In middle school, you probably played some version of “Would you rather” with your friends. In a nod to this time-honored game, the Nerds thought it would be fun to create a grownup edition to help you test your knowledge of credit reports and scores.
So, when it comes to your credit, would you rather …
1. Pay a credit card bill partially but on time, or late but in full?
Answer: Pay a credit card bill partially, but on time.
Here’s why: Since 35% of your credit score is determined by your history with paying your bills on time, you should always make this a top financial priority. It’s true that you’ll rack up interest charges by not paying off your balance in full, but this would likely happen even if you made a complete payment significantly past the due date anyway. And by paying at least the minimum on time, you’re avoiding a costly late fee, too.
To be clear, it’s ideal to pay your credit card bill both on time and in full. But if you have to make the choice, making a partial payment by the due date is definitely the way to go.
2. Max out a credit card, or take out a huge loan?
Answer: Take out a huge loan
Here’s why: Maxing out a credit card is bad news for your credit utilization ratio, which is the amount you owe on your card compared with its credit limit. This number heavily influences the 30% of your credit score determined by amounts owed.
However, the balance you owe on installment loans (like mortgages, personal loans, auto loans, etc.) doesn’t affect your credit utilization ratio and will have a much smaller impact on your credit score. As a result, taking out a big loan is a much better move than maxing out one of your cards.
3. Apply for too much credit at once, or no credit at all?
Answer: Apply for too much credit at once
Here’s why: You’ve probably heard that applying for too much credit at once is bad for your credit score, and this is undoubtedly true – every hard inquiry to your credit report will result in the loss of a few points from your score. If you apply for several credit cards or loans within the span of just a few months, you should expect to see a more substantial drop. This behavior is associated with credit risk, and your score (which is mean to predict risk) will reflect it.
However, 15% of your credit score is determined by the length of your credit history. While a hard inquiry to your report will drop off after about two years, there’s no way to go back in time and start using credit sooner. Consequently, it could do more long-term damage if you never apply for credit at all.
4. Become delinquent on several bills or go through a bankruptcy?
Answer: Become delinquent on several bills
Here’s why: Again, to be clear, both should be avoided. But the answer really boils down to two factors – the length of time it will take for the items to drop off your credit report and the severity of the negative mark.
A delinquency usually stays on your credit report for seven years, which means that it could affect your credit score for that amount of time. Depending on the type of bankruptcy you file, this could stay on your report for up to 10 years, which is obviously worse.
But also, bankruptcy is viewed as a very serious negative mark. A slew of delinquencies certainly doesn’t look good, but bankruptcy indicates a troubled financial past – the hit to your overall credibility as a borrower will be severe. This will make it difficult to move forward with even simple tasks, like renting an apartment or setting up utilities, for years following the event.
Plus, bankruptcy proceedings are emotionally draining for most folks. Delinquencies can be stressful because of the endless calls you’ll get from lenders and collectors, but this generally doesn’t stack up to the psychological distress caused by bankruptcy.
For these reasons and more, it’s easier to cope with a several delinquencies than it is to go through bankruptcy.
5. Check your credit report, or check your credit score?
Answer: Check your credit report
Here’s why: Checking both your credit report and score is important, but the report has a slight edge. This is because of the direction of the relationship between your report and score.
The information on your credit report is what’s used to create your credit score. If it’s not accurate, your score will suffer. As a result, checking your report is critical while checking your score is less so – if your credit report is in good shape, your score will be, too.
Review all three of your credit reports once per year for free by visiting AnnualCreditReport.com. In the meantime, if you enjoyed this game, be sure to check in with the Nerds as often as you can – there’s lots more where this came from!
Either image via Shutterstock