit—nearly 10% less than those in Group One. In general, it’s advisable to keep balance-to-limit ratios on credit cards as low as possible. Having a very high balance-to-limit ratio can adversely affect a credit score.

Late payments, including collections, can have the single biggest impact to a credit score; even one late payment can cause a credit score to drop significantly. Not surprisingly, there’s quite a discrepancy in the number of late payments over the past six months between the two groups. What is surprising, however, is the size of the discrepancy, with those in Group One averaging 2.32 late payments per person—over 1,000 times higher than those in Group Two! Consistently paying bills on time is key to maintaining a good credit score.

Inquiries can also have an effect on a credit score, although they generally have minimal impact on a credit score unless a consumer is not faring so well in other key categories. With an average of only 1.44 inquiries, it appears as though most consumers with higher credit scores may have all the credit they need, or want.

Is Time on Your Side?

Experian’s data backs up the fact that a solid credit history, especially over an extended period of time, can help boost a credit score—a reason consumers should consider not closing their older accounts, even if the account is seldom or never used. The average age of accounts appearing on a consumer’s credit report for Group Two was 114 months (over 9 years). The average age of the accounts for consumers in Group One was only 46 months (3.8 years).

Conclusions or Confusions?

It’s important to note that every consumer is different, and each and every one faces his or her own unique set of circumstances. That said, the one clear delineating factor between the two groups seems to be the amount of credit responsibility exercised. Consumers with higher credit scores consistently had fewer late payments and past-due accounts, fewer accounts in collections, and a lower overall percentage of debt—all pretty good indications of exercising responsible credit behavior.

And the moral of the story? That one of the best ways to preserve your credit and keep your credit score in the ranks of the upper echelon may be to treat your credit as the valuable asset it actually is.