Everyone thinks that being a financial advisor means I am great with numbers, but there are lots of numbers that confuse the heck out of me.
Blood pressure, tire pressure and my son’s PSAT scores come to mind.
A number that is a mystery to many is their credit score.
Sure, you know the higher the better, but how do you get there? And how do you stay there?
This time of the year has me scrambling about at a variety of stores for holiday shopping.
Something I hear over and over again, from one cashier to the next:
“Would you like to save 10% by opening a Fill In The Blank credit card today?” NOOOOO, I would not, but thank you for asking.
I’m a financial advisor – why wouldn’t I want to save 10%?
Here’s the thing. Having multiple credit cards won’t necessarily harm your credit score, it may even help it, when managed properly. It’s the “when managed properly” part that gets many into trouble and can inadvertently affect your credit score.
What Factors Affect Your Credit Score?
- Payment History
Creditors want to see a trend of you making payments on time, every time, even if it’s just the minimum payment due.
Carrying a balance on a high interest credit card is a financial planning 101 topic separate and apart from this (don’t do it), but paying the minimum amount due ON TIME is imperative to maintaining good credit. This is the factor most heavily weighted.
- Credit Utilization Ratio (you want this number low)
Simply stated, if your credit cards are “maxed out”, your ratio is not good. Lenders want to see that you have the option to use the credit, but don’t.
For example, if you have three credit cards each with a $10,000 limit ($30,000 total limit), lenders don’t want to see you carrying a $25,000 balance. You are using almost 85% of your available credit (25/30). Conversely, if you are carrying a $5,000 balance you are only using about 15% (5/30) of your available credit. Lenders like this.
- Length of Credit History
Different from payment history (and not as heavily weighted in your score), creditors look at the average length of all your credit accounts. This is why it often makes sense to keep an old credit card open, even if you’ve moved on to a new shiny one.
This is why it’s also good to get teenagers/young adults started with some form of credit in their early years, and teaching them how to use it responsibly. This will put them on a solid foundation for a good credit score, which they will need for their first car loan or apartment.
- Types of Credit
Having a diverse mix of credit and being able to manage all of them effectively at the same time helps boost your credit score.
This doesn’t mean various credit cards from Macy’s, Amazon and Homegoods. This means entirely different types of loans, such as a mortgage, car and student loans, along with your credit cards.
- New Credit Inquiries
How many new accounts you’ve opened and how many “hard inquiries” that come in from lenders have an effect on your credit score. Hard inquiries happen any time you are opening a new card or applying for a loan.
Too many in a short period of time makes a lender nervous.
Financial Fitness Tip
Separate from your actual credit score is the report that makes up your score.
You can and should be checking your free credit report at least annually. The report will provide a comprehensive overview of your credit history and allow you to flag any activity that does not look right.
There are three major credit reporting agencies: Transunion, Equifax and Experian. They have come together to make requesting your credit report more seamless and to help you avoid scammer websites offering “free” credit reports.
Follow this link to bring you to the ONLY official website you should be using. In “normal” times, you can request a report from each of the three agencies once per year, but due to COVID-19, they are offering free weekly online reports through April 2021.
Things I Love
These beautiful faces are now 17, 15 and 13, and ornaments like these become my favorites more and more every year. I am so blessed. Time is going too fast.
God Bless you and your families this holiday season, as we eagerly wave goodbye to 2020!