This is TAY and most of the time we talk about games, but with school ending and everyone starting to think about finances, I thought I would write a helpful guide to understanding your credit score.
Your Credit Score - What is it?
For those of you not in the know, your credit score is a number between 0 and 800 that is calculated independently by three different agencies. This metric is applied to everyone so it is an easy way for a person to see how “financially responsible” you are. Why should you care? Your credit score will mostly matter to you when you want to take out a loan. Remember when you needed to have your mom or dad co sign your college student loans? That’s because your credit was garbage and no lending institute in their right mind would loan you money without some guarantee that they’d get paid one way (you repaying them) or another (your parents losing their house). The higher your score the more money you will qualify for and in the case of certain loans, the lower your interest rate will be. It’s a great idea to get your credit score as high as you can as you never know when you may suddenly find yourself needing a 50k loan to pay off surprise medical bills or something.
FICO, FACO, and Figuring out Your Score
To find out your score for free once a month you can use either mint via http://www.mint.com or Credit Karma at http://www.creditkarma.com. Beware that while both of these sites will give you a score, you’ll notice that Credit Karma will usually give you a different score than Mint. This is because Credit Karma and Mint use FAKO scores. For what it’s worth, my FICO score (the one used by banks to determine loan eligibility) correlated well with the score from Mint but the only way to know for sure is by requesting a full credit report (which these days you can get once a year for free).
What’s the difference?
FICO is “official” but the calculation that the FICO score uses is kept as secret as the KFC original crispy chicken recipe. No one knows exactly how they calculate that score except for Gene Fico (not a real name). FAKO is any score that emulates your credit score based on a different calculation - with varying degrees of accuracy. Again, Mint seems to be pretty close to my actual score so I’d recommend using it to get an idea of your score.
OK, I have a Score, Now What?
Now you want to make that score go up up up. How you do that depends on a number of various factors which I’ll break down here.
1.Credit Card Utilization
Your credit card utilization is a highly weighted factor in your credit score. You want to keep some balance on a card and make monthly payments to show that you can handle credit, while also not having less than 10% utilization. Credit card utilization refers only to revolving credit, that is short term, monthly payment cards. It is not impacted by things like loans, mortgages, or investments.
2. Payment History
Do you make all your payments on time? Good, then you have nothing to worry about. Even making late payments is usually ok so long as you don’t pass 30 days - don’t take my word for this though. If you miss a payment, call your bank and ask them if there’s some way they will not report the late payment. Do anything within your power to NOT have late payments. My FICO score has taken a HUGE hit on this because of payments I could not make during my divorce over 3 years ago now. Late payments take 7 years to be removed from your account and as you can see in the image below, even making 96% of payments, gives you a very negative impact to your score. DO NOT MISS PAYMENTS.
3. Derogatory Marks
If you miss a payment, you will get a mark against your credit score. If you continue to not pay it will be sent to collections and a derogatory mark will be placed on your account. Don’t do this. If you can’t make a payment, call whoever you owe and tell them. Most credit cards allow you 1 or 2 months of waived payments. My student loan lenders were all very understanding and moved two months worth of payments to the end of my loan period.
Student loans can be restructured based on your income as well. However, realize that every time you refinance a loan you’re usually switching lenders and closing an account. Closing and opening new accounts can negatively affect you because...
4. Age of Credit History
...the average age of your accounts affects your credit score. What does this mean? It means that if you open 9 accounts and have them open for 1 year, and you have 1 account you have had open for 10 years the average age of your accounts is 1.9 years. Maybe. I’m not great at math. Now, also note that let’s say you finally pay off that credit card and you’re DONE. No more credit cards you say and you cut up that card. You close the account and now you just have 9 accounts of 1 year of age. That’s also bad. Keep your accounts open and up to date to maximize the good! Keep in mind that this is a long term game. Currently my average account age is almost 9 years and I’m only on “good” not “excellent”.
5. Number of Accounts
Of course, to make things more fun for everyone - you actually want a large number of accounts, with various purposes, open. Banks like to see that you can handle money and what better way to do that than having multiple accounts that you have to manage. Note that these will accrue over time and that closed accounts DO count towards your “total” accounts. Don’t go opening 21 credit cards unless you’re 18 and plan to somehow use them all a little each month and pay them off. Even then there should be a variety of different accounts from credit cards to loans to mortgages, etc.
6. Credit Inquiries
This is simply how many times a lending institution has checked your account. You don’t want to apply to too many credit cards at once as this will negatively impact your credit score when all of those companies go to check your score to see if you are eligible for their credit card. Although on the other hand credit inquiries are a pretty minimally weighted factor on your score so don’t be afraid to apply for a card or two or a loan if you need it.
Realize that if your score is not great, you can improve it over time. Just be aware of the factors that influence your score and how much each of them is weighted. As long as you have patience and don’t give up, you too can reach the lofty goal of A PERFECT CREDIT SCORE. DUN DUN DUNNNNN.
If you have any questions, I’m not an accountant, but I do know a lot about this stuff these days thanks to ruining my score and then slowly putting back together the pieces :D.
Some general ideas/tips:
- If your credit is shot and you’re going to go bankrupt, you can call your loan providers and see if they will accept a fraction of what you owe as a lump sum. They will write off the balance. It will negatively effect your credit for years to come but it is less of a black mark than bankruptcy.
- If you work for a university or non profit you may be eligible for Federal Loan Forgiveness. They’ll even retroactively give you the years (you need 10 at the institution) if you’ve been on an income based repayment plan.
- Remember that the people who run the credit card companies ARE people and most of the interactions I’ve had with lenders have been phenomenal. They’re always willing to help if you’re in trouble - from a cynical view - they want their money and if they need to give you a few months to get your house in order to do so, so be it.
- Just be responsible. Every few months or so I just take a look at my finances and figure out how much my total monthly bills are vs. my income. I see how much money I have left over and if it matches how much money I’m putting into savings. I assign an arbitrary value to entertainment expenditures and if I’m over that amount I just try to cut back on things.
You can do it!