Finances

Credit Card Debt is From the Devil – Part II

As promised, here’s Part II of my earlier post on credit card debt.  I originally posted this on another blog back in April.  I hope you find the information helpful. Questions?  Send me a note. I read and respond to all inquiries!

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Is it just me or do you too feel like this year is whizzing by?  On most days, I feel like I’m burning the wick from all ends.  I picked up a managing editor gig in November and I’ve been on a weekly deadline ever since. I love what I do, but some days…..

Still, I couldn’t let the month of April get away from me without posting on credit card debt.  April is recognized as National Financial Literacy Month (along with a host of other random recognitions. Who thinks of this stuff anyway?)Plus, I taught financial literacy classes for a bit so I feel a slight obligation to write something on credit this month.

Let’s pick up where we left off.  If you missed Part I, you can read it here.

Understanding How Your Credit Score is Calculated.

It may appear that there’s no rhyme or reason to calculating credit scores, but there really is a method to the madness.  Essentially, your credit score is based on five factors.  Think of those factors coming together to form a pie.   And yes, for visualization sake, you can think of those factors as ingredients for your pie.

April Blog Post

 

Factors that Determine Your Credit Score. 

35% – Thirty-five percent of your credit score is based on your payment history.  No mystery here.  Essentially, how have you paid your bills? Do you pay on time? Are you consistently late?  Or do you neglect to pay at all? (Don’t beat yourself up here.  I haven’t lived a perfect life either. When we know better, we do better- right?)

30% – Thirty percent of your credit score is based on how much debt you owe.  This too is a no brainer.

Let’s pause here for a minute and examine your pie.  More than fifty-percent of your credit score is based on two important factors or ingredients – payment history and how much debt you owe.  This means the power to improve your credit score is controlled by you and not some random external force.  Improving your score is achieved primarily by reducing your debt (the amount you owe) and paying creditors on time.

Reality Check:  For most people, it takes time, discipline and strategy to pay down debt. Oh, how I wish I could sprinkle magic fairy dust around and reduce the debt load for millions of people. It just doesn’t work that way, unfortunately.  According to MyFICO.com, consumers with high FICO Scores consistently pay bills on time; keep balances low on credit cards and other revolving credit products; apply for and open new credit accounts only as needed. 

15% – Fifteen percent of your credit score is based on your length of credit history.  (Are you new to the credit world or do you have an extensive history – good or bad.)

10% – Ten percent of your credit score is based on the types of credit or trade lines in your credit file.   Examples may include, a mortgage, car loan, retail credit, or student loan debt.

10% –  Ten percent of your credit score is based on attempts to acquire new credit or the number of inquiries to your file within the last six months. There are two types of inquires – a “soft” pull versus a “hard” pull.  A soft credit inquiry occurs when you request a copy of your credit report. (To obtain a copy of your report, visit www.AnnualCreditReport.com). A hard credit inquiry occurs when a credit card issuer or other financial lending institution checks your file to determine credit worthiness.  Soft credit inquiries have little effect on your score however too many hard inquires may reduce your overall score. The FICO scoring model provides some leeway when you’re looking for a mortgage, auto or student loan.  It recognizes that this process may cause multiple lenders to request your credit report. To compensate, inquires that fall within a typical shopping period are counted as one inquiry and not multiple inquiries, which can reduce your overall score.  The takeaway here is that if you’re shopping just for the sake of shopping (pursuing new or additional credit like retail cards) you run the risk of reducing your credit score.  If you are rate shopping however, the FICO scoring model takes this into consideration.

As you can see, this is an exhaustive topic.  I could go on and on about credit scores, credit reports and debt, but you guessed it…  I have another story deadline looming.

I hope however what I have shared has been helpful.  Depending on how deep you want to go, you can find additional information and resources at www.AnnualCreditReport.com.

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