We recently had the pleasure of sitting down with Rod Griffin, Director of Public Education with Experian. Experian is a leader in the credit services industry and is 1 of the 3 main credit bureaus that create, manage, and report your credit score. You see the Experian name anytime you run a credit report or score. Rod was kind enough to provide candid answers to many of the questions that our users have asked us. We figured, what’s better than going straight to the source?
We’ve divided this interview into 4 parts:
- Part 1: Credit Basics
- Part 2: Denials and Closing Accounts
- Part 3: Let’s Talk Numbers
- Part 4: User-Submitted Questions
Part 1: Credit Basics is below. We hope you enjoy and learn something along the way!
RS: So you’re the expert on credit! What’s your title and role with Experian?
Rod Griffin (RG), Director of Public Education with Experian. This means I wear a number of different hats. One of them is talking to people like you to educate people on credit. That is my job, my main focus: to educate people on credit reporting, credit scoring, fraud, ID theft – the things that Experian does as a whole. Everything related to education that helps people understand what we do.
RS: People often ask us “doesn’t applying for credit cards hurt my credit score?” Is there more nuance to it?
RG: When you apply for a credit card, we will post what’s called an inquiry to your credit report. It falls into the category of a hard inquiry, which means that other lenders will see this hard inquiry and it can affect credit scores. The answer is “yes”, it will impact credit scores, BUT — there is always a ‘but’ — but minimally, typically only a few points and for a short period of time, 1-2, maybe 3 months and then it tends to go away or at least diminish very rapidly. The reason there is a negative impact with the inquiry, is because there is potential new debt that shows risk, so the inquiry represents a little risk.
RS: Is there a scoring benchmark framework that is a standard in the credit score industry?
RG: FICO scores are the best known scores. FICO is a scoring company. Experian is a credit reporting company that actually creates the credit report and FICO owns the credit score. When you apply for credit, the lender is going to come to Experian and say “we need Rod Griffin’s credit report and we want you to route it through FICO O9 score” and then we’ll (Experian) route the report through the FICO score and the lender then receives the score [from FICO] and report [from Experian]. Some of the large credit card companies use their own scores. We’ll send the credit report to the credit card company and they will use their own score.
FICO is the best known scoring company and score on a 350-850 scale. Generally, scores above 700 are considered “prime”, so you will probably qualify. At 700, you may not qualify for the best rates, but when you get to about 750, that’s generally where you qualify for the best rates (mortgage, auto loan, credit card).
RS: Is it true that there are both positive and negative impacts on your credit score when you are approved for a credit card?
RG: If you get approved for a new credit card the account is reported to Experian. While the account is new with very little or no activity, that may have a small negative impact – this [is due to] the unknown of a new credit line. But, you’ve also added an additional credit limit, which should make your credit utilization rate go down as a whole. Credit utilization is the 2nd most important factor in credit scores, so lower utilization rate should positively affect your credit score. That’s especially true if you’re paying the balance in full, making on-time payments, and not using all of your available credit. This process will work to your advantage and scores will, typically, very quickly rebound and likely get better.
RS: When you say “very quickly”, how long are we talking?
RG: Scores typically need 3-6 months of activity on an account to include in a calculation. So, within 3-6 months, you will see that score recover and improve, assuming everything else in the report is good [read: responsible usage].
RS: Which of the two impacts (positive or negative) is greater when opening a credit card?
RG: It depends, and “it depends” is the answer to most of the questions that you will ask, probably. It really depends on the individual’s credit history. If they have a stellar credit history, low balance on a few credit cards, no late payments, it will have a significantly positive impact. If, on the other hand, they have maxed out accounts, high credit utilization rates as a result, late payments, negative information on their report, the act of opening that account and the risks that opening that account brings will often outweigh the positives for a longer period of time, because of the risks that already existed. It really depends on each unique individual.
RS: That is what we try to educate people on, the more responsible you are with your credit, the better your credit score is going to be. If you are responsible with your credit, opening up a few credit cards is not going to negatively impact your score. Would you say that this is true?
RG: By and large, yes, that is true. Again, it depends on your history. When you fill out that application, they are going to look at other things as well: your ability to repay, what assets do you have, your income level, etc. If they see someone with 200 credit cards and they make $5,000 a year, then that’s probably a concern. If they see someone with 100 credit cards that makes $500,000 a year then it probably isn’t a concern. I actually know someone who collects credit cards for the pictures on the front and they have somewhere over 100 credit cards and they have no problem with their credit history at all. He’s the CEO of a company, so he has the income to support it, but income isn’t part of a credit score, so it’s how he manages those accounts. I know people with 2 credit cards and [they also] have excellent credit scores, so it’s not about how many credit cards you have, it’s how you manage the credit cards that you have.