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Credit 101

Credit 101
May 11, 2020 Torrey Park

Credit is a confusing thing. Companies say they can fix your credit in less than a week for a fee. Auto dealers say they will finance your new auto, no matter what your credit score. There are tons of YouTube videos, websites, and blogs about fixing credit or no credit necessary. Are they right? Or wrong? Why is credit so flippin’ important? Misinformation is rampant. Fraud and scams are even more prevalent. People are desperate for a quick, easy fix for credit.

In my mind, the credit industry is reminiscent of the diet industry. Everyone is looking for a pill, potion, or plan to lose weight.  Some of them work, some are dangerous, there is a lot of desperation. Everyone wants to feel like their ideal self. But In our hearts, we know the best way to lose weight is boring. There is no magic. Most of the time the formula is simple, watching what you eat and moving your body to create a calorie deficit. Once you hit your ideal weight, you don’t stop there. You have to keep exercising and eating right for the rest of your life, or you are gonna undo all that hard work. Credit is much the same. There is a pretty simple formula for building good credit but it requires action and attention, all the time!  What’s even worse, it really only takes a couple of small mistakes to go from great credit to average or less. So let’s talk about credit.

What is a credit score and credit bureau?

*Sigh* There are companies out there that gather your personal information, archive that information, and then synthesize all that information into a nice round number between 300-850. The higher the number, the more “creditworthy” you are and this affects so many things. The credit bureau is that long list of information the three credit companies, Transunion, Experian, and Equifax, are collecting on you. Name, Social Security, Addresses, Work History, Inquiries, Credit Lines, Loans, Collections, Public Records They take all that information to plug it into a semi-secret formula and out pops a number, your credit score.

We know the rough estimates on how a credit score is created it is:

  • 35% of your credit score is your payment history. That means if you’re paying all of your bills on time for an extended period, that will weigh heavily in raising your score.
  • 30% of your credit score is your debt utilization. Basically the lower the percentage of credit that you are using the higher your credit score should be. Maxed out credit cards and lines of credit are bad for your credit score.
  • 15% of your credit score is the length of credit history. Older credit lines mean that you have experience dealing with debt and that will play favorably on your credit score. It’s not a good idea to close older lines of credit.
  • 10% of your credit score is having an assortment of different types of credit lines. They’re looking for a car loan, a credit card, and possibly a home loan. They’re looking to see how you handle different types of debt because it’s a good indicator of how you handle future Debt.
  • 10% of your credit score is new credit inquiries. If your credit is pulled a lot in a short. Of time that will negatively affect your credit score.

The good news is if you pay your bills on time and keep your balance is low you’re more than halfway to good credit. Being intentional about applying for new lines of credit and keeping them open is a majority of the other half of that battle. So now that you know the components of good credit, what are some things that you can do to improve your credit score?

Amber Robinson, Financial Education Coach