Those Pesky Numbers

In the last post we touched upon your credit score; mostly we talked about what credit was. Today we will go a little deeper into what your score is and what those pesky numbers mean and how they are created. 

Your credit score tells the people you want to borrow money from, how much of a risk you are to them and if you are good for it.  Meaning,  will you pay them back and do so on time? One could conclude that the better the score, the lower the risk and the lower the score, the greater the risk.  However, that is not always the case, but we will get to that later.

So, what does your score do for you?  Think back to school when a higher score on an assignment meant a better grade. That is the same principle here.  The higher your score the better your chances of getting credit and better options along with it.  On the flip side, the lower your score, the harder your chances of getting credit and the worse the options will be if and when you get it. Simply put:

• Higher score -> easier chances -> better options
• Lower score -> harder chances -> worse options

 That's all well and good, but what makes up your score?  It is common knowledge you have more than one score.  I'm sure you knew about the biggest three reporting agencies and their scores (and the fact they don't agree) but did you know you actually have up to 49 of them?!  Yes, 49.  Each and every iteration of your score is used for various services.  However, there is one common thing in all of them - the way the score is calculated.  (At least they all agree on the math!)

There are 5 categories/criteria that make up your score.  They are:

• Payment History - 35% of total score
• Debt Burden - 30% of total score
• Length of History - 15% of total score
• Types of Credit - 10 % of total score
• Recent Credit Searches - 10 % of total score

1) History - the most important of all the categories - this percentage is based solely on the payments you have already made. It is influenced by your ability to make a payment on time.  Every late payment (30 days or more) hurts you more than every on-time payment helps you.  Think of this as a one step forward, two steps back kind of thing. In addition to this, the length of your tardiness, say 60 or 90 days (and more) hurts you increasingly more. The biggest impact here will come from accounts that have been sent to collections, been charged-off, turned over to a lawsuit, been paid via wage garnishment, put on lien/judgment.  Your history, in the case of finances, will always catch up with you.

2) Debt - this percentage is based on the amount of debt you have available versus how much you still owe on it. All accounts factor into this and each account is looked at differently. Why? Because the types of loans (accounts) you have open are used as a signal to how well you manage your existing debt. This can be summed up with the phrase, credit utilization.  While it may seem wise to get rid of or have more of one type of account, the fact is a mix is necessary.  Examples of different accounts include - mortgage, auto, credit cards, and installment loans.

3) Length - this percentage is factored on how long you have been using credit.  First, how old is your oldest account, and second what is the average age of all your accounts.  Getting a lot of new credit in a short period of time can lower the overall average which can bring down the weight of this category on your score.

4) New Credit - this percentage is based upon how many new opened accounts and how many newly applied for accounts you have. This is really important because several newly opened accounts could be an indication of cash flow problems or that the borrower is planning on taking on a lot of new debt.

5) Types of Credit - this percentage is based on the types of and totals of each of your accounts. Since this category isn't a huge factor in your overall score, do not run out and open more accounts just to obtain a mix!

Next post we will break down your score and how it can help/hurt you and just what that looks like each month. 

Let me know your thoughts in the comments section below.

Let's Talk Credit

There are a lot of key terms in finance.  While they are all important, credit is the one we all know, even if we don't fully understand what it is.  We hear the word on the radio and tv; we see it on billboards, signs, and applications ... credit, credit, credit...  (Said in my best Jan Brady voice.)  What is the BHD deal with this thing anyway?! What exactly IS credit? 

There are two parts to credit:

Credit is 1) your ability to get someone else's money to pay for something you want which is based on 2) your ability to pay them back. 

Seems pretty easy, huh?  Then why do we get so tripped up?  First thing first.  Not all credit is created equal, nor does it impact you equally. (We'll dive into that deeper in a later post.) Second, there are two main categories of credit, secured and unsecured.  Secured means you have something at stake for ensuring repayment.  Think your car, home, cash.  Unsecured means you have nothing to back repayment.  Think your credit cards, student loans, medical bills.  Can you guess which type costs you more money in the long run?  And Why?

Within these categories, there are four main types of credit. 

1 - Revolving Credit - you are given a maximum limit of money and the opportunity to spend it any way you like. Also, you have the option to only pay back a partial amount of what you spent each month  (called a Minimum Monthly Payment (MMP)) thus the payment revolves month over month.
      - Primary examples of this are credit cards and store cards.

2 - Charge Cards - these are very similar to revolving accounts with one MAJOR difference; you must pay it back 100% each month.
     - Primary example of this is an American Express card

3 - Service Credit - an agreement you make with a service provider to pay an amount each month for a service you use.
     - Primary examples of this are utilities, internet, cell phone, etc

4 - Installment Credit - a set amount of money loaned to you with a mutual agreement to pay a set amount each month over a specific period of time. 
     - Primary examples of this are vehicle, mortgage, and student loans

So, how do we get credit?  Why with credit, naturally!  What the what?!  So circular, yet so important.  That bit above where I said, "all based on your ability to pay them back", yeah that one is the kicker.  You get credit by getting credit - which is an analysis/calculation of your ability to pay people back over time. This calculation comes in the form of three numbers - depending on which credit rating service you look at (another thing we will look at later) - ranging between 250 (the absolute worst of the worst) and 900 (you bloody rock). 

The scores are put into categories and the better the category the better your credit.  The better your credit the better your chances of getting credit!  *Mind = Blown*

Keep in mind, however, credit is a double edged sword.  In some cases it can hurt you coming and going, in others, it can help you coming and going.

Feel free to drop your questions and comments below.  In the fairness and peacefulness of all things - submissions will be monitored. 

Welcome

There are few things in this world people like to keep under cover, personal finances are one of them.  Honestly, there is a lot of good reason for this and naturally, it is quite, well, personal. Anyway...

I'm Mandy.  Let's get the formal stuff out of the way.  I work in purchasing and have been for multiple years.  I have bought everything from boxes of toilet paper to truck loads of car parts and other materials.  I have worked with small budgets and embarrassingly large ones.  The ironic part of this career path is that I hate to shop!  Ask my teenage daughters, I am NOT the mom who handles the Mall very well.  I received my MBA from Trine University and plan to begin my DBA in the not-so-distant future.  I love learning just as much as I love sharing what I learn.

To be honest, I am not completely out of debt and I am not a self-made millionaire or a lucky soul who will come into a sizable inheritance. I am an average joe.  Sure, I have had some personal wins, but I have also had some very hard losses.  I have had to make tough choices and work harder (read that more) and I have had the opportunity to relax a little month over month.  The greatest thing about this adventure is that I will be taking it along with you.  While there are things I have learned there are things I still need to learn.  Plus, I want to be debt free. I want my money to work for me instead of me working for my money.  So, why this?  Why now?

First and foremost, I have a passion to help others.  Second, I think we have a great need to get back to the basics.  So much of what I learned in school is no longer taught in lieu of classes and subjects that increase our test scores, but do not prepare us for life after school.  Third, is my love for personal finance. 

In coming posts, we will learn everything from managing a checkbook to interest rates and loans to coupons and back.  Some posts will be small and some will be big - there are even some subjects which will require multiple posts.  I would like to say everything will compound upon itself, but I don't know exactly how this will flow once we get started.  For those who stick with this from post one, you will get the benefit of seeing it take shape.  For those who come in randomly, I hope you learn what you need to from the moment you join in.

To that, thank you for your interest and here's to learning how to make our finances work for us and not against us.

- M