Credit 101- Getting to 850

What is credit?

In short the closer your number is to 850, creditors are more assured that you will pay them back.

Ex. If I asked you for $1,000, and you looked up my credit score which is above 750, you could rest assured that I consistently pay off my debts and you will get your $1,000 back in a timely fashion.

Credit is a big deal because it determines things like if you need a cosigner for the apartment you would like to rent, or car you want to lease.  If your credit is between:

300-560:

• You may be denied credit because banks are unsure if you will pay them back

560-700:

• You will most likely be asked to pay higher down payments or a insurance on top of your loan principal and interest
• Co-signer may be necessary
• The amount you asked for will be denied or the item you are purchasing cannot be purchased

700-850:

• Most likely to get the lowest interest rate
• Lower payment for monthly lease or loan payment
• Higher probability of qualifying for the amount you requested
• Likely to receive additional perk not advertised to the general public

How is credit calculated?

Payment History, 35%:

• Do you pay your bills on time? This includes everything from phone bills to credit cards. Late payments lower your credibility which may lead to a lower score.

Amounts Owed, 30%:

• Use as little of your credit as possible. Most creditors recommend using less than 30% if you are overachiever 10% or less. The less credit you use the more responsible you look.  My credit card limit is $8,900 the range I stick to is $890-$2670.

Length of History, 15%:

• The length of your credit speaks to how responsible you are. If someone asks you for money and for 10 years they have a record of paying back versus someone with 1 year, the person with 10 years is a safer bet. Having a longer credit history is positive because it gives more information about your spending habits. This is why so many parents open a credit card for their kids. Opening too many lines of credit at once shortens your average history of credit.

New credit, 10%:

• Opening credit cards are good if done responsibly. However, opening several accounts in a short time lowers your credit age and also impacts your sore because it’s a hard inquiry*.

Types of credit used, 10%:

• We know diversity is KEY, this also applies to credit**. Having varying credit lines such as credit card, car loan, mortgage, or loans can help your score. This shows responsibility and credit experience.  If you are in HS a credit card is an option. College you might have a credit card, paying rent, or have a car. Getting a credit card early and using it responsibly can start at any age.

*Soft Inquiries:

• A credit report check that does not affect your score. Usually used by individuals to check scores or lenders.

*Hard Inquiry:

• A hard inquiry affects your score by 5 points or less. This is partly why opening a ton of credit is not good. Hard inquiries count against your credit score for one year and are removed within two years.

**Installment

• Something you pay on specific terms for a defined period of time. Think mortgage or car loan.

**Revolving

• Credit that allows you to borrow repeatedly.  Think credit card or home equity line of credit.

How do I check my credit?

Creditors see your FICO score by looking up three reports Transunion, Equifax, Experian. You can access these reports, not the score, for free yearly on AnnualCreditReport.com. It is important to check these often to notice any inquiries on your report that you are not responsible for the loan, credit cards you didn’t open, or if there is a missed payment that shouldn’t be there. If a major purchase is on a horizon look at all 3 at once, if you are just checking, check one every 4 months, so you can catch things and fix them on a regular basis.

You can also download an app like Credit Karma which actually gives you your score, FREE of CHARGE monitors important changes on your reports, tells you what affects your credit scores and how to improve them, also CK offers personalized recommendations for better rates.

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So you know what credit is and you even know your credit score…what next? If you pay rent, have a car, credit cards, student loans, you are already on your way to building credit. I am not pleased about my student loans but I am grateful that as I pay off my loans on time, my credit is benefiting. Credit reports are updated in 30-day cycles so it is possible to see change regularly.

Quick tips on how to improve your credit score:

1. Pay bills on time.
2. Keep the balances on all credit cards/revolving lines of credit under 30%.
3. Pay balance in full every month, for credit cards.
4. Pay off debt that is 3% interest rate or higher as quickly as possible/
5. Try not to close your credit cards.
6. Do not get new credit accounts unless it’s needed.
   1. No store cards even if you get 5% off your next purchase, this is still a credit card!
7. Obtain a mix of credit types (be responsible with opening and using credit)
8. Be smart about it. Treat your credit card like cash. If it’s not in your budget don’t buy it!
   1. If you make a $1000 purchase you should have $1000 in your checking, will have it by the due date,- interest rates are brilliant robbers of YOUR money.

Why do I keep stressing paying off credit cards in full?

APR – annual percentage rate. APR is why credit cards can be the devil and how companies make their money. Don’t give them your money, take theirs! When you only pay the minimum due the rest of the balance is charged whatever interest rate the card has, probably between, 16-24%. Which leads to compounded interest, when the interest owed becomes part of the principal or balance. The principal is the original amount borrowed. Balance is how much you have spent or how much you currently owe.

If you have a $100 debt and it accrues 10% interest every month, then the first month you will be charged ten dollars (100 x 0.10). With compound interest, that ten dollars is added to your original debt, so now you have $110 of debt. The second month you are again charged 10% interest, which this time comes out to eleven dollars (110 x 0.10), so now you have $121 of debt.

If you can’t pay in full, then pay the minimum.

How do you pay credit cards:

In App, you can transfer money. Credit card bill is $200 you can transfer from your checking to your credit card and you’ll probably see a zero balance in 2 business days. This works in my Bank of America app. For my Chase, I can set a recurring payment so if you want to make sure at least the minimum is paid you can set a recurring for $25. You can also call your company if anything. It’s best to ask when you apply for the credit card what the best way to pay is.