Credit, your score, and how they impact your life.

[shadowrider]

 Let me start by saying I am not a financial consultant, CPA, or a money whiz by any means. I was holding off on starting this topic in hopes that someone that is would take the initiative and do this. Since no one has and I feel this is something everyone should learn in school but doesn't, here we are.

 I won't be doing a super deep dive into everything related to your credit or using a lot of terms that can be confusing to some, myself included. If you really wanted all that you would be enrolled in a class taught by a professional and not reading this.

 The statistics I will be sharing are based in the U.S. as that's where I am and have no knowledge of how things are done elsewhere. I have also been told that a lot of other countries handle finances differently, we all know here we are taught to get credit and use it.

 Some basic stats on that wonderful little bit of plastic that is probably in your pocket as you read this. All stats came from the web and sources are listed.

• Credit cards are the most common consumer lending product by number of users, with 82 percent of U.S. adults holding a credit card in 2022. (Government Accountability Office)
• One-half of American credit cardholders carry a credit card balance from month to month. That's 50 percent of cardholders, compared to 44 percent in January 2024 and 60 percent in March 2020. (Bankrate)
• According to data compiled by TransUnion, the average credit card debt for Americans was an estimated $6,329 through the second quarter of 2024. This was an increase from the roughly $5,090 average credit card balance Americans had at the same time in 2023. (Discover)
• 40% of Americans Have Been in Credit Card Debt for More Than 5 Years. The survey found that 47% of Americans have not been debt-free since 2018. (Yahoo Finance)
• Approximately 16% of Americans have bad credit, according to Experian data. (BadCredit . org)
• Credit scores help lenders decide whether to grant you credit. The average credit score in the United States is 705, based on VantageScore data from March 2024. (Equifax)
• What it means to have a credit score of 800. A credit score of 800 means you have an exceptional credit score, according to Experian. According to a report by FICO, only 23% of the scorable population has a credit score of 800 or above. (CNBC)

How Credit Scores Are Calculated

(Taken from Investopedia)

 The first thing to understand about credit scores is that more than one scoring model exists. However, the most commonly used credit score, across the majority of lenders and tracked by all three of the credit reporting agencies, is the FICO 8 score.

FICO 8 scores can range from 300 up to 850, and take into account the following five weighted factors:

1. Payment history. This is the single most impactful factor in your score, weighted at 35%. It measures how often you have made payments late or on time.
2. Credit utilization. Also heavily weighted, at 30% of your score, credit utilization refers to how much of your available credit you are using at a particular time. In other words, how much debt do you have relative to your available credit lines? Lower utilization rates are better for your score.
3. Length of credit history. At 15%, the weighting of this factor is notably smaller. But a credit history that stretches back a few decades, rather than just a few years, will improve your score. This is part of the reason older consumers tend to have higher credit scores.
4. New credit inquiries. How many times you've applied for new credit in the past two years can put a dent in your score if it's a high number. At 10% of your total score, this can have an impact, but it is far less important than the factors above.
5. Credit mix. Similarly, showing you've been able to manage a mix of different credit types (e.g., credit cards versus installment loans like a mortgage or auto loan) counts for 10% of your score.

Your credit score will play a part in whether you can get that apartment/house you love, that car you want, or in some cases that new job. Yes some employers look at your credit score to determine if you are a good candidate for a position. so if you aren't sure what your score is you may want to have a look. There are plenty of sites you can sign up for but if your are just wanting to see what yours looks like you can get a free copy once a year from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) by popping over to AnnualCreditReport . com.

 That's it for the facts and statistics for now. From here on is just my opinion on how to do your best to have a better than average credit score and not fall into the debt trap.

 For those already in debt's grasp.

By "in debt's grasp" I mean you are struggling or just barely staying afloat.

Option 1 which I prefer.

