Tuesday, July 15, 2008

Personal Finances – Your Credit Score

Helping people out of financial strain has always been sort of a dream of mine. Kind of like Suze Orman without the tan. But I hate the thought of charging them for advice when they’ve already gotten in over their heads. So this is potentially a way for me to offer what I consider to be common sense advice but what many schools and parents fail to teach causing endless cycles of families struggling to survive. Maybe someone somewhere will stumble across this blog and it will reach them somehow…Ah who am I kidding. That’s not going to happen.

So lesson one is about our credit score. Your credit score says a lot about you. The higher your score, the more responsible you have been with credit and money you owe. The lower the score indicates that you are more of a risk to lenders. There are 5 elements that make up your credit score; payment history, total debt owed; length of credit history, available credit, and types of credit used.

There are things you can do in each of these categories to improve your score. For example too many credit cards can be perceived as a negative, especially if they all carry balances. However, having no credit cards can also be a negative since it decreases the amount of credit immediately available to you. As some of you may have noticed, the longer you have a credit card and have consistently paid off the balances you carry, the more credit the card companies make available to you. This is a good thing if you are responsible and don’t carry a balance for long or if you make sure to pay off your balances every month.

Another habit you can get into is to make sure to pay all of your bills on time. This includes loan payments, credit card payments, and utility bills. Establish a history of honest dependable repayment. This tells potential creditors that you care about your financial obligations and that you are less risky than someone who sporadically pays their bills, or gets behind on their bills. People that do that are potentially in over their heads, and potentially don’t care about being in over their heads. As you can see someone lending you money wants to lend it to someone who they can trust will pay it back.

As you can see many of these things improve your credit score with age. This is because generally with age comes more responsibility of bills. I must say though what seemed to cause my credit score to jump most dramatically was buying our house and paying on it for a year on time and in full every month. I can make a guess that it has to do with being able to handle a larger, longer-term loan responsibly with all of our other payments.

The benefits of having a high credit score include the best interest rates, access to credit, and plain ol’ pride in yourself for being a financially responsible member of society rather than a drain on society. Because people that don’t pay their bills or run up high credit card balances and pay the monthly minimum if that, or get in way over their heads and find themselves juggling their bills from month to month are a drain on the economy.

I’m not saying people don’t run across hard times. We all struggle from time to time. But even when you are struggling, you can still live within your means. Maybe that just means, that new car will have to wait another year, or buying a house will need to wait another year or two, or you go without satellite or cable TV, or go without the Internet since you have access to it at your local library or at work during your lunch hour (or all day for most government employees J). Basically speaking, look at how much money you bring home each month, subtract your necessities, and I’m sorry but a cell phone is also not a necessity, negotiate what you will save each month and what excess wants you can afford. That’s living within your means, since keeping up with the Joneses is really impossible since as you get more, they get even more. Trust me, the Joneses are probably in over their heads too. At least you can hold your head high if you live within your means.

Now let’s all hold hands and sing cum bay ah…or however you spell it.

For more information related to your credit score go to http://www.myfico.com


Traci said...

Never wish for other people's stuff because you just might get their bills, too - right?

If you can get people on top of their basic finances and get them to stop recklessly procreating - wouldn't that be a beautiful thing?

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