Headline: Give Me SOME credit
Date: 12/12/2020
Body: I was reading a great article on obtaining a better credit score. The article is linked below:
5 Credit Factors That Affect Your Score (and 5 That Don’t) (thepennyhoarder.com)
Thru my entire life from age 8 to my mid 30s, my parents kept prattling on about how important it is to have a good credit score. To my ear, it sounded kind of like the Public School principal saying “It will be on your Permanent Record” , whatever that might mean. But, due to a constellation of personality attributes and personal conditions, I always paid my credit card in the current month, and took it on faith that this responsibility (their word) would be rewarded, someday. It was.
One fine spring day just after starting a new job in a new town, I decided to buy a house, and found one for sale. This house was immaculate and the rehabilitation process was VERY complete, and it was located a scant mile from my place of business. My parents said that I could make a more compelling case if I was pre-approved for a mortgage, and could certify that for the seller. I had a credit score of 812, and never really used it, to that point. We pulled into the parking lot of a High School, and after a 20-minute phone call with my bank, I had a mortgage commitment. THAT’S why you need to maintain good credit, as far as you can.
How is this credit score calculated?
The 3 major credit bureaus, Experian, Equifax and TransUnion each calculate an independent credit score for you, but assuming that there are no errors on your report, the scores are usually within a small range of one another. They range from 300-850, and the higher your score is, it is an indication to the financial institution (or potential landlord) that you might be a better credit risk. A higher score will qualify you for better terms in most credit situations. (As a Maryland resident, I am entitled to check your credit scores every year for free, and if available to you, this is recommended.)
To calculate the credit scores, each bureau begins with your FICO score. This is from the “Fair Isaac” company (hence FICO, clever, huh?) and they are secretive about the exact algorithm they use. But, they have divulged the 5 main attributes that they look at. Since each of them are key, I will also address the ways to improve that attribute.
| Attribute | % of Importance in Calculation of the FICO score | Reason that this attribute is important. | Methods to Improve each attribute. |
| Payment History | 35% | The best predictor of future payment is past performance of payments. | Pay off your credit card in full each month. If you cannot, contact your creditor immediately; They might be able to help you. Communication is key. |
| Credit Utilization | 30% | This is an indication of how much more financial capacity you have to make good on future debts. | This is the % of the credit available to you that is being used. To improve this number, ask your creditor for a higher limit. Or, you can open another credit card, and just do not use it. |
| Length of Credit History | 15% | The longer credit history allows for potential creditors to understand your spending patterns. | If you plan to make a significant purchase in the short-term, be sure not to close any credit accounts. DO make as many as possible as low as possible, but keep them open and do not open any new accounts. |
| Credit mix | 10% | Opening multiple credit cards could presage a future financial issue. | It’s better to have several kinds of credit (e.g. credit cards, store cards, loans) but this is a small factor. |
| New credit and “hard” inquiries | 10% | This proves that you have experience managing a variety of credit instruments. | Opening a new credit account will result in a “hard” inquiry and affect your score for 6-12 months, but this is a small factor. |
Please note that checking you own credit report is considered a “soft” inquiry and will not affect your credit score.
How do I check my credit score?
If you do check your credit score on an annual basis, you have time to improve it before making any major purchases. Also, if you get a score annually and there is a significant change, you can look at your credit report and dispute any inaccurate information. There are any number of sites online to check your credit score, but please beware that you don’t sign up for any subscriptions. If you have a checking account, your Bank should be able to help you get a credit score.
The Verdict
Your credit score is extremely important to your financial success. The higher your score, the lower interest rates will be charged to you. But, the good news is that even a modest 20-point improvement in your credit score can save you thousands of dollars over the life of the loan.
REFERENCES
How Are Credit Scores Calculated? | Equifax®
How Your Credit Score Is Calculated | Kiplinger
5 Factors That Determine Your Credit Score (thebalance.com)
Your Credit Score: Learn What It Is and How It’s Calculated | Money
Editor’s Note: The information in this blog should not be construed as tax advice. Each individual has attributes that could change the recommendations in a material manner. For this reason, please enjoy this blog, but before taking action, consult a CPA or tax professional to discuss the details of your situation.