1. Take a serious look at what your debt is and how you got to this point.
2. Make a list of your cards and any other debt you have, car note, mortgage, and so on. Place them in reverse order meaning the lowest total owed on top.
3. Make a list of anything you normally buy or do that you could live without. Examples: buying coffee instead of making your own, the same with breakfast and lunches. Eating out because it is easier than cooking at home.
4. This is the hard part. Make a commitment to yourself to get out of this hole no matter what it takes. Been there, it sucks. Make your own coffee and meals. Stop shopping when you are hungry. Stop buying drinks and snacks at the gas station just because "I'm already here and it's only a couple dollars".
5. Take the money you save by avoiding unnecessary purchases and send that to the card in the top spot. Yes it makes sense to pay off the bigger one first to save interest. But you are less likely to stick with the program if you aren't seeing results as quickly as you'd like. Let's pay off that nagging little one first. 
6. Once the top card is gone you take what you were sending to that card and add it to what you normally send the next one. Now you are making a larger dent in that card's total.
7. Repeat these steps until that last one is all that is left. By this time you are probably able to pay double the minimum due each month, depending on where you were when you started.
8. Instead of paying one lump sum each month pay it twice a month. So instead of say $150 in one payment do 2 payments of $75, roughly 2 weeks apart. You're paying the same amount but the card issuer see you making 2 payments each month and your score will gradually increase due to that.

Option 2, contact a debt counseling agency.

1. These can be sketchy so do your homework. Some offer great results and you end up worse off than you were.
2. Make sure they explain exactly how they handle helping you get your debt payed off. Most will contact your creditors and negotiate better terms.

Option 3, can be risky and will hurt your score in the short term. I've seen it work but I'm not a huge fan of taking on a new card if you are already struggling with how to handle the ones you have.

 We've all seen those credit card offers in the mail. Get X amount interest free for 90 days or 6 months or whatever.

1. When you get the next offer in the mail read it carefully and see if it offers no interest on balance transfers. If it does and they offer enough to cover 1 or more of your existing cards. Get the card and use it to payoff 1 or more of your others.
2. Now total up what you were paying those cards and send it to the new one with whatever else you have from skipping all the stuff we discussed skipping earlier. The benefit is you are applying everything to your balance and not paying interest. But that interest will be added to your account if not paid off in that term period. So you would have to take out another card before your 90 days or 6 months or whatever is expired and basically ping pong your debt around between cards.
3. Taking out all those new cards will hurt your credit score. But I have seen someone that owed a little over $4000 in credit card debt get out from under it like this.
4. In my opinion it is a bad idea and doesn't teach you the discipline you need to stay out of the trap.

Trying to establish credit while avoiding the trap.

  I was raised that if you can't pay cash for it you don't need it. It was a great theory and years ago it was doable to an extent. When you are just starting out and trying to carve your way in life you don't have a lot of cash just lying around. And things will pop up or break and bite you right in the bum. That's where our friend the credit card comes in.

 I remember coming home from work and realizing my fridge had died. I was young and barely making ends meet and had no way to buy even a used one with cash. So Sears saved the day by giving me a credit card. They also didn't have the cheapest model on the floor so I had to spend more than I normally would have, convenient for them. The problem with Sears was they sold everything you could need. Tools for work ? got 'em. Clothes, shoes, appliances ? Got 'em. Having that card and being able to buy things I normally couldn't was great, and terrible, since I hadn't been taught how to responsibly handle credit cards. Yep debt followed.

 If I were starting all over I would go with a card that offers the ability to get things in those types of emergency situations, but doesn't allow for the occasional "treating" of oneself. 

 I would probably try and get a Home Depot or Lowes card. HD usually offers interest free offers if you pay the purchase off in a shorter time, depending on how much the purchase was. I think there standard is interest free for 12 months on $299 or more if paid in full in that time. If you don't pay it in the 12 months you get hit with all the interest.

 That card will allow you to start developing a credit history without buying things you can't even remember, like coffee and fries. Buy something small like a plant or cleaning supplies and charge it. Pay it off when the bill comes. Next month buy something else you need like a vacuum. Pay it off over a couple months, never pay the minimum, that's what they want you to do. The longer you take to pay something off the more money they make off of you. 

