What's Your Credit Style?

During my years in mortgage banking, I noticed people fall into one of four distinct credit styles:

Early Bird: Early payers carry no credit card debt. If you’re an Early Bird, you probably pay all your bills, in full, as soon as you receive them. Your mortgage payment or rent, auto loan, and other regular monthly expenses are always mailed far in advance of your due date. Your credit scores are usually extremely high. Sometimes Early Birds are so diligent about their credit that they close old accounts they no longer need. Since credit history comprises approximately 30 percent of your personal credit scores, closing old accounts can lower your scores significantly. Credit is a convenience rather than a loan for an Early Bird.

Punctual Polly: Pay on time and pay most of the balance. Punctual Polly typically plans a bill-paying evening each month, when all checks are written and online bill pay occurs. Bills are usually paid in full although major purchases may be paid down over a few months. While credit serves as a convenience for Punctual Polly, occasionally it’s used as a short-term loan. Credit scores can be as high as Early Birds.

Hang In There Harry: Usually pays on time. However, payments tend to be just a little more than the minimum amount due. They carry substantial credit card balances. Hang In There Harry is faced with monthly expenses greater than monthly income. Either there is ongoing spending, as if credit cards are discretionary income; Hang In There Harry’s income does not cover basic living expenses; or there was some type of life-upending event that caused a dramatic expense increase, which is being slowly paid off. Whatever the reason for this financial mire, Hang In There Harry could transition to Sinking Sam if more robust payments cannot be made on these credit card accounts. If you carry a balance higher than 40 to 50 percent of the credit limit on a personal account, your credit scores drop. To achieve and maintain very good credit, you must keep all balances below 30 percent of your limit on each account and pay bills on time. To raise scores as rapidly as possible, keep all credit balances below 10 percent of the account limit. If Hang In There Harry has very high account limits and maintains balances below 30 percent on all accounts, credit scores will probably be high enough to qualify for most purchases with a reasonable interest rate. With mostly on-time payments plus high balances, credit scores probably range between average and low.

Sinking Sam: Pays late and only pays the minimum amount due. They carry high balances and use credit cards to cover basic expenses. During the past two years of the economic crisis/recession, a debt reduction trend started among Americans. This has been accompanied by increased savings and more consciousness of the need to create a positive credit history. Sinking Sam may desire to reduce debt, but it’s not happening. Sometimes this is an ultra busy person, who doesn’t make time to pay attention to bills or debts until credit card companies start closing accounts. More often, Sinking Sam is someone who cannot cover expenses so credit cards are used as a monthly personal loan. If you’re in the midst of a personal financial crisis caused by job loss, an illness, or some other catastrophic event, excellent personal credit can be damaged quickly. Sinking Sam’s credit scores will be very low as a result of ongoing late payments combined with high account balances. However, credit cards may provide the only means of support during a cash-short situation. If you’re doing the best you can in unfortunate circumstances, don’t beat yourself up. Survival trumps credit ratings! And the good news: You can rebuild your credit. But . . . if you’re in this circumstance because you impulse buy far beyond your ability to pay, get a grip on reality; change your ways. Sinking Sam, who created this mess with destructive practices, can transform into Punctual Polly when behaving responsibly becomes more important than the fabulous find.

While you may never be obsessive enough to be an Early Bird, being Punctual Polly is achievable by most of us. Since credit management is mostly smart habits, we can change our behavior to achieve our credit goals.

To build the best credit scores for your business, you will want to adopt some Early Bird rituals because D&B rewards you with the best corporate credit rating when you pay bills before creditors cut invoices.

Which credit style are you? And who do you aspire to be?