THE IMPORTANCE OF CREDIT (PART 2)
Jan 14, 2018
Welcome to part two of the money talk about credit! I highly recommend reading part one first as this post is meant to be a continuation. So, now that you have pulled your credit report, let's pull our credit score. There are a few different ways to do this. When you go to pull your credit report from the three bureaus, they will ask if you want to purchase your credit score. You do not have to go this route! I will always recommend the free options first. Remember in part one when I said you really have hundreds of reports creditors can use? The same thing goes for credit scores. The scores are calculated in multiple ways so there may be variances between the scores you or a creditor pulls.
Credit Karma! This is my favorite way to pull my credit score. You can download the app or go to the website. The site will ask you a few questions in order to pull your score but it is completely safe and legit. I have been using it for years! Credit Karma will allow you to see scores based on your TransUnion and Equifax credit reports.
Each score is based on six different factors:
- Credit Card Utilization (high impact) - This is how much credit you are using in relation to what's available. The goal is to be below 10% (preferably 0%). For instance, if you have a credit limit of $2000 and you have used $1000 of it, your credit card utilization is 50%. That would be way too high. If you do find yourself in a similar situation (or worse), you have to pay down the debt or ask for a credit limit increase to help your utilization. I only recommend asking for a credit limit increase if you are disciplined with your spending. Otherwise, you are just setting yourself up for failure! Chances are if your utilization rate is too high, you aren't disciplined enough yet and need to go the paying down debt route.
- Payment History (high impact) - This is based on your payments to creditors. Every time you make a payment (or don't) to a creditor, they report it to the bureaus as being on time or late. The goal is to have this percentage at 100%. That means you made all of your payments and they were all on time. If you have difficulty remembering to pay your bills, you may want to set up automatic payments so you don't have to think about it.
- Derogatory Marks (high impact) - Remember when we pulled our credit reports, anything listed that is in collections or a public record like a lien, repo, or foreclosure is considered a derogatory mark. The goal is to have 0. If you have any, you either need to pay them off or wait the 7 years for them to drop off. This has a big impact on your credit score!
- Age of Credit History (medium impact) - This is how long you have had open accounts. Your accounts could include student loans, auto loans, mortgages, credit cards, etc. Time is the only thing that can improve this. I recommend not opening accounts too close together and keeping the oldest accounts open to try and expedite the process.
- Total Accounts (low impact) - This is how many total accounts you have. You can kind of ignore this factor. It is not worth opening credit just to help this factor as it is low impact and will negatively effect "age of credit history" which is medium impact.
- Hard Inquiries (low impact) - Hard inquires are added to your credit whenever you put in a credit application and a creditor pulls your credit report. These stay on your credit report for up to 2 years then they will start dropping automatically. If you have a lot of inquires, there is nothing you can do but let time pass. Try not to apply for credit unless you have to! Don't worry about checking your credit score on Credit Karma. It is considered a soft inquiry and does not show up on your credit report/score.
- Credit Sesame - Same premise as Credit Karma but you only get access to one score
- Banks and Credit Card Companies - Typically if you have a credit card with a bank, credit union, or credit card company, they give you access to your credit score for free
Always try these FREE options before paying for your credit score. It gives you a pretty good idea of where you stand!
When I started on this financial journey, my credit score was about 590. I had a lot of derogatory marks and no credit history. My wake up call was when I went to my local credit union and couldn't even qualify for a $200 credit limit. I used that as motivation! I got all collection accounts off my credit and watched it jump up tremendously. I got my first card with Capital One. I used that card strictly for gas and paid it off in full every month. Just making those small changes and being consistent my score jumped up over 100 points. My score is now in the 730s according to Credit Karma. I didn't have to pay anyone to fix it for me. I just had to have the drive and discipline. It doesn't matter where your credit score is now, it can be fixed! My next post will go into detail on how to get that done.
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