Look, Jim. Can I call you, Jim? We’ve got to talk. We’ve been seeing each other for months and I think we both know this isn’t going to work out. I’m swamped at work and you’re clearly a stuffed animal. We come from two very different backgrounds.
Here I am with an excellent credit score where I’m approved for any loan I even stare longer than five seconds at. And there you are, furry as the day my mom snatched you from the claw machine at Fuddruckers.
Does this sound familiar?
Gosh, I hope not. There’s only enough room for one crazy person who talks to stuffed animals on this post. But it does bring up my topic for the week: understanding your credit score.
Yes, I’m talking about the mystical FICO score that your parents have always harped on you about. It’s the same score that determines what your interest rates will be, whether you’ll be able to buy that house and whether your future spouse will have one more reason to regret marrying you (not speaking from experience!).
If you’re not aware, or you simply don’t want to believe it, FICO (AKA: Fair Isaac) is the creator and manager of your FICO score. And while we all would have hoped that they would tell us exactly how it is that they calculate such a life-altering number, it’s simply not the case. Instead, they leave us all to make educated guesses on how we can break their system for our own benefit.
Kidding. They’ve only mostly kept us all in the dark. To hold our tongues and keep us from moving on to a different system, they’ve at least come out with a table that explains how the scores are weighted.
How kind of them.
And I’ve found it in my heart to share that information with you here. Your FICO credit score is made up of:
- 35% payment history
- 30% amount owed
- 15% length of credit history
- 10% new credit
- 10% types of credit used
Marvel at it and bask in all of its glory because that’s really all they’ve officially given out as to how we need to play their game of high stakes blackjack. But don’t worry; “Papa BD” is here to take you from a wee lad to a full-fledged Jedi in the art of mastering your credit score.
Step #0: How to establish your score if you have no prior credit history
(AKA: FICO probably thinks you’re dead in a ditch somewhere)
If you have no credit history at all, like outsider males trying to get into a frat party, you’re going to have to pay. Wait, that’s not the right analogy.
What I mean to say is that you’re going to have to kiss a frog before you can find a prince. Yeah, that’s a much better analogy. And to do that, you’re going to have to get some sort of starter loan. I’m talking about either a secured credit card, a high-interest not-so-great credit card, or a credit builder loan.
- Secured credit card: for lack of a better way of describing it. This is basically a bank account card. You put money into the account as collateral. Then you use the card. It’s backed by your green.
- High-interest not-so-great credit card: we’re talking garbage consumer cards. You’ll likely have a low credit limit (maybe a few hundred or thousand depending on your annual income), a beefy penalty for late payments/missed payments, and a super high-interest rate.
- Credit builder loan: you basically go to the local credit union and take a small loan out for giggles and pay it back over time. This shows you have the ability to be loaned money.
- Bonus: be added as a co-signer to someone else’s credit card. This is a bonus because in order to do this, you’ve got to have a really trusting friend or family member. If you screw up, they’re the one who gets hanged and you get to simply run off into the sunset.
Step #1: Growing your score:
Assuming you’ve already got a standing credit score by the time you reach this step, it’s time to start talking about growing what you’ve got. And like any good houseplant, if you feed it and water it how it likes, it’ll grow into a giant flesh-eating monster that will destroy all your enemies (or in this case a great staple for you to obtain amazing lines of credit/buy a house/etc).
That being said, here are the rules to live by:
- Make all payments on time (set up billing alerts)
- Never carry more than 30% of your credit limit on one card, even if you’re planning to pay it off in full when the statement comes out. On that note, don’t open twelve cards just so you can split it up to make this make sense. FICO looks at the total amount owed by you, not just how much is carried on each card. This affects your credit because you are statistically more likely to default on your payments if your debt load is too high to eventually pay off.
- Focus on credit card debt over student debt if you’re paying down debt. Student loan debt is valued far less harshly than consumer debt when it is applied against your score.
- Manage multiple types of credit – mortgage, consumer loans, student loans, secured loans
- Limit how many cards you open. Opening a few accounts at once will hurt your credit. It’s best to limit how many accounts you open at the same time. A firm number of how many is too many is unknown but a good rule is to stagger them by a good distance of time (as a general rule, we don’t open or close more than one per year).
- Keep your accounts open as long as humanly possible without having too many lines of credit (but be aware of cards that charge annual fees or fees if you hold no balance on your credit line). The longer your history, the higher your score. It’s easier to deem how good of a lender you might be if they can see how long you’ve been performing at the level of debt you’ve handled.
- If you struggle with tracking your purchases, consider keeping a log book (link: https://amzn.to/2Kiunhi) with you at all times to ensure you’re not spending what you don’t have just because you have a plastic alternative.
- Piggybacking on the previous point: if you know you can’t control your spending on credit cards, do NOT open one. I cannot stress this enough. Instead, pay off all your existing credit card debts, close the accounts, and seek to reclaim your credit score of zero. If you can’t be helped around credit cards, it’s better to have a zero credit score and simply find lenders who will work with cash backed purchases. It’ll take awhile (I believe six months) of no open credit lines and no reportable sources for it to zero out but it will eventually get there once you close everything and wait.
Step #2: There is no step #2
Really, it’s as simple as that. After all the hooting and hollering by your parents, you’d have thought it would be more complicated. But it’s really pretty simple.
Given a bit of patience and the knowledge provided here, pretty much anyone can take control of their FICO score and be better prepared when they need it to be as high as Willie Nelson. Just be careful not to take on debt that you can’t pay back. A good rule of thumb is to never put something on credit that you couldn’t immediately pay for in cash. Also, don’t trust sketchy guys in tunics. Two good rules of thumb.
And with that, we’ve reached the end of the article. If you’ve enjoyed this read and would like to see more, don’t forget to hit the follow button at the top right to be notified by email. And if you have something nice to say, drop a comment in the box below. I’d love to hear from you!
Until next time,
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