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  • Greg Payne

The Credit Score Game

I was a teacher and coach for 15 years. I was in the classroom for 13 of those and was in administration for two. I taught in both public and private schools. I learned a lot about kids, parents, and the educational process.


I was in the banking business for almost nine years and am now in the mortgage business. I've learned a lot about finances, credit reports and other things that NO ONE ever taught me in school.


Why schools don't teach about such things is beyond me. I've always wondered why the powers that be who decide on school curriculum didn't incorporate such life skills as personal finance. Stuff like "how to buy a house", "how to buy a car", "why credit reports are important" and stuff like that. I actually got to teach these things in a class at a private school one year, but private schools afford the teacher and student much more latitude in what's taught. The teachers in public schools have a ton of standards they have to meet, not to mention the all-important tests at the end of the year, so real-life stuff like that mentioned above isn't taught. I mean, that's not on any high-stakes test so teachers really can't "waste time" with it. It's stuff like this that makes our educational system look woefully inadequate when there's no "real-life" overlap.


But I digress.


Since I'm back in the credit business, I thought I'd write about a topic that is extremely important...but none of us are really taught about it in school. Today, I'm discussing the actual credit report and your credit score.


You've seen the ads that are out about knowing your credit score, right? They seem to run all of the time. Credit karma, or something like that. Also, I see that Discover Card is promoting its free credit score tracking as an enticement to get one of their cards. Credit scores aren't new, but they are relatively new in regards to being used in advertising.


How does one go about getting a "good" credit score?


Most people would say, "Pay what you owe and pay it on time"...and they'd be right.


Partially.


It's more than that though. Your past payment history is THE most important factor that affects your credit score. But...it only makes up about 35% of your actual score. As much open talk as there is about one's credit score now, I'm surprised that there's so little education about what makes up a credit score. Of course, the worse the incident, the more it impacts your credit. For example, having your car repossessed hurts you more than if you were ever 30 days late on a credit card. But, it all impacts your score in some way...good and bad.


Your balances make up about 30% of your score. So, even though you have paid every bill you've ever had on time...never been late (I'm going to discuss "late" payments in a minute), you can still have credit score that's not real good. The biggest reason is credit cards. Follow me here: 72% of Americans own at least one credit card and of those who own credit cards, the average number they actually have is 3.7 (http://www.creditcards.com/credit-card-news/owners...) and the average household with credit card debt owes $16,061 on those cards (https://www.nerdwallet.com/blog/average-credit-car...). If you owe more than 30% of the total credit limit on your card, then your credit score goes down. If you've "maxed out" your card, then your credit score takes an even bigger hit. So, as you can see, paying your bills on time isn't enough.


But, there's more.


Your credit history makes up about 15% of your score. The longer you've had that particular credit, the better. If you open a new account, your score goes down. If you "close" a card once you've paid off the balance, your score goes down. I know that doesn't seem right, but it does. What you're doing when you close an account is cutting off that available credit. That may seem smart (and it is, it just hurts your credit score), but you should keep it open and use it periodically so you're showing a responsible use of available credit. Check this out: Back in 2008, I had a $20k credit limit with Capital One. I had never missed a payment. I'd never even been a day late. I owed about $9500 so I was almost 50% to my limit. Then, the economy went in the tank. Delinquencies skyrocketed. Capital One cut my limit from $20k to $10k even though I'd done nothing to deserve that cut. That greatly affected my credit score because I went from just under 50% of my limit used to 95%...thereby making me a much greater risk for delinquency or even bankruptcy. Crazy, huh? What I'm saying here is this: even when you pay that card off, don't close the account and use it periodically.


The types of credit in use also has an impact on your score. This area is about 15% of your total score. Mortgage loans aren't scored in the same way as, say, finance company credit is scored. Finance companies are the most negatively weighted type of credit because, generally, they are the riskiest loans and are made to the riskiest borrowers.


Finally, inquiries on your credit make up the last 10% of your score. Don't let anyone and everyone pull your credit report. There are about 50-60 points available in your score that can be affected by inquiries. If a bunch of agencies pull your report, your score will go down.


Here's another secret: if you pay a week late, that doesn't affect your credit report...but you're still late. Late payments on credit reports are only in 30 day increments, but your loan contract (or credit card contract) spells out a specific due date. If you don't pay on or before that date, you're late. Think of it this way: If you're supposed to get paid on the 1st and 15th of each month, and those days fall on a Sunday, do you want your check on the 2nd and the 16th? NO...you want it before the 1st. It's the same principle with creditors. It's why credit card companies can tack on a $35 late fee when you're just one day late. Bottom line, you're still late.


Hopefully, you've learned a little...or a lot...about credit reports and scoring. Protect your score. But, if you've got some dings on your credit, all is not lost. I can help you get that score up. Then, once you have it up to a good score and want to buy a house, let me hook you up!

Greg Payne, Loan Officer

NMLS ID# 1527537 GA LIC# 52400

6148 Lee Hwy, Suite 308

Chattanooga, TN 37421

Branch NMLS ID# 1821797

Summit Funding, Inc. NMS ID# 3199, GA Lic# 39456

www.nmlsconsumeraccess.org

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