Updated: Jan 24
Our society today is very focused on the quantifiable characteristics of a person. What was your GPA? How much money do you make? How many years' experience do you have? But there is one number that is becoming more and more critical, and it is often ignored by millions of Americans. It is a number that can determine whether someone gets a home, a job, maybe even a spouse.
That number? A person's credit score.
Having a good credit score is one of the best tools you can arm yourself with for financial success. Besides helping to secure better loan terms (potentially saving tens of thousands of dollars over a lifetime), a strong credit score can also impact other areas of life, like rental applications, cellphone plans, and approvals for other large purchases.
A survey from the National Foundation for Credit Counseling reported more people would be embarrassed to admit their credit scores (30 percent) than their weight (12 percent).
Now I'm sure most of you have a solid handle on your credit score, and know the importance of maintaining it. But we, as adults, have a responsibility to teach our youth! The most important time to focus on building good credit is in your 20s and 30s, which is why it should be important to young people looking to start down their financial path on the right foot.
For those who feel embarrassed of their credit score, that is okay… we can work on improving it.
What is not okay is to not know your credit score. Sticking your head in the sand never turns out well.
So, let's first understand what affects that number. The Fed put together a list of factors that most often define a person's credit score. I want to take some time to go through that list, and give you a few tips on how to easily get a credit score moving in the right direction.
The first is your track record for paying bills. The most obvious impact on a person's credit score is declaring bankruptcy. Creditors are going to be reluctant to extend credit if you have been deemed bankrupt in the past. Additionally, to have good credit, you must also pay your bills on time. Problems with either past bankruptcies or late payments can take a huge chunk out of your credit score, and can be the most difficult to repair down the road.
The second factor revolves around outstanding debt. A person's credit limit is graded in direct relation to his or her outstanding debt.
The recommendation is not to use more than 30 percent of your total credit limit, with the ideal ratio of debt to outstanding credit being just 10 percent.
It does not matter if you pay off your card in full every month, the percentage is still important. So if you need to adjust that ratio, you have two easy options, decrease spending or increase your limit. If you feel like you can increase your limit without being tempted to increase your spending, that could be a great option. If you know that if you have a larger limit, you will simply go on a larger spending spree, do not take this route.
Your credit score is also based on the length of credit history available for review. If you have a very short history, you may find yourself with a lower score because there is less of a record to base the number on, and so more risk to the creditor. But having a short history of on-time payments and low balances is better than a long one with substantial bad debt. The easiest way to start a credit history is to open up a credit card, and use it responsibly.
Your credit score can also be negatively affected by applying for numerous new cards and loans. Make sure you don't just start willy-nilly going for broke (for lack of a better term) and applying for loans and credit cards too often. This will hurt your chances at success and hurt your score as well.
The last thing to consider is the diversity of your credit accounts. I talked about the importance of opening up a card and starting your credit history early. In addition to opening a credit card, making payments on other types of loans, such as a car loan or student loan, can help to start building a positive track record by diversifying your credit.
But I will stress again, doing this is only valuable if you are responsible with these payments!
Also, if you have too many finance company accounts or too many credit cards, your score could suffer. It is a delicate balance.
I mentioned earlier that more people are embarrassed by their credit score than their weight. The correlation between those two concepts goes even further. Just as with weight loss, improving your credit score requires commitment, diligence, and patience because it won't happen overnight. So put down that cookie and pick up that credit report.
This content created by Rick Durkee in conjunction with Fusion Capital Management.