Your Credit-Whats On It?
By Genevieve Dobson
I was honored to be a guest blogger for Black in the Bay this month and want to share with my readers what their readers were able to learn. Below you will get to read all about your credit, your credit score and how it all works. This is a simple to read break down to keep you from having to guess whats on your credit. Thanks to all of my readers for continuing to support me and my company Degrees of Success!
You ever feel like everyone around you must have been given some secrets to credit that you just were never made privy to? Well, it just may be possible that they did. People around you are getting 0% interest rates on cars, buying homes with a 3% mortgage loan and traveling on points, so why aren’t you? It’s all because of your credit score. Without a credit score somewhere in the mid 700 range you simply will not qualify for all the benefits that others do. Those with a low credit score will spend over $200,000 more in their lifetime. Fortunately, credit score secrets are not all that secret. This is the part where I give you some great “inside” information to help you start your way down the path to financial freedom.
First things first: You have to understand what your credit score is made up of before you can even begin to make corrections, so here goes.
- Payment History is the most important percentage of your credit score making up 35% of your score.
- Outstanding Debt is the next on the list. If you utilize too much of your available lines of credit it will adversely affect you. This makes up 30% of your score.
- Time is a very important factor as well. 15% of your score is based on the amount of time you have maintained your credit history.
- The type of credit you have is also important. Lenders want to see you have a balanced portfolio like a mortgage, a car loan and a few credit cards. This is another 10% of your total score.
- Equally as important as the type of credit you have is the new credit you try to utilize. The number of credit inquiries should be kept to a minimum to avoid a decrease in your score (keep in mind you can pull your own credit as often as you want and your score is never affected).
Now that you have some bullet points and a pretty little chart let’s explain what it all really means:
For starters, making payments on time is the most obvious factor to your credit score. When you do not make your payments within 30 days on credit cards, car payments, student loans or your mortgage the credit bureau will receive a report from the lender letting them know you are past due. Here is something you may not have known: If you are only 30 or 60 days past due once every few years or so you won’t see a major decrease in your credit score. Matter of fact, if you get back on track in that time frame your score will almost snap back to exactly where it was. However, once you are 90 days past due your credit is drastically reduced and it will take some time to recover. Word of advice, don’t let it get to 90 days!
Now if you noticed I didn’t mention things like your water bill, electric bill and rent because for the most part these companies don’t report past due payments until you are seriously delinquent. It’s a good idea to not push them past 90 days either but you may get away with being 30 and even 60 days behind without anyone even noticing. This may allow you some time to pay on the debt that is being reported monthly but only do this when absolutely necessary. Don’t dig yourself a hole you can’t get out of.
Now here is where it gets fun! Your outstanding debt makes up a large percentage of your score (30%) so if you know how to play the game you can make sure your score is always high when you need it to be. The trick is to never utilize more than 30% of your credit cards available limits. It is best to simply use the card for a few hundred dollars a month to pay for things like gas, food, your water bill and the cable bill that you would have to pay no matter what and take the same money in your bank account and send it to the credit card company within 28 days (setting up automatic withdrawal is a great option). This way you are using the card responsibly every month and showing lenders your high balances at the beginning of the month but your balance of $0 on the card at the end of the month (the card will need to be paid in full prior to them reporting your balance to the bureau). Nothing will increase your score faster than this step!
You may have noticed that we are talking about credit cards here…so what if you never had any credit cards, don’t have a mortgage and don’t make car payments? Well it sounds good but it means that you have no way of having a good credit score because 75% (including the 10% that is based on the type of debt you have) of your score is based on these factors. However, if you had all of these things in the past you can still have a great score if you followed the rules and paid everything on time and now have a zero balance. Be aware that lenders are looking for you to have a balanced portfolio and never having owned a house or been given a car loan or have any credit cards is a sign of not being worthy for these things and they will be reluctant to lend to you in the future when you need it.
Paying off your credit cards like I mentioned before is a great thing to do each month but do not close your credit cards completely because you will lose time value. The amount of time you maintain your credit cards or pay off your mortgage or stick with the same bank for your auto loan shows a time commitment that you can’t buy. Time passes at its own due time and there is no way of fixing time, changing time or making it seem as if more time has passed then it did. Therefore, this 10% of your score is about waiting. It takes several years before lenders consider your time as being a good factor in your score. You want to have an average of open, good standing credit on file for 7 years. This means that card you got in college should never be closed even if you are paying a yearly fee. The fee may just be worth the time value.
Side note: If you are a parent you can add your child to your credit card as a user and allow them to piggyback off of your good credit and gain the time value that they could never get on their own.
Lastly, credit inquires are seen as the least important factor in determining your credit, however, don’t underestimate its power to destroy your credit score. Many different companies pull your credit for various reasons so it’s important to know who and why. If you are shopping for new car insurance the company may tell you they want to review your credit or they may simply ask for your social. Just because someone asks for something doesn’t mean you give it to them. Tell them no. Have them guesstimate your price based on all other factors and if you know your score, which you should, make sure to tell them what it is. You may also think twice about switching cell phone companies and refinancing a vehicle based on how many inquires you already have. On average you should try to keep your inquiry count to about 2-3 every 2 years. Once you start to have more than that is when you begin to see your score drop. Plan your goals out ahead of time so you don’t need your credit pulled until you are sure it’s a good time to do it.
These are the beginning tools to get you on the road to having a credit score to be proud of. It doesn’t come easy and you can’t expect it to happen overnight either. Just like anything in life, to get a good credit score you have to work at it. However, the reward of turning the key to your first home or driving off the lot after buying your first brand new car will make the effort all worth it!
Know your score! Very poor: 350-580; Poor: 581-640; Fair: 641-699; Good: 700-750; Excellent: 751-850
Originally posted by Black in the Bay.
Thanks Black in the Bay for allowing us to be a guest blogger this month.
First, no, having a lot of crdiet cards is *not* bad for your score. There are plenty of people with dozens of crdiet cards and a FICO score over 800. Note that there are actually different types of FICO scores, optimized for different purposes (e.g. crdiet cards, car loans, mortgages) and they are affected in slightly different ways. Having variety in your crdiet report counts for a small percentage of your score, but not large enough a percentage for you to stress over.What does matter about having multiple cards is your overall account age, and your ratio of debt to available crdiet. As such, my general advice is to *avoid* closing accounts (and I’ll elaborate on that). If you have $2000 of debt (or you use $2000 each month, and pay in full, which is definitely best) and you have $15000 in available crdiet, your utilization will be good. If closing cards drops your available crdiet to $4000 but your debt/monthly charges remain the same (they look the same on a crdiet report) your score will drop *significantly*.Finally, keeping those accounts open keeps the overall age of your portfolio higher (and continues to grow it). This is an important part of FICO. If you aren’t using a card, but it isn’t hurting anything, dust it off from time to time for some quick use* and toss it back in the sock drawer.*Note that a crdiet line which hasn’t been used for a long period of time actually factors less on your score. By using it again it applies freshly, and thus keeps your score healthier. This also helps to avoid account closure due to inactivity.If you close a card, do it because it isn’t worthwhile (e.g. if that old Orchard Bank card costs money every year, and isn’t doing anything for you, you can consider closing it out).
Thanks Papi for your comment. Its good to see you know just how to manage your debt.