Most employees are aware they have a credit score, and they know that it impacts them when they apply for a loan. A good score can not only get them approved for the big ticket item they want to finance, but it can also affect the specific loan product or interest rate offered. A person’s credit score can have a far greater impact on their lives than just taking out loans. Today, these three-digit numbers are used to qualify for home or auto insurance discounts. For example, some general insurers won’t even offer coverage to those without a high enough score.
Credit may even be used in the workplace for certain jobs. A low score can indicate that a candidate may be in personal financial distress, which is a potential red flag that could result in theft or fraud. Credit health is a very important area of personal finance, and it’s a must for any employee financial wellness program.
1. Checking credit scores 🔎
A credit score is a three-digit number between 300 and 900. Where an individual falls within that range is based on several aspects of an individual's credit behaviour and history. The higher the score, the better. Score ranges and methodologies vary between bureaus, but a score above 760 is generally considered to be excellent. However, the scale isn’t proportionate; the bottom range of 300-560 may be considered poor. That’s a 260 point spread. Meanwhile, 660-724 is typically a good score. That’s only 64 points.
Everyone should know how to check their credit scores, but there are still too many people who don’t know how to do that, or they may hesitate because they aren’t sure how their own checks could impact their overall credit rating. Employees can check their credit scores in a few ways.
- There are some free options through these organizations, but also some options that have a price tag. Employees should read carefully to ensure they don’t accidentally pay for something they didn’t intend to.
2. Online banking
- Many banks provide access to free credit score checks through their online banking apps, so employees can check for themselves.
3. Credit score apps
- There are a few apps that offer people access to their credit scores for free. These can be a good option, but employees should be wary of ads for financial products on these platforms. Sometimes even people with great scores will get offered subprime lending products. These products may not be suitable for employees, so it’s best to be aware and ignore the ads.
In many cases, the only thing shown when checking credit is the number. But depending on where it’s accessed, there may be additional details available. There is also such a thing as a credit report. It is not the same thing as the score, and doesn’t include the number. However, it’s a good thing to check, especially if the credit score seems lower than it should be.
The credit report may show mistakes that can be disputed directly with the credit reporting agency. It can also show employees loans that they didn’t get approved for. Checking the report can sometimes illuminate issues. For instance, there could be an old debt, like a car loan, that was paid off during a trade-in years prior. But for some reason, that didn’t get reported to the bureaus as paid in full. In this case, the report shows a car loan that hasn’t been paid in years, but the score is fine because no late payments are being reported. This is usually just a paperwork issue on the part of the car dealership, but it can create issues for employees in the process of borrowing or reorganizing debt.
Employees can check their credit scores as frequently as they like; these are considered soft checks and will not negatively impact their credit score. It’s important to note that their three-digit number can fluctuate from day-to-day. The trend is more important than the score going up or down on a given day. The actual score an employee sees isn’t the exact number lenders see when considering them for a loan, but they will get a good sense of their credit health, especially if they check it consistently and keep track of it over time.
2. Beware when reducing credit limits or cancelling cards 😲
Employees may be tempted to limit their risk of racking up credit card debt by lowering limits. But this can cause a few issues. Credit utilization is a major factor in determining the score. Reducing the limit too much could mean that they are often carrying a high balance compared to the limit. This can pull the credit score down even if they pay it off every month. Learn more about credit utilization here. At the moment their score is taken, a balance of $900 on a card with a $1,000 limit would negatively impact the credit score because it looks like they are using most of their available credit.
Major credit cards should also be cancelled with care, especially that first credit card held over many years. Not only could this action negatively impact credit availability, but there is a risk that closing the oldest card could also reduce an employee’s credit history, especially if their other major cards are new. That’s because it takes a while for the oldest card’s history to fall off. For up to 10 years after a card or other credit account is closed, it still shows on the credit report, but it eventually falls off. Let’s say someone cancelled a card they’ve had for 30 years, and all of their other credit cards are only three years old. About 10 years later, they could appear to only have a 13-year credit history because the record of that older card disappears. So think carefully before cancelling cards.
3. Paying bills on time is great, but…🤔
Most employees think paying their bills on time is good for their credit. This can be true, but it’s not always true. That’s because a lot of regular bill payments like rent, utilities, and internet are not regularly reported to the bureaus, except in the case of some cell phone service providers. But if an employee falls behind and their bill is sent to collections, it will negatively impact their credit. So while it’s wise to pay bills on time, a lot of that good behaviour may not earn many brownie points towards improving scores. But very late payments will cause damage to credit.
Ensure your financial wellness program includes education that covers how credit scores work, and provides employees with strategies to help them protect and improve their credit health over time. Knowing and doing are not the same. So be certain there are practical activities in your financial wellness program, and that employees are taught to turn information into action when it comes to credit.
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.
About the Real Life Money program
An annual, digital, behaviour-based program that teaches employees everything they need to know and do to become financially capable. Our proven financial wellness program that combines online workshops, microlearning, and a powerful app called Winton that puts financial capability, confidence and control into the hands of every employee. Learn more.