This is an excerpt from Chapter 5 of Certified Financial Planner™ Scott O’Brien’s brand new e-book Surviving to Thriving: A Financial Resource for Divorcées and Widows. This e-book brings you in depth information from 7 experts across industries to help women manage the financial and personal elements of life’s major transitions. Download your complimentary copy today.
By: Eddie Johansson
President at Credit Security Group
Your credit history on file at the credit bureaus is used to determine whether you’ll be able to buy a house or a car, or to make other large purchases you’d like to finance, and what interest rate you’ll be offered if you are extended credit.
But that’s not all. Your credit report may affect your insurance situation and even whether you will be able to get a job. Hiring decisions are not credit score-driven, but many employers don’t want to hire people who have a lot of debt.
You may notice that your history paying utility bills for electricity and water, as well as cell phone bills, does not appear on your credit report. And thus we come to our first credit tip, regarding which bills are most important to pay on time:
Tip 1: If you only have enough money to pay either a credit card bill or an electricity bill, pay the former, as that delinquency will be reported to the credit bureaus.
Personally, I’d rather live with candlelight for a month to maintain my high credit score, rather than have it drop up to 70 points due to paying a credit card bill late. And here is our second credit tip:
Tip 2: It’s very important to realize there are no “boo boos” on a credit report — only bombs and bigger bombs. A 30-day delinquency is a bomb.
What’s Your Number? FICO Scores
Your FICO score is based on your payment history, but you may not know that you have numerous FAKO scores, which are those provided by the credit bureaus; organizations like Credit Karma and FreeCreditReport.com; and even your credit card provider. You have only one true FICO score — the one lenders use — and it’s available for $60 at MyFICO.com.
How can this be? The data being used to calculate all scores is the same, but the scoring method applied can be dramatically different. Without getting too technical, the three models used by the credit bureaus are:
- Equifax Beacon 5.5: FICO 5
- Experian Fair Issac version 2: FICO 2
- TransUnion Classic 04: FICO 4
What this means is you need to be conscious of the scoring model used to determine a particular credit score — and you must understand that lenders don’t use FAKO scores, only your true FICO score.
FICO scoring is a future risk assessment tool, with scores that range from 300 to 850. The better your payment history, the higher your score will be. What scores are considered good or bad? From the FICO company’s illustration above we see that: :
- 300-560: bad
- 560-660: not good
- 660-720: good
- Over 720: great
Your score will go up or down based on your payment activity as well as the number of inquiries into your credit. The key concept for maintaining good credit scores is “paid as agreed” – no late payments, ever. Inquiries make up less than 10% of your score, but it’s still best to keep them to a minimum, perhaps 1-4 per year. Here are a couple more tips:
Tip 3: Small mistakes cost you big points. One 30-day late payment will lower a 680 credit score 40-80 points.
Surviving to Thriving: A Financial Resource for Divorcées and Widows brings you practical advice from 7 experts across specialities to help women manage the financial and personal elements of life’s major transitions. Get your complimentary copy today.
Eddie Johansson is the founding president of Credit Security Group. He trains and manages CSG’s staff of credit analysts and researchers and has personally analyzed over 10,000 consumer credit reports. He developed credit score analysis tools tested on more than 250,000 credit lines. He has educated lenders and consumers on the facts of the credit system, helping lenders understand true credit risk and helping consumers and investors properly manage credit to reach their financial goals.
Office: (972) 820-0342
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