Money 101 - Lesson 3 Your Credit Score

Money 101 Lesson 3 - Boost Your Credit ScoreMonday, February 21, 2011

You Should Know Your credit score represents your real world GPA and how likely you are to pay your bills. Your credit score comes into play in many situations like buying a home, car, apartment, new cell phone, getting a job, turning on utilities, and the list goes on. Credit scores can range from 300-850Monday, February 21, 2011

You Should Know 5 main categories make up your credit score Your payment history How much you owe vs. how much you can barrow The amount of time you’ve had credit Recent applications for credit Your Credit mixMonday, February 21, 2011

You Should Know You have 3 credit reports and as a result 3 credit scores from Equifax, Experian, and TransUnion. Some lenders look at all three and some just look at one. Not all of the bills you pay report to the credit bureaus. Knowing which ones do can help your prioritize appropriately. Canceling your credit cards can hurt your score not help it.Monday, February 21, 2011

Score Board Credit scores are used more often then people realize and can either cause great frustration or save you thousands of dollars. Most people realize credit scores come into play when they need to barrow money for big purchases like a car or home. You credit score will determine how high or low your interest rate is.Monday, February 21, 2011

Score Board Have you noticed that “qualiﬁed buyers” can get great deals on new cars like 0% interest? These deals are for those with the best scores in the 750+ range. Likewise when buying a home having a score of 650 instead of 750 could put you back $200,000 over a 30 year mortgage.Monday, February 21, 2011

Auto Loan Example Examples from Your Credit Score by Liz Pulliam Weston Emily Karen Credit Score 750 650 Interest Rate 5.00% 8.00% Monthly Payment $377 $406 Interest Cost Per Loan $2,646 $4,322 Lifetime Interest Paid $12,166 $34,653 Karen’s Penalty $13,487Monday, February 21, 2011

Home Loan Example Examples from Your Credit Score by Liz Pulliam Weston Emily Karen Credit Score 750 650 Interest Rate 5.50% 7.375% Monthly Payment $2,271 $2,763 Total Interest Paid (30 yrs.) $417,616 $594,572 Karen’s Penalty $176,956Monday, February 21, 2011

The Big 5 Credit Mix 10% New Accounts 10% Payment History 35% History 15% Balance vs. Barrow 30%Monday, February 21, 2011

Payment History Payment history is Credit Mix the largest part of 10% New Accounts your credit score. 10% Payment History 35% This part of you score History looks at if you pay on 15% time, if you’ve been late, how often you’ve been late, and how Balance vs. Barrow 30% late were you?Monday, February 21, 2011

Payment History Fair Isaac (the company that makes up the equation) reports that more than half of Americans don’t have a single late payment. If you score is less than stellar this is the ﬁrst place to start. Pay on time every month. As long as you at least pay the minimum it will count as on time. It’s better to pay the minimum on time then the entire balance late.Monday, February 21, 2011

Balance vs. Barrow Ratio Your balance compared to how much you can barrow is the 2nd largest part of Credit Mix 10% your score. New Accounts 10% Payment History If you have a $1,000 credit 35% card limit and you are History borrowing $900 that 15% doesn’t look so good. But if instead you only barrow $200 then that seems more Balance vs. Barrow responsible to lenders. 30%Monday, February 21, 2011

Balance vs. Barrow Ratio You should remember this ratio includes all your loans. Mortgage loans, auto loans, school loans, credit cards, etc. To help your score try to get those balances low. Aim for the 20-30% range on each loan and knock out the small ones if you can.Monday, February 21, 2011

Credit History Your credit history Credit Mix doesn’t count as much 10% New Accounts as the ﬁrst two items 10% Payment History but it all adds up. 35% History This section of your 15% score looks at the average age of all your accounts and the age of Balance vs. Barrow 30% your oldest account.Monday, February 21, 2011

Credit History Time is on your side here. There isn’t much you can do to improve in this area except wait. Waiting isn’t always a bad option. It might be better to rent one or two more years than the pay extra thousands in interest on a new home loan.Monday, February 21, 2011

New Accounts New accounts only make up 10% of your score but New Accounts Credit Mix small dings can show up at 10% 10% the wrong time. Payment History 35% This section of your score History looks at recent 15% applications, recent account openings, and how long since you’ve applied Balance vs. Barrow 30% and opened a new account.Monday, February 21, 2011

New Accounts You can’t hurt you score by checking it yourself. Don’t have lenders pull your score just to check for you, that could hurt. If you’re shopping around for the best deal on something big like an auto loan or home loan keep your search conﬁned to 2 weeks. The 2 week window will be viewed as one application not several.Monday, February 21, 2011

Credit Mix Credit Mix A healthy mix of credit is 10% good to have. Although Fair Isaac doesn’t give many clues to what that New Accounts means. 10% Payment History 35% It’s good to have revolving History debts like a credit card 15% and installment loans such as auto loans or a Balance vs. Barrow mortgage. 30%Monday, February 21, 2011

Credit Mix Don’t apply for credit you don’t need just to boost your score, this could backﬁre. Go with bank cards rather than department store cards. Installment loans look good because in order to get them a lender had to gather adequate documentation to approve you.Monday, February 21, 2011

Get Started Improving Your Score Get a copy of your 3 credit reports and scores to make sure all the data is accurate. One source to consider is MyFico.com, they are a join venture with Fair Isaac and Equifax. Make sure whoever you use has a FICO trade mark or one of the 3 credit bureau’s trade marks. FICO, Equifax, Experian, or TransUnionMonday, February 21, 2011

Get Started Improving Your Score Focus your efforts on the biggest pieces of the pie. Pay on time, every time at least the minimum. Get your balances low so your balance vs. borrow ratio is much higher.Monday, February 21, 2011

Get Started Improving Your Score Don’t close out credit card accounts. Even if your balance is $0.00 closing it could hurt your score. Closing off your borrowing power hurts your balance vs. borrow ratio. Be patient and only apply for new credit when necessary.Monday, February 21, 2011

Thank You Article and Slides by Brandon Crombar I am the blogger and designer behind Shared Financial Success. I love ﬁnding and sharing new ideas about saving money and how to make your Benjamins work harder for you! Find me on Facebook and Twitter and share your ideas!Monday, February 21, 2011

Money 101 - Lesson 3 Your Credit Score

by Brandon Crombar

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