Friday, January 23, 2015

Become High Scorer!

Last year, I was converting old VHS tapes to DVD.  One of the tapes was of my husband playing high school basketball.  It was a game where he was a scoring machine.  I didn’t know him in high school, so it was fun to watch.  While I was concentrating on the game, he walked in and said, “I made 30 points that night, and that was before the three-point line.”  Many people (who are old enough to know) would agree that the three-point line changed the game.  With sports, knowing how many points you earn and under what conditions is important.  The same is true with your credit score.

Credit scores are usually expressed in numbers ranging from 300-850.  These scores are what lenders use to determine how big of a risk you are.  But it is no longer just lenders who use the scores.  Some insurance companies, phone companies and employers also use the scores to determine their risk in doing business with you.   Do you know your credit score?  Do you know how it is tallied?  Did you know the credit game had a score board?

Much of your credit score is determined on your past behaviors and experiences.  Your score is based on information in your credit report.  In the starting lineup are your current balances and limits (or a ratio of the two), how many accounts you have, and your payment behavior (whether you pay your bills on time or not).  There are a variety of factors that may be considered and many versions of a credit-scoring models.  The scoring systems are supposed to help predict who is most likely to repay a debt.  You can get a credit report free at annualcreditreport.com, but getting your credit score involve additional fees. Some credit card companies are now including a credit score with their billing. 

You should know your credit score and which direction it is trending over time.  Many people get confused between a credit report and a credit score.  If you were playing basketball, for instance, the credit report would be how you played the game – assists, steals, rebounds, hustle and so forth.  Your score, or how many points you had, should reflect how well you played versus your opponents.  Credit scores give a numeric assignment to how well you are doing on the financial court compared to others.

Your 3-digit credit score can drop if you make a credit payment up to thirty days late.  A substantial drop in a credit score could affect interest rates offered to you from mortgages to credit cards. A different interest rate on a mortgage can add up to thousands of dollars over the course of the loan.  Late payments are just one of the many factors.  Your score can be affected by current transactions on a credit card.  A lender recently explained why my husband’s credit score was higher than mine.  At the point in time when my credit was reviewed, I had higher balances on my credit cards.  The company scoring me could only see the current charges, but not the fact that all balances were paid in full each month.  Of course, my husband was pleased with outscoring me. 

If you are trying to improve your credit score, you might look at some game-change strategies.  Pay your bills on time.  Timeliness and consistency account from more than 30 percent of your score.  Be careful how many times you apply for credit, especially the plastic kind.  Multiple inquiries to your credit report, such as those made by credit card companies or other lenders, can lower your score.  However, you definitely should check your own credit report, because there is no penalty on the score for self-inquiry.  If there are errors, you need to cry foul and get them fixed. 

If you have credit cards, you might think twice before applying for more, or before cancelling any of them.  Applying for new credit cards lowers the average length of time you have had credit established.  If I have three credit cards that I’ve had for five years and I get a fourth one that I’ve only had for a few months, that lowers my average.  If I cancel a credit card that had a $5,000 limit, I’ve just changed my potential “debt to limit” ratio.  It really is a numbers game.  Having a variety of credit can be important to show you can balance multiple credit lines at the same time.  For instance, an auto loan, home loan and credit card that are all paid promptly each month can prove your ability to manage your finances. 

No matter how you play the game, it is important for you to know your score.  It is a little like a team watching a game tape or reviewing stats.  It’s about improving how you play the game, and eventually that gets reflected on the score board. 



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