Monday, May 5, 2014

MONEY MONDAY: Get to know your credit score NOW and how to raise it INSTANTLY.

I signed up for Credit Karma after Dennis had found out about it from his friend.
And then shortly after that, Credit Sesame.

With these sites, you can constantly check your credit score for free and I became addicted.  I had a girlfriend who never knew what her score was but she only had one credit card that she was on top of. I urged her to sign up for it ASAP and both her and I were shocked to when we saw her account.

First of all, she had a higher score than mine (and I thought I had it pretty good already) but secondly, she actually had TWO CREDIT CARDS in her name.

One was, of course, the one that she had but according to Credit Karma, she has had the second credit card for 15 years!!! That means, she got it when she was 8 years old!  How's that possible?  Well, I told her that sometimes parents will open cards in their kids' names to build their credit up and not tell them about it and this might be one of those situations.  She went home and asked her parents and guess what, it was exactly that situation.

Lucky for her, I've heard horror stories.  You know, the ones where kids don't realize until they're adults that their parents opened a credit card in their name and then defaulted in their name as well. This woman was already a homeowner at 25 years old, but on paper, she has been a deliquent since she was in the 5th grade! 

Her mummy dearest bought the house in her name.  Identity theft is already bad, but when it's your own parents that commit the crime?  That's the worst kind of identity theft there is!

Which brings me to my next point, you should always know your credit score and why it is the way it is.

I never really knew what my FICO score was or what it even stood for.
(FYI it's Fair Isaac Corporation.  The firm that invented the formula.  Just saved you a Google search)

I didn't think it mattered because it's not like I was planning on buying a house in college.  But it's pretty much your report card for life.  Let's be real here, it's not the best report card out there. 

I know people who have never had an any debt, don't have any credit cards, pay cash in everything and have a terrible credit score.  It's flawed on that count in true responsibility, but it's how people and institutions will determine how responsible of a person you are based on what they can actually keep track of.  It's how landlords will trust that you'll be paying rent on time or how you'll figure how much you'll really be paying for your car in the end.

These days I use my credit score as a persuasion tactic and to sign up for credit cards for bonus airline miles.  After all, you want a good, healthy credit score to get the best rates in town for whatever it is that you need.  If you have a poor credit score, you become even poorer!

Let's use a 30 year fixed mortgage in California for $200,000 as an example from's Loan Savings Calculator.

A poor credit score will cost you an extra $69,784 from the best credit score's rate!  That's 4 years of only one of your kids' college tuition!  That's an extra year and a half of working full-time!  That's 69,784 reasons to keep up a good score.  

And what's considered a good FICO score?  I've taken this range from here.


But I do feel that mint has the best elaboration on the score range.  
I just wished they made a better graphic out of if.

A lot of people have these misconceptions of what lowers their credit scores and so below is a chart that sums it up quickly and then my elaboration on it.

35% of it is based on how many on-time payments you make.  You make one late payment and this will ding you.  SO DON'T BE LATE!  It's that easy.  Automate your payments.  Even if it has to be the minimum.  I used a simulator of what would happen to mine if I had a 30 day late payment and it knocked it down by 56 points!  I did it by 60 days, it was still 56, but with a 90 day late payment, it jumped down by another 47 points to a total of 103.  OUCH.  (By the way, these are my numbers, yours may be different based on your score)

30% is your debt-to-credit ratio.  In other words, the total amount of your debt (from credit cards and other loans) compared your total credit limit.

15% is the length of credit history.  They actually use the average of all of your credit cards' ages.  The oldest one I have is now 9 years, there's no way I'll ever close it only because of that.  However, because it's only worth 15% of my score, if I was to close it, it would only lower my score by 5 points.  Not that big of a deal for me.  If you're going to close any other card, close your newest accounts first because if anything, they'll help your average.

10% are based on the number of hard credit inquiries you've had.  Every time you apply for a credit card or loan, or even for housing situations, you'll have an inquiry show on your credit report.  Too many of these and it sends a red flag to lenders that you're credit happy and cash sad. 

If you're looking for a house, your real estate agent may have even told you to not apply for anything to avoid hard credit inquiries because it'll affect your credit score which will in turn affect how much you can afford a house.  True, during that sensitive process.

But of course, this has a really low impact on your score.   I've had 3 inquiries this past year and it's only dinged 2 points each time.  The fact that I've made consistent on-time payments (which remember, accounts for 35% of my score), it offsets my inquiries.

And thanks to Suze Orman for this bit:  Let's say you're shopping around with 5 different mortgage lenders and each one of them is going to ask to check your credit. It doesn't mean you're going to have 5 different inquiries on your report.  If you do it within a 2 week span, it'll show up as ONE INQUIRY.

