Credit Scores: GPAs for Adults

by Wade Barnes 10. May 2011

Improving Credit Score

Your credit score impacts every major (and some minor) purchase that you'll make during your lifetime. In regards to making a purchase that requires financing, (i.e. a house or car) your credit score can dictate the applied interest rate and in some occurrences, can prevent you from being eligible to receive financing at all. How about the impact on your career? Nowadays, many employers run credit checks before hiring.

Do you want to own a car, buy a house, have a career and be an all-around self sufficient individual? Mmm. Not much thought required there, huh? Of course you do!

So what is the best way to tackle this overly-exciting subject matter?

We asked our very own Wade Barnes, Vice President of Consumer Lending, to run through the ins and outs of a credit score with a word that we think will be all too familiar to you - the dreaded GPA.

"Professor" Barnes, meet the world.

The world, meet "Professor" Barnes.

700 - or above- is the score (or grade) that will get you on the honor roll of society. Like GPAs, credit scores are simply a numerical ranking of your credit performance.  The best way to think of a credit score is like a grade in school.  There are many parts to this grade like tests, quizzes, homework, participation, and attendance.  The teacher then weighs each factor in accordance with its importance and determines a final grade or score.  Credit scores are no different and look to the following factors. 

Not everything is treated equal - the return of "weighted averages."

35% of your overall credit score is determined by your Payment History, which is the single most impactful factor of your credit score. Be sure to make your payments on time every month. If you’re having issues paying your bills talk to your lender. Many lenders will work with you to help establish favorable terms for both you and the lender.

Next on the list is outstanding debt, holding a 30% weight.  It is important that you don’t carry high balances on your credit cards.  Carrying balances of less than 35% of your available credit limit is ideal.  Balances using 70% of your credit limit or greater are having a negative impact your score.

Weighing in at 15% is the length of time the accounts have been established.  It is helpful to have accounts with a long history reporting to the credit bureaus established.  For revolving accounts that have been managed well, consider keeping these accounts open so they continue to build history.

At 10% each, inquires and credit diversity are the least impactful but are nonetheless important to consider.  Be sure you aren't authorizing lenders to pull your credit report needlessly – keep this in mind when you’re checking out at your favorite retail store where they offer a discount for opening a store credit card.  With regards to diversity, be sure your debt instruments are spread amongst various loan products.  An individual who has a car loan, credit cards, and a mortgage will rate better than an individual who simply has multiple credit cards.

Is the test going to be graded on a curve?

Yep. Just like finals, these factors are scored on a curve type system where your performance is compared directly to other individuals.  Scores range from 350 – 850 where anything over 700 is good and anything under 600 needs improvement.

Be Aware

Perhaps the most important tip is to be aware of what’s on your credit report.  With over 290 million reports, mistakes are bound to happen.  You are entitled to receive a free copy of your credit report from each of the reporting bureaus every year.  To obtain your credit report, visit www.annualcreditreport.com , an official site sanctioned by the bureaus to allow you free access to your report.  Put this on your calendar and make it an annual practice.

As always, feel free to reach out with any questions you have about your credit score or any other credit question.

FDIC Article on Convenience Checks

by Wade Barnes 15. March 2010

Convenient or expensive??  The FDIC posted an article on convenience checks issued by credit card companies.  While this may be a convenient service for many borrowers, it may come with expensive fees and unseen pitfalls from overdraft fees to fraud if you're not careful.  Check out the FDIC's article: http://www.fdic.gov/consumers/consumer/news/cnspr09/blank_check.html

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Should I close my credit card?

by Wade Barnes 24. February 2010

There has been a lot of discussion this week revolving around the Credit Card reformation act that became effective this week (If you missed the conversation, check out the Credit Legislation post for details).   A result of the proposed legislation was a knee jerk reaction by the credit card companies to raise rates across the board to all of their customers, as future rate hikes will be regulated a bit more aggressively.  Over the past few months, many good customers whose rates have been hiked now feel slighted and want to close their account with their credit card holder.  By all means, if you feel so strongly don’t let me discourage you from acting.  On the flip side, this same legislation has unintentionally made credit harder to come by (and likely more expensive), so you may want to consider this before axing your old account.  On top of this, think through what affects this may have on your credit rating.

I had lunch with a friend a few weeks ago who is an executive at a local business.  He has never been late on his payments, never gone over his credit limit, has excellent credit, a stable job with a solid income but was still a victim of blanket rate increases by his unnamed credit card company.  Out of frustration, he wanted to close this account that has been opened for over 20 years.

The reality of it is, my friend never carries a balance on their card and hence is never affected by the associated interest rate.  Even if a balance was carried from month to month, I’d check out the competition’s rate before moving a balance as the grass isn’t always greener.

On to the core issue: If they close their credit card, an account with an excellent history, their credit score will take an immediate hit – especially if they open a new card in its place.  Not only would they close a beneficial account in their credit history, they would also reduce the available credit limit, which could affect the credit usage ratio (the amount of revolving credit outstanding / the total credit limit).  So, there are two factors that could possibly affect your credit score by closing an account with a solid history to keep in mind before jumping ship.  Keep in mind though, with a stable credit rating, even this minor hit won't affect your overall rating in the long-term and shouldn't be of great concern but there are consequences to every action that should be considered before making any financial decision.

For more information on how credit scores are calculated and factors that affect your score, check out the post on maintaining credit ratings during tough times or feel free to be in touch for more information wbarnes@1stmarinerbank.com.

As always, I welcome questions and conversations about situations you may have encountered and how these recent changes have affected you.



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