June 24, 2011

Know Your Score!!!

Hey Fab Friends! 

Welcome to the Finance Friday Series! 

I wanted to kick off the first "Finance Friday" topic with something simple, one of the basics of personal finance – The importance and foundation of having good credit.  As simple as this is to me, there are a lot of people who don’t realize HOW IMPORTANT this is!  Can you believe that?  

I’m sure you all have heard and seen those corny commercials about obtaining a free credit report once a year, right???  Ok, but I feel like that is only half of the battle.  The free credit reports are good for initially reviewing all of the information that is listed as yours and then verifying if it is true.  However, you should take it a step further and find out your actual score. 

This is no joke, one of the most important things you will need to know in life is your credit score.  Your credit score is the 3 digit number that deems your credit worthiness.  Not only that, this score is what the potential lender then uses to decide if extending credit to the loan applicant is an acceptable risk.

Who comes up with your scoreThe most widely used provider of credit scores is the Fair Isaac Corporation or FICO.  FICO scores come into the credit picture when potential lenders obtain credit information from one of the 3 major credit bureaus:  Equifax (EQ), Experian (EX), and Trans Union (TU). 

The Numbers:  Credit Scores can range from 300-850 and are derived by the data collected in your credit report that can be categorized into five major categories:  Payment History, Account Utilization, Established History, Inquiries, and Credit Mix.  Let’s take a look at the breakdown below.

Payment History 35% This includes The Good, The Bad and The Ugly of your payment track record.  This will tell a creditor how you pay your bills (credit cards, installment loans, mortgages, etc.), if you have any negative public records (bankruptcies, liens, judgements, collections, etc.), and payment delinquency (amounts, length of time and how often).
Bottom Line:  Pay your bills in FULL and ON TIME!

Account Utilization 30% This is a display of how your existing accounts are being used.  Account Utilization tells creditors how much you owe on each account, how many accounts have balances (high or low), and the proportions owed. 

You can calculate your utilization with a basic formula: 

Balance/Credit Limit = Percentage

Tip:  It’s best to have a mixture of accounts with low balances versus having a few accounts completely maxed out.  Keeping your utilization percentage below 10% puts you in good shape – and it’s one of the fastest ways to improve your credit score.

Established History 15% This tracks the amount of time that the accounts have been open by type and the time since account activity has began.  The longer the better! 

Tip:  With adverse accounts, think before you just close them.  It is more beneficial to your score to pay the balance down and cut the card up than to close the account if it happens to be one of your longer standing accounts. 

Inquiries10%  This tracks the number of recent credit inquiries, time since recent account openings (by account type),  time since last credit inquiries, number of recently opened accounts, and re-establishment of positive credit history.  The lesson to learn here is:  Don’t apply for credit unless you really need it and/or know you can get it.  Unnecessarily applying for credit (and being rejected) over and over can kill your credit score! 

Credit Mix 10% This is simply the importance of having a variety or mixture in the type of credit lines you have.  Types can include but aren’t limited to:  credit cards, retail accounts, installment loans, auto loans, and mortgage loans.

To sum it up, your credit score is made up of several factors and reduced to three digits as highlighted above.  ALL of them are taken into account when deeming your credit worthiness not just one or two.  Building good credit takes time there are no easy fixes, in fact most of them back fire. 

It is essential that you comprehend the importance of a FICO score as it pertains to the foundation of establishing good credit.  Take the necessary steps to protect and grow your score.  And always remember - It’s your credit, please use it responsibly. 

Love You for Following,


  1. Ohh I will be looking forward to these posts :-)

    Love financial/budget tips

    A Girl's Next Best Friend

  2. Thanks Ladies! Stay tuned. There will be much more. :)

  3. Thanks for Finance Fridays-- wonderful idea!! Being broke is definitely not fashionable ;-)


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