Hi guys! It’s me again. Okay, credit scores might not be the hottest topic out there right now, but it should be!!! I promise not to make this too dull, but I really feel like folk should be a little bit more concerned about their credit score and little less concerned about, well, pretty much everything else!
Everybody wants to talk about the American Dream, which is the big house, white fence, forty acres and a mule. But what they don’t tell you is that, most Americans buy that stuff with what? CREDIT!!! And the problem today, with low income, impoverished or minorities, is that we have yet to figure that out.
So, today I just want to go over the basics. What is a credit score, what is it important?
A credit score is a number that is calculated based off of your credit history. The score ranges from approximately 300-850. There are three major credit bureaus: Equifax, Experian and Transunion. Some creditors report activity to all three, some report to one or two. It is important to know all three of your credit scores because different credit companies pull your credit scores from different credit bureaus, which causes you to have different credit scores with each company. You should know your score for each one, as when you apply for new credit, the company you want to open a credit line with may pull Experian, Transunion or Equifax.
Within your credit score, there will be a sections catering to each line of credit that you have had, pretty much, ever. Each line of credit will note who the credit is/was through, when the account was opened, the longest time you’ve ever been late making a payment, and the current status of the account (if it is open, closed, passed due). Then there are little boxes with the word “OK,” indicating that you paid on time, or “30,” “60,” “90” etc. The numbers indicate the number of days you were late paying that particular bill that month.
The following is a breakdown of how much each category affects your over all score:
Amounts owed: 30%
Payment History: 35%
New Credit: 10%
Length of Credit History: 15%
Credit Mix: 15%
What does each of these categories mean?
Amounts Owed
How much money do you owe to creditors? What percent of your available credit are you using? A good rule of thumb for an optimal score is to keep your ratio of used to unused credit to 30%. In other words, if you have $1,000.00 in available credit on your credit cards, you should only keep a balance of $300.00 or less.
Payment History
Do you pay your accounts on time? Having an account that is 30, 60, 90 or more days late, adversely affects your credit score. Once, I forgot to pay a credit card and I was over 30 days late, my credit score went down nearly 70 points! Imagine if I had been 60 or 90 days late!
New Credit
How long has it been since you opened your last account?
Length of Credit History
What is the average age of your accounts? Having a credit history that is 10 years old is going to reflect more positively than only having 1-2 years of credit. The sooner you start, the better off you may be!
Credit Mix
Having different types of credit shows a well-rounded borrower. The different types of credit are credit cards, retail accounts, installment loans, and mortgage loans.
Granted, this is a very brief overview of credit scores, but at least you have a general understanding of what a credit score is.
It may be scary when you look at your credit score and see a low number, but just remember, nothing lasts forever! Your credit score is constantly changing, and you can make sure that it changes for the better by making good credit decisions. As time passes, the negative items on your credit score will disappear .
Questions, comments, concerns? Suggestions for follow up posts? Leave a comment below!
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