10% is based on the mix of credit cards and loans that you have.  The more diverse, the better.  As in, student loans, credit card loans, mortgage, auto loans, etc.  I know, you would think it's a bit counterintuitive.  However, in the lenders' eyes, they see it as how you've obviously been soooo fiscally well-behaved, that you have been approved before for other fun things.

On a somewhat irrelevant but analogous note, this reminds me of how as a model, clients and agencies love to see a portfolio full of tearsheets (published work that you tear out of magazines, hence "tearsheet") rather than a portfolio full of pretty photos.  Because what that means is that you've been hired before, and they'd rather go with someone who's experienced and has been seen as desirable.  Even if you didn't get paid for certain tearsheets, lol.


1.  Sign up for Credit Karma: 

This checks on your TransUnion score and updates it weekly.  Its shows you a report card of how you're doing in all the categories above and my favorite feature on the site is the simulator.  You can see how your credit score is affected by selecting different scenarios, whether it's closing your oldest credit card, adding a new loan, being on time with your payments, not being on time with your payments and so forth.

2.  Sign up for Credit Sesame:

This checks on your Experian score and updates it monthly.

There are 3 different credit bureaus:  Equifax, TransUnion and Experian.  Some places will check one, some will check two of them, and others will check all of them.  Knowing 2 out of 3 scores will give you a general idea of where you are.  There's a 22 point difference between both of mine.

These sites are secure and checking on them will not incur any hard inquiries on your report.  They're merely soft checks and a close reflection of what your FICO score is.  And use these as reference guides.  For example, if I was to buy a new car and had to take out a loan, I'll negotiate based on those scores.  But if I was gearing up to buy a home, I would buy my actual FICO score (a compilation based on the information from all 3 credit bureaus) so I would be armed with the actual number for better negotiation.

AND, they're truly FREE.  Can't beat that.


MANIPULATE YOUR DEBT-TO-CREDIT RATIO:  This formula accounts for 30% of your score.  Pretty meaty.  This is the one thing you can control right away because it's simply a numbers game.  If for example, on a card you have a $7000 credit limit but you owe $5000 on it, you're using 71% of your credit limit.

You want to ideally be using less than 30% across all of your credit cards.

So call in your credit card(s) and ask them to see what's the max you raise your credit limit to.  This DOES NOT give you permission to spend more, otherwise, it's defeated the whole point.  The whole point is to make it mathematically advantageous for you.

So if you raise it to $10,000 with the same debt of $5000 on it, now you have a 50% debt-to-credit ration.  The lower the ratio, the better.  Pay it down more now and help it out.  And I've been there.  So I'm going to throw in a screenshot of an old e-mail and attachment I sent to my boyfriend about my debt-to-credit ratio at the time.

Also, if you do a balance transfer, you're also manipulating your debt-to-credit ratio by default because you've given yourself more credit limit to work with.  But go with a balance transfer that has 0% APR and no balance transfer fee such as Chase Slate so you don't have to pay any interest or any fees to do this.


PAY ON TIME:  If you're late on a cell phone bill, your credit card will still know about it.  If you're late on Credit Card A, Credit Card B will raise their interest on you even though they're separate entities.  That's just how it is. 

To avoid this, automate all your payments a week before it's due.  All of my bills are automated.  I still look over them to see if there are mistakes, but I'd rather call in about the mistake and have them refund me money than to be late and owe them the money and some change.  The more consistent, back to back, on-time payments you have, the higher your score will be because this accounts for 35% of your score.

DON'T CLOSE YOUR OLDEST CREDIT CARDS:  The older the card, the better.  Keep it.  Once you close it, you wipe away all that history.  Sure, it might have not been a pretty history for you but you might as well make the most of it because over time it's what's going to help you.  My 9 years with CitiCard hasn't always been the best, but now it is and lenders can see that.  If I close it now, lenders can't anymore.

However, when I started doing balance transfers, I had all these new cards that hurt my score a bit.  But because I was paying off my card on-time, it offset that by a lot.  And then when I was done with those cards, I noticed that when I closed my newest card (it was only 9 months old), it actually HELPED my credit score because now the average age of my credit history was higher.  I thought that was interesting.

So now when someone asks you what your credit score is, you'll know exactly where you stand.
When I became aware of my credit score, I felt more sure of myself and confidence is just one of those things that helped me thatmuchmore in chipping away at my debt.

Thanks for reading and check again every Finance Friday and Money Monday. 
I'll be honest though, I'm about ready to throw in a random fun entry in between.  Till then!

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