2652: Six Secrets of a Credit Score by J Money of Budgets Are Sexy on Payment History & Financial Habits

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[00:00:40] This is Optimal Finance Daily, episode 2652,

[00:00:44] Six Secrets of a Credit Score by Jay Money

[00:00:47] of budgetsorsexy.com.

[00:00:49] And I'm your host and personal finance enthusiast,

[00:00:52] Diana Merriam.

[00:00:53] This is the show where I serenade you

[00:00:55] with the sweet sounds of personal finance knowledge

[00:00:57] from some of the best blogs on the planet,

[00:01:00] with the author's permission, of course.

[00:01:02] And with that, let's get right to today's post

[00:01:04] and start optimizing your life.

[00:01:10] Six Secrets of a Credit Score

[00:01:13] by J.Money of BudgetsorSexy.com.

[00:01:16] It's been a while since I've talked about credit scores,

[00:01:19] mainly because they kinda bore me,

[00:01:22] but they really are important to keep in mind,

[00:01:24] especially if you'll

[00:01:25] be buying a car or a home soon. Whether we like it or not, our entire credit history will show up

[00:01:31] and be used to determine what our interest rates will be when we go to finance. Of course, if you

[00:01:36] were really a pimp, you'd just pay all in cash. But we all know that's realistically pretty hard

[00:01:41] to do. So if you've ever wondered what exactly makes up these credit scores, listen on my friends.

[00:01:48] The explanations of these breakdowns were forwarded over by a good PR friend of mine

[00:01:53] and longtime reader, Erin, and come from a new site out there called ZenDo.com.

[00:01:59] And of course, I sprinkle on my own thoughts at the end of each.

[00:02:04] The six secrets of a credit score.

[00:02:06] Number one, payment history.

[00:02:09] A history of late payments, even by a few days,

[00:02:12] can be potentially hurtful.

[00:02:14] Payments received beyond 30 days of the due day

[00:02:16] are considered late.

[00:02:18] When lenders report credit data to credit bureaus,

[00:02:21] they typically lump payments that are late one day

[00:02:24] in with those that are late 59 days.

[00:02:27] Me, another reason to have a lot of this stuff automated

[00:02:31] or at least paid manually as soon as you open up a bill.

[00:02:35] Follow my look at bill, pay bill,

[00:02:37] forget about bill method if it helps.

[00:02:40] Number two, credit balances.

[00:02:43] Similar to the utilization issue, credit balances current and past provide insight into issues

[00:02:49] of financial liquidity and prudent borrowing. Historically maintaining high balances on

[00:02:56] key credit accounts will likely have a negative impact on a score. Me, which is why having

[00:03:02] a high credit line, even if you're not going to touch a dime

[00:03:05] of it, can be important.

[00:03:08] Owing $1,000 on a $5,000 line looks a lot different than $1,000 owed on a $50,000 credit

[00:03:15] line, you see?

[00:03:16] Now, if you get yourself into trouble by having a higher limit, then obviously don't even

[00:03:21] think about it.

[00:03:22] But if you can control yourself, then it might be worth the quick three minute phone call

[00:03:27] just to ask to have it raised.

[00:03:29] It really is that easy sometimes.

[00:03:32] Number three, recent credit.

[00:03:34] A consumer that opens a number of credit accounts in a narrow time frame may be interpreted

[00:03:39] as experiencing cash flow problems, particularly if utilization of his or her previously existing

[00:03:46] available credit is very high.

[00:03:48] In addition, a large number of credit inquiries in a short timeframe may also lower a score.

[00:03:55] However, multiple inquiries for a mortgage or auto loan will be counted as only one inquiry

[00:04:01] each, enabling consumers to shop for favorable rates without fear of

[00:04:05] lowering their score.

[00:04:07] Me.

[00:04:08] I don't really know much about this one.

[00:04:10] I just open up credit cards and run credit reports for free when I need them.

[00:04:14] Unless you're always trying to get into something, you should be fine.

[00:04:18] Probably best not to play open one card to pay off another.

[00:04:22] Eventually, you'll slip up and get slammed with God knows what.

[00:04:26] Number four, utilization.

[00:04:28] Having access to credit is one consideration

[00:04:31] and how much of that has been tapped into is another.

[00:04:34] An individual who has maxed out his or her credit cards

[00:04:37] and other lines of credit may not be able to obtain

[00:04:40] additional credit or credit at the best possible terms.

