"Wanna know what's more important than throwin' money at a strip club? Credit." - Jay-Z
Whether you're a Jay-Z fan or not, your credit score is way more important than you realize. It determines the kind of response that you get from lenders, insurance companies, and even some employers. In fact, your credit score plays a significant role in your financial identity. Your credit score is based on several factors, but it provides a snapshot of your relationship with managing credit. If you’re not happy with your credit score or have no clue of what your credit score is, you have come to the right place! I will share with you 3 steps to getting a L.I.T. credit score!
LOOK IT UP
Like the saying goes “If you can’t measure it, you can’t manage it”. Without knowing your credit score, it will be a challenge to set a target to work towards. That is why the first step is discovering what your credit score is. These days it is super easy to get your credit score for the free, with websites like Credit Karma and even through a lot of the major banks. Based on the credit scores you receive, choose the lowest credit score, so you don’t overtime estimate what your credit score is.
Next, you will want to pull up your credit report, which you can get from each of the credit bureaus (Transunion, Experian, and Equifax) once a year for free. Your credit report includes information about your credit history and allows you to identify any errors on your report.
Now that you know what your credit score is, it’s important to identify how your credit score is calculated. The most commonly used credit score is the Fair Isaac Corporation (FICO) score. A good FICO score to shoot for is at least 700. Anything below 700 can create challenges for getting loans or other lines of credit. Even if you get approved for a loan, you’ll pay higher interest rates. Any score 750 and above is considered “excellent” and puts you in the best position to obtain loans and lower interest rates.
· Payment history (35%) - which is based on your history of making on-time payments. At the very least, make the minimum payment on everything you owe. According to FICOdata.com, 30-day delinquency could cause as much as a 90- to 110-point drop on a FICO Score of 780 for a consumer who has never missed a payment. In short, never miss a payment!
· Amount owed (30%) – based on your credit utilization, which is the debt you have compared to your total credit limit. For example, let’s say you have you have two credit cards with a total balance of $300 and a credit limit of $1,000 your utilization is 30% ($300/$1000). Keep it below 30%, but I suggest keeping it under 10%. Therefore, it’s a good idea to keep your credit cards open even after you’ve paid it off to maintain a high credit limit.
· Length of history (15%) – based on the average age of your accounts. The longer you’ve had credit, the better your score will be. Also, another good reason not to close any credit cards.
· New credit (10%) – based on how often you’re opening accounts. If you’re opening too many (6+ a year), your credit score will be impacted. The key is to minimize the times you request new lines of credits. This can also be impacted by “hard” inquiries, which are requests to pull your credit score. Pulling your credit score from Credit Karma or your bank is typically considered a “soft” inquiry. It’s always a good idea to determine whether a credit score pull will count as a “soft” or “hard” inquiry.
· Types of credit used (10%) – based on the mix of lines of credits you have (student loans, car loan, credit cards, mortgage, etc.). The bigger and the more varied the mix, the more it shows that you’re capable of managing several types of debt.
Now that you understand the game, it’s time to get your numbers up. Here are a couple of strategies I recommend for those starting or struggling with credit:
1. Get some credit - If you have no credit history and plan on financing, a good place to start is getting a secured card. Secured cards are a great way to get your feet wet with credit and are easy to get for first-timers. You put up some money, say $500, then that $500 will be your credit limit. Once you use the card and consistently make payments on-time for a couple of months, you should have no issues getting an unsecured card (i.e. credit cards).
2. Automate your payments - this helps reduce the chances of missing a payment, which I mentioned accounts for 35% of your score. Get familiar your payment due dates and set reminders on your phone to review your statement too before the automated payment is made. Also, look at your bank account to make sure you have enough funds to cover the payment.
3. Strategize your credit – out of all the factors that impact your credit score, paying off your credit cards will mostly be the biggest way of boosting your credit score. It not only improves your credit score, but it also saves you a ton of money in interest payments. A popular method of reducing debt is called the “snowball method”. To implement this method, you must first list out your debts from smallest to largest. Begin by paying off the smallest debt, while paying making the minimum payment on the remaining balances. Once the first debt amount is paid off, use the same contribution you made and apply it to the next debt on your list until all your debt is paid off. The snowball method is intended to keep you focused and motivated by paying off the smallest debt first.
So there you have, if you follow the steps I mentioned above, you will have a L.I.T. credit score in no time.