December 2011
790? 680? How Do They Come Up With This Number? (… And Why Should I Care?)
Now that you are armed with you and your spouse’s credit score (assuming you emailed me after last month’s newsletter, got the internet code to get your free credit score, and saved $40) let’s talk about what it means. Haven’t done it yet? Email me at [email protected] and I will let you know how - it is a free service available on base (if you know to ask!)
FICO scores range between 300 and 850. Higher scores are better. Bottom line, a better score means that you save money. A quick example; you are applying for a mortgage. The difference of a 620 vs. 780 on a 30 year $250,000 mortgage means paying $84,424 more in interest over the 30 years. It doesn’t matter who you are, that is a lot of money to be wasted on interest. High FICO scores pose less risk of missing payments or defaulting on a loan and are charged less to borrow money.
Factors that Affect your Credit Score and their Weighting in the Calculation
- Payment History (35%) - Paying bills on time is generally the single most important contributor to a good credit score
- Amount Owed (30%) - What is your balance compared to your limit? Too many cards with balances can lower your score
- Length of Credit History (15%) - The longer the history, the better. Those with highest scores opened accounts on average 19 years ago and average age of all accounts is 8 years
- New Credit (10%) - Opening several accounts in a short period represents higher risk
-Types of Credit (10%) - It seems counterintuitive, but you need several lines of credit to have a good credit score. If you demonstrate responsible use of different types of credit, you are considered to be less risky. The ideal mix is 2 installment loans (mortgage, car) , 3 revolving accounts (credit cards) and no delinquencies. Debit cards have no effect.
Things you may not know…
- You can increase your score by increasing your credit limit. If you typically have $3,000 balance and a $10,000 limit, see if you can increase your limit to $15,000. Voila, your balance is now a lower percentage of your limit
- In sickness and in health, in credit history and debt - if you hold a joint account with your spouse, their payment behaviors are now yours. Make sure you know ALL the accounts that you are listed on as joint or authorized user
- Co-sign on a loan? Be careful. Their late payments and balances due are 100% yours
-Want to give your children the gift of a good credit score? Add them as authorized user on your account (and don’t give them a card and you don’t even have to tell them). They will benefit from your good credit history
-A FICO score is a snapshot. It is a score as of that day, that time. Say you just PSC’d and have $15,000 of expenses on your $20,000 limit. You just got back from overseas and need to buy a new car. You apply for a loan and your score is lowered because of your high balance. Consider waiting until the balance is paid off before applying for the loan
- Your credit score does take into account open and closed accounts. You can’t get rid of a bad history by closing the card
-Closing credit cards will negatively affect your score. FICO likes to see long, boring credit histories. If you have lots of cards and need to close some, close those with the shortest payment history first
What this means for you…
-Applying for a job? Your employer checks your credit score and may think twice if you are financially irresponsible
-Buying insurance on your home? They will check your credit score as a factor in determining your premiums
-You can’t “marry into” a good credit score. Joint accounts matter but you need your own credit history, too.
FICO scores range between 300 and 850. Higher scores are better. Bottom line, a better score means that you save money. A quick example; you are applying for a mortgage. The difference of a 620 vs. 780 on a 30 year $250,000 mortgage means paying $84,424 more in interest over the 30 years. It doesn’t matter who you are, that is a lot of money to be wasted on interest. High FICO scores pose less risk of missing payments or defaulting on a loan and are charged less to borrow money.
Factors that Affect your Credit Score and their Weighting in the Calculation
- Payment History (35%) - Paying bills on time is generally the single most important contributor to a good credit score
- Amount Owed (30%) - What is your balance compared to your limit? Too many cards with balances can lower your score
- Length of Credit History (15%) - The longer the history, the better. Those with highest scores opened accounts on average 19 years ago and average age of all accounts is 8 years
- New Credit (10%) - Opening several accounts in a short period represents higher risk
-Types of Credit (10%) - It seems counterintuitive, but you need several lines of credit to have a good credit score. If you demonstrate responsible use of different types of credit, you are considered to be less risky. The ideal mix is 2 installment loans (mortgage, car) , 3 revolving accounts (credit cards) and no delinquencies. Debit cards have no effect.
Things you may not know…
- You can increase your score by increasing your credit limit. If you typically have $3,000 balance and a $10,000 limit, see if you can increase your limit to $15,000. Voila, your balance is now a lower percentage of your limit
- In sickness and in health, in credit history and debt - if you hold a joint account with your spouse, their payment behaviors are now yours. Make sure you know ALL the accounts that you are listed on as joint or authorized user
- Co-sign on a loan? Be careful. Their late payments and balances due are 100% yours
-Want to give your children the gift of a good credit score? Add them as authorized user on your account (and don’t give them a card and you don’t even have to tell them). They will benefit from your good credit history
-A FICO score is a snapshot. It is a score as of that day, that time. Say you just PSC’d and have $15,000 of expenses on your $20,000 limit. You just got back from overseas and need to buy a new car. You apply for a loan and your score is lowered because of your high balance. Consider waiting until the balance is paid off before applying for the loan
- Your credit score does take into account open and closed accounts. You can’t get rid of a bad history by closing the card
-Closing credit cards will negatively affect your score. FICO likes to see long, boring credit histories. If you have lots of cards and need to close some, close those with the shortest payment history first
What this means for you…
-Applying for a job? Your employer checks your credit score and may think twice if you are financially irresponsible
-Buying insurance on your home? They will check your credit score as a factor in determining your premiums
-You can’t “marry into” a good credit score. Joint accounts matter but you need your own credit history, too.
