Introduction
Ever feel like there’s a secret financial party everyone’s attending except you? Well, the key to that party is a little three-digit number: your credit score. Basically, its that mischievous guest that’s been photobombing your financial selfies while you’re daydreaming of that white-picket-fence house, zooming around in a new car, or those jaw-dropping zero interest deals. It feels like our credit score is that friend who just can’t stop meddling, right?
But, plot twist: your credit score isn’t a maze with dragons. It’s more like a karaoke song — you’ve just got to learn the lyrics and belt it out with confidence. All it shows is how well you work and get down with debt.
Despite all the technical language, here’s a little secret: mastering your credit score is more like a game of tic-tac-toe than rocket science. Undeniable, it may not be the most dramatic saga in the world of personal finance, it’s still a simple game that can transform your life.
So, no more lurking in the shadows. Spotlight’s on you and that credit score.
What the Heck is a Credit Score Anyway?
Let’s cut through the mumbo jumbo. A credit score (often referred to as a FICO score -named after the software used to produce it) is just a numerical rating that reflects how risky a borrower you are. It’s like a financial report card and, just like in school, the higher the score the better.
Your “score” is a way for banks to judge your trustworthiness before lending you their money.
This three-digit number ranges from 300 to 850. The higher your score, the less of a risk you appear to lenders. Anything above a 670 equates to “good credit”. You are now financially trustworthy in the bank’s eyes.
This means you’re in the running for lower interest rates, better loan terms, and more flexibility in your financial life.
Why Should You Give a Damn About Your Credit Score?
You might be wondering, “Why should I care about some silly number?” Well, here’s the deal: your credit score affects almost every aspect of your financial life.
Want to buy a house or a car? Your credit score comes into play.
Looking to get a new credit card or loan? Yep, your credit score matters there too.
This score also shows up when you’re applying to live someone as a renter. Landlords check your credit score to make sure you’re good for the money.
Believe me here, I’m a landlord, and I require a certain credit score before I even consider an application.
In short, a good credit score gives you options. It opens doors to lower interest rates and better borrowing terms, saving you a heap of cash in the long run. It’s like a financial passport, granting you more access to the best the financial world has to offer.
So yeah, it’s kind of a big deal.
The Skeleton in the Closet: Factors Impacting Your Credit Score
You might think that your credit score is some mysterious, mystical number decided by a bunch of financial wizards in a dark room. But it’s not. There’s a method to the madness.
Your credit score is made up of five key factors:
1. Payment History (35%): This is the biggie. Simply put, lenders want to know if you pay your bills on time. Up to 7 years of payment history is included, along with the details of any missed payments. A few late payments won’t destroy your score, but a history of missed payments, defaults, and bankruptcies? They’ll torpedo your score faster than anything else.
2. Credit Utilization (30%): This is just a fancy term for how much of your available credit you’re using. Maxed out your credit cards? Your score will take a hit. The credit utilization that is optimal in the eyes of lenders is for you to only use a max of 30% your total credit limit.
3. Length of Credit History (15%): Lenders like seeing that you’ve managed credit responsibly over a long period of time. The older your credit accounts, the better.
4. Credit Mix (10%): Having a mix of credit types—like credit cards, student loans, a mortgage—shows lenders you can handle different types of debt. As you go through life, this type of diversification tends to happen naturally. No need to force it if you’re still young in the game.
5. New Credit (10%): Opening a lot of new credit accounts in a short time can signal risk to lenders and ding your score. Hard inquiries that are made when you apply for loans and credit remain on your report for two years, though they only count negatively for 12 months. The impact of a hard inquiry is roughly 5 points off your score.
One caveat: Shopping for loans (such as mortgage and auto) are an understood practice, so any inquires made on the same type of credit within a 15-45 day window will generally be counted as one pull. One important distinction here is credit cards. You’re going to feel every card you apply for – especially in short time intervals.
Unpacking the Impact: Practical Examples
Let’s say you miss a credit card payment. Your payment history gets a red mark, and your score drops. If you keep missing payments, your score will keep falling.
Next, imagine you’ve maxed out all your credit cards, pushing your credit utilization through the roof. This sends a warning to lenders that you might be overextended, causing your score to drop.
Now, let’s say you’ve only had one credit card for a year, and that’s your only credit account. Your short credit history and lack of credit mix could also lower your score.
Lastly, if you go on an application spree and open several new accounts in a short time, lenders may see you as a risk, leading to another dip in your score.
So, that’s the quick and dirty on how your actions can influence your credit score. But don’t despair, we’re going to tackle how you can turn things around in the upcoming sections.
Common Missteps and How to Dodge Them
So, you’re feeling pretty smug. You understand credit scores now. You’re on top of the world. Not so fast, cowboy. There’s still a whole minefield of mistakes that can drag your score into the gutter.
1. Ignoring Your Credit Report: Not keeping an eye on your credit report is like flying blind. Mistakes and fraud happen, and they can wreak havoc on your score.
The only way to catch these issues? Regularly review your credit report. You can’t reach your financial goals if you don’t know where you’re starting at.
All Americans are authorized a free credit report annually from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Review it carefully for errors and signs of fraud.
Go to www.annualcreditreport.com for your authorized report. And please look out for the impostor sites. Stealing your digital information is big business.
2. Applying for New Credit Too Often: Every time you apply for credit, it results in a hard inquiry on your credit report, which can temporarily lower your score. Do this too often, and it starts to add up.
3. Closing Old Credit Cards: It might seem logical to close a credit card you’re not using, but this can actually hurt your score by reducing your available credit and making your credit history appear shorter.
