Well, hello there again, and welcome to our next series, which is on credit and credit scores. Educators in the finance community seem to very rarely discuss improving your credit as part of their overall financial wellness education, which I find odd. I, myself, am odd, so maybe that comes in to play. It may also be because they do not know much about how to give advice on improving your credit, or perhaps they just assume that everyone knows you should have good credit scores and history so they can skip helping people out with this topic. But regardless, I will not be skipping this portion of a financial conversation because it is one of the easiest ways to save you thousands, and possibly hundreds of thousands of dollars over your life time. We do this by making sure you continuously acquire the lowest interest costs available on any current and future debt you have by having the best credit scores you can (among other pieces). After having the best credit scores, we then have you pay off the debt rapidly so you do not have much of any interest costs, period. But that is another conversation for an equally exciting read (as I am sure you are currently thinking to yourself).

Now, I know, the best advice someone can give in regards to credit is to get rid of all your debt forever, mortgages and all, and then you do not have to worry about credit scores or interest costs (because you are not paying any interest and never have debt again). But for the majority of Americans, we are not currently financially independent and are working our way towards that goal (whether we know it or not). So, focusing on credit scores (whether that is to raise your scores, fix your scores and history, or maintain your already magnificent scores) can and will be important to put your finances in a position to have more of your money go towards investments that can provide you freedom, compared to interest and debt payments that will shackle you to the proverbial stone that rolls you continuously down the hill, hitting you in your sensitive areas along the way, away from your goal. In this instance, I also think of you as both Atlas, holding up your excruciatingly heavy world on your back, and Prometheus shackled to the rock with the eagle eating your liver. The smaller your interest costs, the smaller the bites of your blood, sweat, and tears (and kidney) the eagle takes. And the faster you pay off your debt, the lighter your world gets that you are holding up.

So, let us jump into the first part of credit, which is understanding what the credit bureaus and the world want from you with credit, and the first pillar of how credit scores are calculated.

WHAT DO THEY WANT!

We all need to understand the purpose of credit and what the credit bureaus want from you to give you magnificent credit scores.

The Purpose –

The purpose of credit and credit scores is actually pretty simple. They want you to spend money, and more than you would have spent if you had only cash available, so the economy is stimulated. But they do not want you to spend too much money so that you have difficulty paying the lenders back. The whole focus of credit scoring is to help lenders provide you money to buy more things, but also to understand if you are borrowing the right amount of money so that they have a gauge on how much risk the lenders are taking by giving you more money. The better that you can show them that you are not borrowing too much, and that you are capable of paying it back on-time, all the time, the higher they will show your credit scores. It is all about the balance between taking out debt but not taking out too much. You spend more money, they collect interest to make more money off of you, you are in a great position to pay it back so they can lend the money out again, and you are rewarded with lower interest costs (and cool scores to brag to your friends about).

So, what areas do the credit bureaus look at and how do they calculate your scores based on that? Fantastic question, friend!

Your not my friend, Pal? I beg to differ, bud!

The credit bureaus are going to look at (among other pieces, I’m sure) your total accounts and credit mix, your length of credit history, your number of recent credit checks/pulls/inquiries (each mean the same thing), your total revolving credit utilization, and your credit payment history.

In this first post, outside of going through what the credit bureaus want, we will jump into why focusing on your credit and checking your credit information regularly is so important (financially), then we will jump into the first component above (total accounts/credit mix) and the rest of the other components of credit scoring in another part of the series. We don’t need these posts getting too crazy long, despite my incredibly sexy ability to talk forever about everything finance until you mentally hate me. So, let’s jump in to the riveting components of credit (with the forward of financial importance of good credit)!

WHY FOCUS SO HARD ON MAGNIFICENT CREDIT-

1. SAVE YOURSELF MONEY FOR THE LOVE OF, well, MONEY! -Man, oh, man if I could help you understand how much money I have saved myself over the years by having good credit scores compared to others who have not, it would make you want to focus on your credit asap. There are numerous studies out there that compare interest costs on mortgages, car loans, credit cards, personal loans, your homeowner’s and car insurance costs, and more. The majority of the studies or case studies only focus on a small aspect of credit situations, like the difference between the mortgage interest a person would pay that bought a home. But even in a small study that focuses on one savings category like that, they tend to estimate a savings of $35,000 or more over the life of the loan. If someone truly calculated all of the interest differences for the average American who has a mortgage, car loans, student loans, credit cards, etc., the likelihood is those who have credit scores of 600 and below likely pay somewhere between $50,000 to $100,000 (I’m estimating) in interest beyond the person who has a 760 and above score. That doesn’t even count the differences in car insurance and homeowner’s insurance, and other factors in life. Think of how much easier it is to save money for retirement and your financial freedom when you don’t have to give away so much money to creditors.
2. Save yourself headache! – Having low credit causes many issues for people outside of the financial issues. Having very low credit can make it so you get denied for loans, denied by landlords from renting properties, and causes issues of embarrassment for a multitude of situations (like maybe when you and your significant other want to do something together for your future but are held back because of your credit scores). For your own peace of mind, improve your credit scores to high ranges so you can hold your head up in pride and have confidence that you can take the opportunities that come in front of you.
3. Save those you care about! – Having your credit scores at the highest levels, and knowing how to get them their and keep them their, can also help you teach others how to have the best opportunities for their future. Think about it, if you understand all these pieces and take action, you can be a role model for others to do the same. Whether it be your kids, your other family, your friends or whoever, if you improve your credit and finances, and teach those you care about to do the same, imagine the impact you can have.

ON TO THE NEXT PART – MAKING YOUR CREDIT SCORES MAGNIFICENT – Part 2