[00:04:43] The lack of liquidity will deem these consumers

[00:04:46] high risk in the eyes of lenders.

[00:04:49] Me, falls under the same sort of thing

[00:04:51] as number two's credit balances scenario.

[00:04:54] Being maxed out doesn't do anything good for you.

[00:04:58] Number five, depth of credit.

[00:05:00] Having a strong long history of prudent credit usage

[00:05:04] is ideal under any credit scoring

[00:05:06] model.

[00:05:07] But as important as it is to have long-term credit relationships, a diverse mix of credit

[00:05:12] accounts is also beneficial.

[00:05:14] Me.

[00:05:15] Which is why it can be important to hold onto at least one credit card or line of credit

[00:05:20] for a long period of time, even if you never tap it, or better yet, just tap it once every couple of months or so just to keep it active.

[00:05:28] I've kept my original card from way back as a freshman in college, since 1997.

[00:05:33] I've only really been using it the last few years, but it's helping keep my score high

[00:05:37] as it shows my entire history, including the times when I was late and didn't care back

[00:05:43] in college.

[00:05:44] Oops. And this is also why you hear people say to open up a card or two even if you're not including the times when I was late and didn't care back in college. Oops!

[00:05:45] And this is also why you hear people say to open up a card or two even if you're not going to use it ever.

[00:05:51] It helps build history.

[00:05:53] Mrs. Budgets are sexy had zero history when we bought our house and was advised to open up a card and make a quick purchase

[00:06:00] and then pay it right off to start having a base.

[00:06:03] We also opened our house accounts under both our names to help establish even more of a history.

[00:06:09] But again, you only do this if you can control yourselves.

[00:06:13] Number six, available credit. Maintaining low balances on credit cards and open lines of credit

[00:06:20] will be a positive factor in generating a score. The typical benchmark is to keep these balances at

[00:06:26] or below 30% of the total available credit.

[00:06:30] Me, basically the same thing I've already commented

[00:06:33] on twice now.

[00:06:34] I guess the credit score companies

[00:06:35] break it all down differently.

[00:06:38] I hope this makes sense to you all.

[00:06:40] It may seem like a lot to grasp at first,

[00:06:43] but once you do, you get to hold on to it forever.

[00:06:46] Or at least until the industry changes things up.

[00:06:49] Either way, I hope it'll be another year until I talk about it again.

[00:06:57] You just listened to the post titled, Six Secrets of a Credit Score by Jay Money of

[00:07:01] BudgesAreSexy.com and I'll be right back with my commentary.

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[00:08:44] I have to say that while I have a high credit score, it's never been something that I've

[00:08:49] been really focused on.

[00:08:50] I see it as the natural result of good financial habits that benefited me when I bought my

[00:08:55] house a couple years ago.

[00:08:57] I also think it's important to remember that a credit score isn't really a good indicator

[00:09:02] of your financial health.

[00:09:04] It's simply an indicator of your ability to pay back the money you borrow.

[00:09:09] I used to think that having a high credit score meant that I was doing well financially,

[00:09:14] but you could be drowning in debt with a fantastic credit score if you make

[00:09:18] payments on time and have a low utilization of your overall available credit.

[00:09:23] A much better number to focus on is your net worth.

[00:09:27] I've been able to maintain a high credit score

[00:09:29] by putting most of my spending on credit cards

[00:09:31] and then paying them in full each month.

[00:09:33] But my reason for doing this

[00:09:35] isn't really for the credit score.

[00:09:37] It's more for the convenience

[00:09:38] and to get the credit card points.

[00:09:40] When it comes to your credit score,

[00:09:42] there is a point of diminishing returns.

[00:09:45] To qualify for the best rewards credit cards,

[00:09:47] a home mortgage with the lowest interest rates

[00:09:49] or personal loans with the best terms,

[00:09:52] you usually need a solid job history and income,

[00:09:55] a record of responsible credit use

[00:09:57] and a FICO score of 720 or above.

[00:10:01] So while my 820 score might feel good,

[00:10:04] it's really not getting me that much more

[00:10:06] favorable terms. That'll do it for today and another installment of Optimal Finance Daily.

[00:10:12] Have a happy Monday, thank you for being here every day and listening, and I'll see you

[00:10:16] on the Tuesday show tomorrow, where your Optimal Life awaits.