A person’s credit score can have a major impact on big financial purchases in someone’s life, and this guest contribution by Andy Shuler discusses common questions about credit such as: what is credit? What does your credit score start at? What can you do to raise it?
Let’s let Andy answer that first question first…
What is credit?
If you asked me this question when I was 18, I would’ve said that this is the little piece of plastic that I keep in my wallet that I use to buy as much as I want, whenever I want, and only must make a minimum payment each month.
If you’re asking me this now, at 28, recently married and first-time homeowner, I would say it’s the single-most important thing that I have that shows I’m a credible lendee. It shows that I’ve borrowed money in the past. It shows that I’ve paid it back. It shows that I’ve paid it back on time.
And most importantly, it shows that I can be trusted.
Having a solid credit score will allow you a greater opportunity to borrow money for things that might not normally be purchased out of pocket, such as a house, car, boat, anything, or even just simply when applying for a credit card. Credit, in my opinion, is really showing exactly how reliable someone is with their money.
What does your credit score start at?
You can find this in many ways. My preferred method is simply to download the Credit Karma app.
You will be asked to enter in some personal information (which is essential as they’re basically looking at your entire life health records (financially, of course) and then you’re all set. You can open the app as frequently as you’d like and see what your score is.
When I first started monitoring my credit, I was scared that every time I looked at it, it would negatively impact my score. What I learned was that I was simply wrong.
Whenever your credit is pulled for a hard inquiry, such as a loan or credit card application, that will negatively impact your score as you’re asking for more money, or more credit, but simply just checking your score is an example of a soft inquiry and that has no impact whatsoever on your score.
So, what does your credit score start at? When I first started monitoring it, I was in the low-600’s, or in the “Fair” category, per the Fair Isaac Corporation (FICO), as FICO was the first company to assign a score to determine credit risk.
My credit has significantly increased since then, but it definitely wasn’t easy. It took a lot of work. In the last 6 months alone, my score has jumped up over 60 points and I am now into the “Excellent” score rating per Credit Karma. I’m not saying this to brag – I’m stating this to show that it can be done, and to explain the process that I took.
What factors determine my overall score?
This essentially shows how often you are applying for new credit. Why is this important? The more you’re applying for new lines of credit, the less likely you are to be able to payback those loans, and that is a major risk to a lender. Hard Inquiries will typically stay on your report for up to two years.
Suggestion: The sweet spot tends to be to only have 1-2 hard inquiries every 2 years, and that should be plenty. I understand that there are times when you might have a mortgage, car loan, credit card application and maybe a loan for an engagement ring all pop up in the same 2-year period, but try to be strategic and apply for the loans only on an as-needed basis, and to try to time it up so you don’t apply until another inquiry falls off your report.
Age of Credit History
This is also important as it can show some background as to the true reason that you might be applying for the line of credit. If your credit age is only a couple of years, it might mean that you’re opening it up, getting the benefits that some cards offer during introductory phases such as no APR or a cash back incentive, and then canceling. While this might help you now, it’s very short sided. Credit Karma shows anything above 7 years as an average line of credit as being good.
Suggestion: If you’re going to sign up for new cards, it will hurt you on the hard inquires section, but don’t close your current card and let it ding you on the average age either. Just cut the cards up so they can’t physically be used anymore, and let the account sit there. You’ll continue to increase your age of credit history and it won’t hurt you by closing a card.
Credit Card Utilization
This portion shows what percentage of your total credit cards are still outstanding and yet to be paid. For example, if you have 3 cards with $5,000 limits, and two are paid off, but you owe $4,500 on one of them, your total utilization is 30% ($4,500/$15,000 = 30%). Under 10% is Great and 10-29% is considered good, so you would be just above the good category, sitting in the middle tier.
Suggestion: First and foremost, pay down your credit cards. This is the easiest, and fastest, category that you can have a meaningful impact on.
Second, you can call your credit card companies and ask them to increase your credit. I would start with either of the cards that you have no balance on. They might be more willing to increase your credit limit since you’ve shown that you are responsible and pay your bills. If they both increase your credit limit to $7,500 (which is very realistic and quite frankly, this is a low number), then your new utilization is 22.5%, so you’re now in the good category! That’s quite the improvement for just picking up the phone and asking your credit card providers what they can do for you.
This section is a simple count of the amount of accounts that you have open. To put it simply, the more accounts, the better for your score. The more accounts you have simply show that there’s less volatility in you as a lendee.
For instance, your first account or two might have had missed payments, high outstanding credit, etc., but maybe you’ve become a more reliable lendee and now you have 15 accounts that are all in good standing. In other words, it’s like a multiplier. 1 good account is not as reliable as 15 good accounts.
Suggestion: Open accounts only on an as needed basis. Do not open an account just to open one. But this is a time where you can keep an account open, cut up the card, and let that thing ride. When I was in credit card debt in college, I would cut up the cards, pay them off, and then just leave it. Having an open line of credit that’s inactive doesn’t hurt you – it actually helps you.
This portion tracks how many times you’ve had an account go to collections. 0 is good and 4+ is listed as the absolute worst section. These can stay on your record for 7-10 years so it’s SOOO important to avoid at all costs.
Suggestion: Simply put, don’t ever, ever, ever let an account have to go to collections. Setup your autopay to make minimum payments at a MINIMUM. They’re called minimum for a reason….
Payment history measures how frequently you’ve made your payments on time. If you’ve made a late payment, it also will tell you how late that payment is made. So, to be honest, I missed a payment in November of 2016 on my Chase card. Wasn’t that I couldn’t afford it, it’s that I was dumb and simply forgot…for too long, so I was dinged as being 30-59 days late.
Suggestion: This is very similar to the previous suggestion, but setup an autopay to make your payments. You can pay more if you’d like (and you should, unless you love and crave paying 22%+ on credit card balances). This will keep you from making late payments like what I did in 2015.
Credit Karma is also very cool in the fact that it shows total on paid payments, so I’ve been on time 424/425 times. That seems pretty good to me, but that’s still listed at 99%, which only gets me the Good category and not the Great. Frustrating, but I can only be frustrated at myself.
I urge you to not make the same mistake that I did and setup autopay. The future you, the one that’s going to buy an engagement ring for your future wife or a house, will thank yourself when you’re paying a low, manageable interest rate.
All in all, credit is a scary word that should be viewed as a good thing. I feel proud when people have to check my credit for various reasons. It’s a sign of honor to me. It’s not that amazing 850 score, but it’s also not the low 600’s. It shows that I’ve worked hard and that I’ve grown as a person, and as a lendee. Follow some of these simple steps and you might find yourself in the same situation in a few months.