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Six Secrets of a Credit Score

by J. Money on Monday, March 29, 2010

six secrets of the credit scoreIt’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.

4. Utilization

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?

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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!


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{ 12 comments… read them below or add one }

1 Falling Into Favor March 29, 2010 at 11:06 am

lol @ “aka places that aren’t shady”! There are enough shady places out there too. I have my payments automated too. I got a credit card when I was still in college to build up my credit so when I wanted to rent an apartment and later purchase a house, I’d have some credit to show. My parents actually paid the bill, but I paid them. They wanted to teach me responsibility but also cover me while doing so.

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2 J. Money March 29, 2010 at 3:46 pm

That’s exactly why I was given a credit card in college too my mom & dad – to help build up that credit, baby!

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3 Tom @ Canadian Finance Blog March 29, 2010 at 5:05 pm

This time last year I played every credit score game there was as I wanted to make sure I got the best mortgage rate possible.

The best move was probably how I left my student loan balance around $700 and had the bank reduce my minimum payment to the lowest possible of $25. Would have been simple to pay it off and be done with it, but keeping it around increased the length of my credit history by an extra 2 years!

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4 J. Money March 29, 2010 at 5:11 pm

Hah! That is awesome dude. It’s really unfortunate that we have to do little things like that, but just 1% can make all the difference in the world when it comes to mortgage rates! I think 1% off of mine would mean something like $200/mo – freakin crazy. So well done stretching it my man :)

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5 weddingdress March 29, 2010 at 10:02 pm

That’s exactly why I was given a credit card in college too my mom & dad – to help build up that credit, baby!

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6 Skyler March 29, 2010 at 10:04 pm

I can’t remember the exact wording but a number of months ago when I tried (unsuccessfully) to get my first unsecured loan, one of the things they cited was something like “high ratio of credit to balances on revolving accounts.” At the time I had a credit card, with a credit limit that seemed to go up a couple thousand dollars every other quarter. I rarely, as in almost never, used it. I now use it regularly but pay it off each month. This seems like a big area of confusion because keeping a low balance is “good” but no balance is “bad” i.e. having a card and not using it. Am I really missing something?

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7 Shelley March 29, 2010 at 10:40 pm

I get my credit score from creditkarma,com for free. I have never run my score through a pay-for site, but I hear that it is generally correct.

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8 Smarter Spend March 30, 2010 at 5:52 am

Skyler,

Credit scores favor using 20 – 35% of the total credit. This shows them that you use the credit card but aren’t a huge risk. Over 50% and it starts affecting your credit adversely.

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9 J. Money March 30, 2010 at 4:04 pm

@weddingdress – Gotta love it!
@Skyler – That’s a great question…financially speaking, I’d have to side w/ the “not having any balances” on your cards but *still* using them actively and paying them off, but credit-score wise who knows…Smarter Spend’s answer below seems legit ;) I’ll see if I can get someone from zendough to chime in too.
@Shelley – You can get a free score from Credit Karma? no strings attached? Interesting…I’ll have to research them later.
@Smarter Spend – Thanks for sharing that with us bro, It’s def. a fine line to walk with having stuff on credit ;)

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10 Heather March 31, 2010 at 6:15 pm

@Skyler:

Making on-time payments to your lenders is critical to maintaining a healthy credit profile, so you’ve already mastered that important step. That said, there are two other factors that help determine your credit score: credit utilization and a strong credit history. Credit utilization is the ratio of your credit card balances to credit limits, and while it’s definitely important to keep your utilization percentage low, it shouldn’t be non-existent. In other words, lenders also look at your complete credit history to determine whether you have been able to successfully pay off debt and credit accounts in the past.

If you continue to build long-term credit relationships, maintain a diverse mix of credit accounts, and keep making payments on time, you can make yourself more attractive to lenders and you may increase your chances of obtaining the best loan rates.

If you have any further questions, we would be happy to discuss them with you. Please give us a call at 312.985.3299.

Heather Schneider – education director for zendough.com by TransUnion

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11 Skyler March 31, 2010 at 7:13 pm

Thanks for the comments. It clears things up a bit. I understand that “credit history” doesn’t strictly mean how long you’ve had the accounts. Just having one doesn’t mean that you’re using it wisely. I’ll be continuing to use my cards, and paying them off each month.

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12 J. Money March 31, 2010 at 10:39 pm

Thx for helping us out Heather :)

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