Be Brave Not Safe

I just had the opportunity to perform a minor rescue mission for our youngest son, Evan. You see, he is graduating from high school next week. And, he was supposed to bring his graduation cap and gown to school for rehearsal. But, he forgot it at home. So, I jumped in the Rover and delivered the package just in time for his 8:45am event.

On the way to our high school I passed a few local car dealerships and made an interesting observation.

2 dealerships, in particular, pretty much across the street from one-another, have tantalizing (to some) messages on their billboards. They were:

1. Credit Forgiveness
2. Credit got you down? Stop here.

In both cases, they are trying to entice people with a less than stellar credit score to stop in and purchase their vehicle there.

To be clear, most ANYONE can obtain credit (e.g., get a loan) – somewhere. However, the COST of that line of credit is directly based upon our credit score.

The “cost” may include the following factors:

• Interest rate, or how much we pay for the money borrowed
• The resulting monthly payment
• The amount of down payment that must be made
• The need (or not) of a co-signor
• Collateral, or what the lender wants to lay claim on if we are unable to pay back that loan

So, our goal must be to maintain the best credit score possible, to minimize the cost of any line of credit we may need to obtain (for a credit card, home mortgage or school / auto loan). But, how does one do this? And, are we REALLY in control?

Like most things in life: we are 100% in control! We must simply take charge!

First, it is important to discuss the make-up of our credit score. We’ll then cover how our credit score is interpreted by lenders (and others) who rely upon this information to make decisions about our credit (and other) worthiness.

I use Mint (a free, online financial management application provided by Quicken). You can learn more about my experience and recommendations using Mint as outlined in several posts, by clicking here. What follows is some very user-friendly information I’ve gleaned from Mint…

What makes-up our credit score?

Following are key attributes, in the order of impact.

• Credit Usage: Makes up to 30% of our credit score. Unlike other credit attributes, credit usage has no history and is re-calculated every month. More specifically, Credit Card Usage shows how much we spend on credit cards as a percentage of our total available balances (our credit limits) for all of our credit cards. A high percentage could indicate that we don’t have our spending under control and could be a greater risk for defaulting on our payments. As such, it is important to try and keep our credit card usage under 30%.
• Payment History: Plays a critical part in determining our score. Making payments on time shows potential lenders how reliable we are in paying back what we owe.
• Derogatory Marks: Indications of poor behavior in the past when it comes to being responsible about credit. These include accounts in collection, liens, and bankruptcies—things potential creditors are definitely wary about. No matter the reason, these negative marks will likely stay on our credit report for seven years or more.
• Age of Credit: The average amount of time we’ve had all of our open credit accounts and has “medium” impact on our credit score. It measures the longevity of our credit history. Opening several accounts in a short period of time may indicate a great level of risk, so avoid opening lots of credit accounts unless ABSOLUTELY required. Be sure, also, to keep our old accounts open with a good payment history for each.
• Total Accounts: The number of accounts we have, which may be an indicator of how credit worthy lenders think we are. That said, we shouldn’t go crazy and open a lot of accounts, though, because the average age of credit is more significant than the number of accounts when calculating our credit score.
• Credit Inquiries: A count of all hard credit inquiries placed on our credit report. What makes an inquiry “hard” is when we authorize a lender to get our credit report for their benefit, so they can evaluate us when we apply for a credit card, a loan, or other form of credit. If we get our own credit report or go through an agent such as Mint to get it for us, it’s called a soft inquiry and it does not affect our credit score.

Now, some might ask: Who the heck tracks all this stuff, and where do they get the information? The answer, is quite simple: There is a credit monitoring big brother, who knows EVERYTHING about our credit worthiness.

In summary, there are 3 credit reporting agencies (Equifax, Experian and Transunion). These agencies receive information from all forms of credit providers including, but not limited to:

• Credit Card companies, including department store (ALL forms of credit cards)
• Mortgage companies
• Banks
• Etc.

The credit reporting agencies receive this information and then render a credit score based upon our credit providers’ experience with us. So, taking into account the attributes that make up our credit score, these 3 separate agencies provide a score to anyone inquiring upon our credit worthiness.

It is now important to understand how our credit score is interpreted…

Interpretation of our credit score

At a high-level, there are ranges of credit worthiness. Following are general guidelines on the scoring / ranking (this may vary depending on the lending institution):

• 280 to 590: Color code = Red which translates to: Poor
• 590 to 640: Color code = Orange which translates to: Not Bad
• 640 to 720: Color code = Light Green which translates to: Good
• 720 to 850: Color code = Dark Green which translates to: Excellent

Bottom-line: The lower the score the more difficult it will be to obtain credit and the more costly it will be, from those willing to provide us credit, due to the high risk (based on our past performance). And, conversely, the higher the score the more likely that we can easily obtain credit and the lower the cost it will be.

So far, we have covered the importance of a good credit score as it relates to obtaining credit. But, did you know, that employers are increasingly checking the credit score of job applicants? Make sense to me! That is, if I’m about to hire someone I want to know if they are reliable (in ALL aspects of their life). And, their credit score is an indicator of their financial reliability. So, I want to know this.

Realizing that we all need some form of credit and our score can impact many aspects of our life it becomes crucially important to take steps to create and protect our credit score by ensuring we:

• Establish good credit early – For those just starting out (teenagers graduating from high school etc.) a good first step is to apply for a no-fee credit card. The credit card company will likely issue a card with an available line of credit in the neighborhood of $300. Once the card is received, however, do NOT consider this free money. It is not. It is very expensive money. Instead, use the card to buy gas for the car and other normal expenses. Then, pay it off EVERY month – without exception. Doing so is a first step in establishing credit history so that when you apply for a larger line of credit it will be less costly to you.
• Minimize credit usage – Not only is this important to maintain the highest possible credit score, but it also dramatically lowers the cost of living. That is, every time we buy something on credit (and don’t pay that balance off each and every month) the more the acquired item or service costs us. If you are struggling with debt (like I was), you are encouraged to read my article on Debt Eradication by clicking here.
• Make all payments on time, every time (even if it’s just the minimum payment due), and remember that all types of credit payments count!
• Protect our credit profile by ensuring that no-one can take out a line of credit in our good name. There is a simple and (almost free) way to do so. Click here to view my article covering this topic.
• Watch it like a hawk – If you use Mint, they offer a free credit score dashboard that is updated monthly. Doing so ensures we know exactly where we stand and if things are getting better or worse.

Now that you know how crucially important our credit score is you are now in control. Right?

Right!

All the best!