Today we’re hearing that many parents don’t teach their youth or children about their own personal finances. I have to agree! I sure know my parents never took the time to show me anything when it came to my own personal finances. It’s so very important for all of us to learn this process and take time to understand it all the more as we get older, graduate college and get started into a career.
We hear stories in the national news or personally feel the effects Student Loans put on us. On top of that, they’ve become much harder for the majority of us to obtain. So many students today are faced with taking unsecured personal loans at a much higher interest rate with unfavorable terms of repayment. Federal Student Loans are much better in terms of repayment, giving us more time to pay back and at a very low rate, as well as longer terms to allow the payments to remain even lower over the life of the loan.
It is a great idea to start learning more about this now instead of later in life. Don’t let it be those hard life lessons that teach you, or how you might see others suffering; maybe even knowing someone who had a great financial loss.
You must start now to take control of your personal finances because you can maintain a good credit standing for life with this knowledge. Here is a breakdown of how your Credit Score is determined by Credit Reporting Agencies, which sell this information to Lenders and then the lenders use this information to determine how much if any they are willing to risk and lend.
Fast forward to today as we are looking for a job. Employers also obtain your Credit Score to determine if they will offer employment to you. Understanding how your Credit Score is determined is key to your own personal success in life. Knowing how it is calculated and determined by the financing reporting agencies is important for all of us to understand.
These are the personal affects of how the Banks, Credit Card and Loan Leaders are using our Credit Score.
Payment History has a 35% impact.
Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact.
Outstanding Credit Balances – have a 30% impact.
Debt ratio of outstanding balance to available credit is important. Keeping that below 50% is wise and below 30% even wiser. It is never a good idea to close an account; the debt ratio will go up and the number of seasoned lines of credit will decrease. Pay outstanding debt down as close to zero as possible and evenly redistribute the remaining balance among the open lines. The increased interest incurred by moving a balance from a 0% card to a 23% card will be minimal relative to what the increased mortgage debt might be with a low credit score. Hitting the maximums of available credit can be very negative. It may be worth calling and asking the credit company to increase your available credit to lower the debt ratio, provided they can do so without a hard credit inquiry.
Length of Credit History – has a 15% impact
The length of time a particular credit line has been opened is important. A seasoned borrower is stronger. Opening new credit cards will decrease the average length, and therefore hurt this portion of the score.
Type of Credit – has a 10% impact
A mix of auto loans, credit cards and mortgages is positive, rather than a concentration in credit cards only. Careful, too, when getting credit at a store that is not a department store: the credit agencies frown on cards for more specialized stores where you’re likely to only make one purchase, as they seem to show desperation.
Inquiries – have a 10% impact
Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment. 20 inquiries can be made in a 14-day period for auto or mortgage and will be treated as only 1 inquiry. The maximum number of inquiries that will reduce the score is 10. Any inquiries beyond that in a six-month period will have no further impact on the borrower. Each hard inquiry can cost 2-50 points on a credit score.
For more information, visit www.myfico.com. If you feel you could benefit from credit counseling, protect yourself from fraudulent organizations. The U.S. Department of Housing and Urban Development keeps a list of approved credit counseling agencies at https://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credits: MyFico.com has shared information regarding the credit scoring model. Consider all these five (5) factors when trying to improve your credit. Credit Score Image was taken from Credit-Score-Scale.org. Use these sites to obtain your free Credit Report. Credit Scoring