Broker Check

Did we learn about Credit Scores in school?

| February 12, 2019
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I remember learning about the components of a plant cell while in school, but never anything about a Credit Score.  To this day I have only used what I learned about plant cell structures once in real life, and that was to answer a question on Jeopardy.

There is a little bit more that goes into a credit score than people realize, and it’s important just to understand how they work, how you can seriously hurt them, and how to build and maintain them.  Let’s breakdown the pie chart a little bit;

  • Payment history 35%
    • This is exactly what it sounds like.  When I pulled up my credit score from annualcreditreport.com I found that I was 30 days late from one payment 6 years ago from a Best Buy credit card.  It was pretty frustrating to see that, but it makes you never want to miss a payment again.
  • Balances & Utilization 30%
    • The balances make up what is called the Utilization Ratio.
    • Utilization ratio = Credit Balances/Credit Limits
      • If you have a $300 balance on your credit card with a $1,000 limit than your Utilization Ratio is 30%
    • What is a good ratio? The lower the better, but anything over 12% is going to start counting against you.  
  • Credit History 15%
    • This is the length of time you have had credit.  This makes it difficult for younger people to have high credit scores so the sooner you establish credit the better for your score.
  • Applications 10%
    • Whenever a creditor checks your account you get a little ding to your score.  This means if you are opening up a credit card and the credit company is checking your credit you will get a small ding.
  • Variety 10%
    • Variety is having different types such as credit cards, car loans, student loans, etc.

These will hurt your credit score

  • Missed payments
  • Default accounts
  • Public records data (e.g., tax liens, judgments, bankruptcies)
  • Excessive credit report requests

Help yourself and DO THIS…

  • Have a list of your credit accounts and check once a month.
  • Automate minimum payments to creditors on all loans.
  • Keep track of your Utilization Rate.
  • Pay off any revolving debt.
  • Open additional credit cards or request higher credit limits on current cards (don’t do this if you are close to buying a home)
  • Clients should generally keep cards open (even if they are not in use) to keep utilization ratio low and increase length of credit history.
    • Clients are protected from unauthorized charges by federal law, which limits exposure to unauthorized use to $50.
  • Have a variety of credit such as auto loans (even if paid off early)

Here’s my suggestion

Go to www.freecreditreport.com and get a FREE detailed report on your credit history.  The free part doesn’t include a score, but most major banks offer that as a service now anyway.  YOU CAN GET THIS REPORT WITHOUT IT HURTING YOUR SCORE ONCE A YEAR!  You can choose from any of the 3 major credit companies (Equifax, Experian, and TransUnion).

The most important thing about maintaining a good credit score is understanding it and being on top of it.

Good luck out there!

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