There are two major components that account for two-thirds (2/3) of your Credit Score: Payment History and Amounts Owed
Payment History: reveals your past credit behavior, such as how well you have done with making your payments in the past, up until ‘date-current’.
Amount Owed: reveals (theoretically) how ‘deep-in-debt’ that you currently are, in other words, are you living ‘within your means’ or ‘beyond your means’.
If you have a ‘short credit history’, then your ‘current credit balance’, or the amount that you ‘currently owe’ on a particular credit product(s), will weigh heavy on your Credit Score.
Artificial Intelligence (Ai) is being relied upon more and more by banks, credit card companies, and lenders, and Ai spits out Credit Scores based on the ‘available’ information on an individual’s Credit Report.
Utilization Rates are used by banks, credit card companies, and lenders, and many today use Ai technology to determine your credit Utilization Rate.
So, How is Your Credit Utilization Rate Determined?
Utilization Rates are simply a percentage of how much credit you are using, compared to the MAXIMUM credit LIMIT granted to YOU by your creditor, whether it be the bank, credit card company, or the lender, and this is determined by what is reported to your credit report by your creditors, which employ Humans.
For example, let’s say that over six months ago you were issued a credit card with a $5000 MAXIMUM credit limit, and your current credit card balance is $1500 dollars (or less), and if this is the case, then you are AT or BELOW 30% percent Utilization Rate.
($1500 ÷ $5000 = .3 or 30%)
Now, you may have more than one credit card, and let’s say that all of your credit cards have a 30% percent or LESS Utilization Rate, EXCELLENT!
This makes for an Excellent Credit Score.
However, currently, Humans are inputting information, and many Humans, as far as I am aware, are imperfect.
So, I am going to reveal a few ‘imperfections’, as it relates to Utilization Rates and Credit Scores.
If you are a user of credit, or if you are attempting to improve your credit, you should be aware that credit data is not always prosessed korectly.
In short, misstakes can be made when Humans are entering data.
In ‘some’ other instances, some creditors do not report the full credit story, such as, the Credit Card Holder’s ‘MAXIMUM credit card limit’ is ‘sometimes’ not reported to the Credit Bureaus, also known as Credit Reporting Agencies or CRAs. (CRAs are the entities that store your credit information).
Please keep in mind, that when I say ‘creditors’, which are banks, credit card companies, and lenders, do not look past the fact, that Humans are also working, and making decisions, in those buildings.
Now ‘sometimes’, creditors will report, either ‘mistakenly’ or ‘inadvertently’, (we still don’t know which), the ‘Highest Credit Charged’, and since the ‘HIGHEST Credit CHARGED’ is usually well below the MAXIMUM Credit LIMIT’, this action has the potential to destroy a person’s Credit Score.
For example, let’s say that you have a credit card with a $5000 dollar MAXIMUM credit LIMIT, and the Highest Credit ever CHARGED by you is $900 dollars, (let’s say that it was for an auto repair, it doesn’t matter), and your current credit card balance is $800 dollars, well, if the bank or the credit card company ONLY reports the HIGHEST Credit CHARGED ($900), rather than your actual MAXIMUM credit card LIMIT ($5000), then your credit Utilization Rate for this particular credit card is 89%, which is false and misleading.
($800 ÷ $900 = .89 or 89%)
This ‘mistake’ is not only false and misleading, which is a clear violation of the Fair Credit Reporting Act (FCRA), but also has the high potential to annihilate your Credit Score and can also be devastating to your personal life, your financial life, and detrimental to your career.
In some other instances, I have heard, that the credit card industry is HIGHLY competitive, and banks and credit card companies do not want to lose a current Credit Card Holder, which is YOU, to a competing bank or credit card company, especially a Credit Card Holder with an EXCELLENT credit payment history, so, a bank or credit card company may report a LOWER credit card LIMIT, or worse, not report a credit card limit at all, and this results in a terrible, and false, Utilization Rate for the Credit Card Holder.
This is bad form, but difficult to prove, but this action by the current credit card company is an attempt to prevent other banks or credit card companies, also known as ‘competitors’, from enticing their excellent Credit Card Holders from leaving, and making the switch.
Banks and credit card companies are often ‘fishing’ for new Credit Card Customers, and one of the ways that they ‘fish’ is by requesting ‘soft-credit-pulls’ on the competitions current Credit Card Holders, and when they discover a Credit Card Holder in Good-Standing with a competitor, they will send a favorable credit offer to entice the Credit Card Holder to become their Credit Card Customer, but if the soft-credit-pull reveals that a current Credit Card Holder has a terrible Utilization Rate, like say 89% percent, with one of their credit card competitors, based on false and misleading information on the Credit Card Holder’s credit report, this bank or credit card company would prefer to NOT make a credit card offer to this particular Credit Card Holder, and would rather toss the fish back into the water.
This is unsportsmanlike, and bad business, but, like in any sport, it’s not a ‘penalty’ if the referee did not see it.
In other words, if YOU do not take the time to check and review your credit report periodically, you will not be aware of any inaccuracies on your credit report, and creditors might ‘get-away’ with reporting inaccurate, misleading, and false information to your credit report, which can result in a LOW Credit Score, which may cause you to be denied for the credit that you need, or may cost you lots of money in excessive interest charges, and may also prevent you from taking advantage of certain financial opportunities.
Inaccurate Utilization Rates can also be Detrimental to Your Career
Employers and Human Resource Departments are not necessarily trained in reading and understanding Credit Reports and Credit Scores, but if an opportunity should arise for an employee to be promoted into a high salaried position, and during a background check, the employer discovers a LOW Credit Score on a candidates credit report (as a result of false and misleading information) the opportunity for promotion, along with an increase in pay for the employee, may cause the employer to disqualify an employee from being promoted.
Artificial Intelligence (Ai) is being relied upon in many sectors of our lives, and Ai is only as GOOD as the Person (Human) inputting the information, and for our purposes here, we mean the ‘credit information’ that is being inputted into our individual credit reports, which then determines our individual Credit Scores.
Look, there are some bad apples in business, how many, I don’t know, but I am for certain that Humans are imperfect and are susceptible to making mistakes, so for these very reasons, it is extremely important for all of us, to maintain a close watch on our own credit reports, so that we can be certain that all the information is current, and 100% percent accurate.
Not ‘sort of’ accurate, and not ‘close enough’, but 100% percent accurate, as the law requires, under the Fair Credit Reporting Act (FCRA).
