Am I That Dumb About Money? Part 6: Credit Health

Becky Blevins, CFP®, CPWA®, MSFS April 10th, 2023

For starters, please read Part 1 of this series for more insight on the title.

Let’s talk about credit scores! Your credit score is given to you by a credit bureau and it is based on many factors (more information on that below). Your score tells lenders how much of a risk you are to them. Credit scores can range from 300-850, and this one little number can have a huge impact on your financial life.

If your credit score is below 640 you are considered a subprime borrower. In this case, to get anyone to give you money you will have to pay in the form of higher interest rates, large down payments or deposits, etc.

So, what do you do to maintain or improve your credit score (full disclosure, there will be a lot of references to past blog posts)? First, let’s look at what makes up your credit score from the highest to lowest impact.

  • Payment History (~35%)
  • Credit Utilization (~30%)
  • Length of Credit History (15%)
  • Credit Mix (10%)
  • New Credit (10%)

Payment History — do you make your payments on time or are you 30, 60, or 90 days behind? Pay your bills on time, set up autopay if you need to, just pay on time! Remember in my credit blog I said to pay at least the minimum on each card every month? This is why… payment history is the number one contributing factor to your credit score (as a percentage).

Credit Card Utilization — The amount owed vs. the amount of credit available on your credit cards. Lenders want to see that you have the discipline and have available credit that you don’t use. If your credit card’s limit is $5,000 and your balance is $50, that will result in a more favorable score compared to a $4,500 balance.

You want to keep your credit card utilization under 30%, but people with excellent credit scores keep it much lower than that. Lower credit card utilization percentage = higher credit score. In my post about debt where I said to put the credit cards away in a safe but not to cancel them… this is why! If you have a card with a $5,000 available credit that’s hiding in your safe and never being used (has a zero balance), the utilization on that card is 0%. There’s a very important Tips and Tricks about this, so read to the end.

Credit History — The longer your credit history the better! You’re going to feel like you’ve heard this before (because you have several times), but do you remember my post about debt when I said to put the credit cards away in a safe but not to cancel them… this is why! Unless there is a compelling reason to close the card, like an annual fee, keep it open to keep the clock running.

Credit Mix – you don’t want all of one type of credit, you will want installment accounts (mortgage, car loans, etc.) and credit cards. Many people have a goal to be debt free. While it’s not a terrible goal, it will impact their credit score, albeit marginally.

New Credit – every time you authorize a lender to pull your credit report, it puts a hard inquiry on your credit report. If you have many hard inquiries, it may reduce your credit score. There is a bit of a caveat to this. If you are shopping for a mortgage lender, and you have five different lenders run your credit in a short period of time, it will show as five inquiries, but most lenders will view them as one inquiry.

Pull your credit report and scores from each reporting agency (Equifax, Experian, and TransUnion)! The good news is you can pull all three from Avoiding it will not improve the information or scores.

You get one free report each year from each agency. If you are on a website that charges you to pull the report, you are not in the right spot! When you get the reports, make sure the information is accurate, we’re human and we all make mistakes. If you find incorrect information dispute it with the credit bureau. The credit bureaus do however charge a minimal fee to provide your score.

Tips and Tricks: You must use the credit cards that have been banished to your safe periodically. There’s no official length of time, but if unused, the issuers can and will cancel them. My first credit card has rewards that are well…non-existent. I will not cancel it because it is my longest-running account. I do use this card each year to buy holiday gifts.

A tips and tricks inside of the tips and tricks: don’t forget to make the payment. Because it’s not a card you use every day, it can slip your mind easily… it’s happened to me. I have a different credit card that I use for everyday purchases (hello, travel rewards again).

In addition to talking to your children about the importance of paying bills on time, be a role model and actually pay your bills on time.

This next statement really isn’t for the kids but it’s important. Monitor and consider freezing your child’s credit. There are people out there that will get ahold of your child’s Social Security numbers, open a bunch of credit cards, never pay them, and crush their credit rating/score. Usually this isn’t discovered until your child is over 18 and applying for their own credit. It’s something that can be corrected but it’s a time-consuming nightmare.

Thank you for taking the time to read my blog. I hope you learned a thing or two along the way and it wasn’t a major snooze fest. As always, if you have any questions, please feel free to reach out!

Read More By Becky Blevins, CFP®, CPWA®, MSFS

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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