As long as it’s not costing you in annual fees, keep your old credit card open and use it occasionally to keep the account active.
4. Only Paying the Minimum Due: Just making the minimum payment each month can keep your credit card balance high, which increases your credit utilization ratio and can hurt your score.
See my article here about the negative aspects of compounding interest.
I like to think of my credit card like a debit card. As soon as I use it I’m paying it off from my bank account that month. If you can’t afford something, credit cards are the absolute worst way to purchase. Remember: treat credit like cash. Use it for the fraud protection and the rewards.
There you have it, the common missteps and how to dodge them. Just straight talk about protecting your credit score.
Building a Solid Credit Score: Concrete Steps You Can Take
Alright, enough talking about what not to do. Let’s talk about what you can do to buff up that credit score. I’m not going to lie to you: there’s no quick fix, no magic bullet. But here are some concrete steps you can take:
1. Pay Your Bills on Time: Your payment history is the biggest factor in your credit score. So, pay your bills on time. Every time. No excuses. If you struggle to remember, set up automatic payments or reminders.
2. Keep Your Credit Utilization Low: Try to use only a small portion of your available credit. Remember the rule of thumb: stay under 30% of your credit limit.
In other words, if you have a credit card with a $1,000 limit, try to never have a balance of more than $300.
3. Keeping Accounts Open: Closing old accounts – even those old ones with zero balance – can hurt your score. This is because your credit utilization percent and payment history will take a hit. Keep the old accounts open and consider keeping the balance above zero.
Remember, Good Credit Takes Time
Building a good credit score isn’t a sprint; it’s a marathon. It takes time. But every on-time payment, every month where you keep your credit utilization low, moves you closer to your goal.
So, keep at it. Your future self will thank you.
And remember, as much as a good credit score can help you, it’s not the end-all-be-all. It’s just a number. Don’t let it define you. Instead, use it as a tool to help you achieve your financial goals.
Now get out there and show that credit score who’s boss.
Confronting Credit Screw-ups: Embracing the Financial F*ck-ups
Let’s face it: we all mess up. Some of us mess up our relationships, others mess up their plant-based diet with a sneaky burger (or three), and then some of us mess up our credit scores. And you know what? That’s okay. Life isn’t about avoiding mistakes but learning from them.
Next I want to cover how to dig out of any holes our younger, less financially literate self put us in. Pep talk inbound.
1. Own Your Sh*t
Admitting you messed up is freeing. So grab your credit report and get intimate with it. It’ll show you all your financial blemishes. Understand them, own them, and get ready to tackle them.
2. Consistent Effort Over Perfection
Your credit won’t fix itself overnight. But regular, consistent efforts, like paying bills on time, will set you on the redemption path. Automate payments if you need to. A string of small wins is better than chasing one big miracle.
3. Prioritize Your Battles
Not all debts are created equal. Some are like those nagging exes – costly and persistent (I’m looking at you credit cards).
Tackle these first. Get them off your back, and you’ll breathe easier. Check out my article here about fighting that nasty, icky feeling we all have around debt.
4. Resist the Seductive Siren Call of New Credit
New credit offers might wink at you, promising better days. But remember, every hard inquiry is a tiny ding on your score. Play hard to get. Make them come to you.
5. Expand Your Horizons, But Stay Grounded
Considering raising your credit limit? It’s like expanding your horizons. It can be beneficial, but don’t lose yourself. More available credit doesn’t mean more money to blow. You must know yourself and know your personal money scripts.
Best to recognize if and when you should save the future “you” from itself.
6. Guidance Isn’t for the Weak; It’s for the Wise
If your credit is a tangled mess, seeking out a credit counselor is like seeking wisdom from a sage. They’ve seen it all, and they can guide you through the maze.
Listen, everyone screws up now and then. But a credit score isn’t some life sentence. With a bit of grit you can bounce back. So, put on your game face, confront those financial f*ck-ups, and let’s turn them into learning experiences.
After all, it’s not about the fall, but how we rise from it.
Conclusion
Look, credit scores might seem like some high-level calculus, but they’re not. We’ve gone through the basics, dissected the factors, pinpointed the common credit score killers, learned how to boost those numbers, and introduced some shiny tools like credit monitoring services that can help you on this journey.
What’s Next: Your Concrete Action Steps
You’ve gotten the lecture, now it’s time for some homework (don’t worry, there’s no grading). Here’s what you need to do next:
1. Know Your Numbers: Use a free service like www.annualcreditreport.com to check your credit score. Yes, the number might scare you, but you can’t start a journey without knowing your starting point.
2. Evaluate Your Spending Habits: Now that you know your score, take a long hard look at your spending habits. See what you need to change, cut back, or maybe spend more on (like paying off high-interest debts).
3. Make a Plan: You know your numbers and you’ve evaluated your habits, so now you’ve got to make a plan. Set a goal for your credit score and make a concrete plan to get there.
4. Monitor Your Progress: Remember, it’s a marathon, not a sprint. Your credit score won’t skyrocket overnight, but consistent, good decisions will make it climb.
5. Celebrate the Wins: See your credit score rise by a few points? Celebrate it! Progress is progress, no matter how small.
Your Journey to a Better Credit Score Starts Now
Credit scores are not set in stone. They’re more like Play-Doh. You can mold and shape them over time with the right actions. It might seem tough now, but once you start seeing your score rise, you’ll know it’s worth it.
So get started. As a recovered credit f*ck up, I’m cheering for you every step of the way.