 You can also get a gas card if you drive. But only get gas with it because no one needs $3 a bottle water or $5 M&Ms.

 I personally would avoid the big credit card companies until you have a firm grasp on how to handle your spending. I recommend joining a local credit union and getting their card if you can. I love my credit union and they take better care of me than a credit card company that has never seen me.

  That's it for now. Please feel free to drop any thoughts, suggestions, or questions.

 

 

[Guest pawpaw]

Some real world advice on improving your credit score over time in the USA.

The older you get the more important your credit score becomes.

My Experian credit score as of this post is 838

I can walk in anywhere right now and sign for anything because of that. (can't afford to make the payments but I can get anything just by signing... 😆)

They ask no questions of employment or income or anything else once they see my score. And I always make sure running my score is the very first thing anyone does.

After they run my credit they only ask if I am comfortable, and would I care for a drink, or can they send someone to get me anything.

I actually tried out that last one the last time I bought a new truck. I told them I would like some real butter and saltine brand crackers while I waited for the paperwork to be completed. I'll be damned if they didn't send someone to get them for me.

He also came back with a cheese platter which was very considerate... 🤣

1) there are 2 types of credit checks run. Hard hit (bad) and soft hit (bad if you have a bunch in a short period even though they claim a soft hit has no effect)

2) When applying for a credit card they do a "hard hit" credit check which will always cause your credit score to drop. Avoid applying for multiple cards in a year.

3) The majority of credit cards have no real positive effect on your credit score. But can easily have a negative effect. (Debt to liquidity ratio)

4) If anyone ever asks to run your credit always ask if it's a hard hit or a soft hit. Try to avoid hard hits unless absolutely necessary. 100% of the time they drop your credit score.

5) I always recommend no more than 2 major credit cards. One for emergencies only. And one for regular use. And try to pay that one off monthly so there is no interest paid.

6) Never withdraw cash on a credit card. Cash has a much higher interest rate than credit purchases. And not one cent of your cash balance is ever paid until after 100% of your credit balance is paid on almost all cards.

7) Regular bank loans have the most positive effect on your credit score. I've always taken out loans for far more than I need, then I pay the majority of what I borrowed right back and pay off the remaining small balance as soon as possible so the loan is paid off long before maturation date. You pay minimal interest this way and paying it off early boosts your score.

I recently took out an $80K bank loan. I took a huge hit initially on my credit score because of that but I paid $70K back the first payment and then paid the balance off over the next several months and my credit score jumped up to the highest its ever been. 

Very Important: whenever you sign for any type of loan or financing always make sure you can make payments on principal only. If you can not then walk away.

To start out doing this begin with small loans like $500 or so. Pay back $400 of it first payment and then the balance early.

NEVER take out what is called a balloon loan. These have tiny monthly payments and a massive final payment. They are designed to force you to refinance. 

8) This one really helps your credit score long term and is a good habit to get into... most people do paperless auto pay on regular bills anymore which does nothing major to help your credit score other than show you weren't late with a payment...

I keep about 1/3 of my regular monthly and quarterly bills in snail mail. And I pay each as soon as I receive the invoice in the mail (not by the due date) so every payment shows as paid early. Long term this boosts and maintains your credit score. Before paperless I did this with all of my bills.

So why is a high credit score so important ?

The older you get the more money you generally make... and the more you make the more you spend... and the higher your credit score is the lower the interest rates are that are offered to you and you can shop around for the best offer.

As you get older and you aquire better stuff it's nearly impossible for most to keep the mindset of "if I don't have cash for it I don't need it" , and you will need to finance things.

Plus the prices of everything is crazy now and you will find as you get older they just get crazier. You will get to the point where its nice to just walk in somewhere and sign your name...

and get a free cheese platter 😇

 

Edited December 4, 2024 by pawpaw
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