It’s been a while since I’ve talked about credit scores (mainly because they kinda bore me), but they really ARE important to keep in mind. Especially if you’ll be buying a car or a home soon. Whether we like it or not, our entire credit history will show up and be used to determine what our interest rates will be when we go to finance. Of course, if you were really a pimp you’d just pay all in cash!, but we all know that’s realistically pretty hard to do ;)
So, if you’ve ever wondered WHAT exactly makes up these “credit scores,” read on my friends! The explanations of these breakdowns were forwarded over by a good PR friend of mine (and long-time reader) Erin, and come from a new site out there called zendough.com. And of course, I sprinkle on my own thoughts at the end of each. Enjoy!
The Six Secrets of a Credit Score:
1. Payment History
A history of late payments, even by a few days, can be potentially hurtful. Payments received beyond 30 days of the due date are considered late. When lenders report credit data to credit bureaus, they typically lump payments that are late one day in with those that are late 59 days. ME: Another reason to have a lot of this stuff Automated! Or at least paid manually as soon as you open up a bill…follow my Look at Bill – Pay Bill – Forget About Bill method if it helps.
2. Credit Balances
Similar to the utilization issue, credit balances current and past provide insight into issues of financial liquidity and prudent borrowing. Historically maintaining high balances on key credit accounts will likely have a negative impact on a score. ME: Which is why having a HIGH credit line – even if you’re not going to touch a dime of it – can be important. Owing $1,000 on a $5,000 line looks a LOT different than $1,000 owed on a $50,000 credit line, ya see? Now if you’d get yourself in trouble by having a higher limit, then obviously don’t even think about it. But if you can control yourself, then it might be worth the quick 3 min phone call to just ASK to have it raised. It really is that easy sometimes.
3. Recent Credit
A consumer that opens a number of credit accounts in a narrow time frame may be interpreted as experiencing cash flow problems, particularly if utilization of his or her previously existing available credit is very high. In addition, a large number of credit inquiries in a short time frame may also lower a score. However, multiple inquiries for a mortgage or auto loan will be counted as only one inquiry each, enabling consumers to shop for favorable rates without fear of lowering their score. ME: I don’t really know much about this one :) I just open up cards and run credit reports (for free) when I need them. Unless you’re always trying to get into something, you should be fine. Probably best not to play “open one card to pay off another” – eventually you’ll slip and get slammed with God knows what.
Having access to credit is one consideration, and how much of that has been tapped into is another. An individual who has “maxed out” his or her credit cards and/or other lines of credit may not be able to obtain any additional credit or credit at the best possible terms. The lack of liquidity will deem these consumers high-risk in the eyes of lenders. ME: Falls under the same sort of thing as #2′s “Credit Balances” scenario. Being maxed out doesn’t do anything good for you.
5. Depth of Credit
Having a strong, long history of prudent credit use is ideal under any credit scoring model. But as important as it is to have long-term credit relationships, a diverse mix of credit accounts is also beneficial. ME: Which is why it can be important to hold onto at least 1 credit card or line of credit for a long period of time, even if you never tap it (or better yet, just tap it once every couple of months or so just to keep it “active”). I’ve kept my original card from way back as a freshmen in college – since 1997!!!! haha…I’ve only really been using it the last few years, but it’s helping keep my score high as it shows my entire history…including the times when I was late and didn’t care back in college too – oops. Oh, and this is also why you hear people say to open up a card or two even if you’re not going to use it ever – it helps build history. Mrs. Budgetsaresexy had zero history when we bought our house and was advised to open up a card and make a quick purchase (and then pay it right off) to start having a base. We also opened all our “house” accounts under both our names to help establish even more of a history. But again, you only do this if you can control yourselves ;)
6. Available Credit
Maintaining low balances on credit cards and open lines of credit will be a positive factor in generating a score. The typical benchmark is to keep these balances at or below 30% of the total available credit. ME: Basically the same thing I’ve already commented on twice now. haha…I guess the credit score companies break it all down differently?
I hope this makes sense to y’all! It may seem a lot to grasp at first, but once you do you get to hold onto it all forever :) Or at least until the industry changes things up…either way, I hope it’ll be another year until I write about it again. Haha…
Oh, and if you’re looking for GOOD places to check your credit report for free (aka places that aren’t shady), check out AnnualCreditReport.com – it’s the only site that I’m aware of that’s approved by the FTC. Keep in mind though that you only get your credit *history* for free, if you want your actual score (which I usually do, cuz who knows when the next time I’ll go and check it out will be?) you’ll have to pay the $6 or $10 or whatever it is… zendough.com may be pretty cool too, just haven’t been able to check it out yet. Happy Monday!