The Credit Series Part 1: Your Credit Score (Mom’s Occasional Money Advice)

The Mom Weekly Volume 55: August 27, 2024

Well, buckle up, kiddos, because this is a long post of Mom’s Occasional Money Advice. I am going to break this into several parts, since writing about credit score alone is so long.

The genesis for this is a lengthy text exchange I had with one of your cousins earlier this year about credit scores. I love getting to answer questions about these things, even if I have to do some research. I “heart emoji” answering money questions. 🙂

Remember how much I love you,

Mom

The Credit Series Part 1: Your Credit Score (Mom’s Occasional Money Advice)

I won’t go into the whole history behind credit scores. If you are interested in exploring, here’s a good introductory article on how credit scores came to be.

Our goal for today? A quick look at your credit score. I’ll show you how to find yours, what each element means, and ways you can bring it, if you want. This is not a bad idea for anyone, even if your credit score is great.

Your Credit Score

Let’s start by obtaining your “credit score.” There are actually many variations/flavors of this, and places to obtain them, but let’s do the easiest: check with one of your credit card issuers.

I find Discover’s information to be highly accurate and useful.

If you have a credit card with Discover, there is a link on your home page to view your FICO score (image). If you do not, you can get one for free by visiting here.

Chase, another credit card issuer, offers something called “Credit Journey” which also shows a FICO score and more info.

If you don’t have a Chase credit card or other account, here is the free link to gather your information:

For the purpose of this Weekly, I opened a Credit Karma account, but I found the data not as accurate as Discover or Chase. I’m not sure why, but it shows me as having only 9 years of credit history, as if I were an actual baby.

But I digress.

Here is a screenshot of a recent credit score.

This is mine, but with much of the information cut off for security purposes). My credit score is 822 — exceptional, according to Discover—thank you Discover! We will be going through each of the “tabs” listed in that photo, to show what goes into your credit score.

What Goes into Your Credit Score:

Column 1: FICO score.

This number will be different from different sources. Here you can see it is 822. Chase tells me my FICO score is 807. (Darn you, Chase! For some reason, Chase’s number is almost always slightly lower than Discover’s number).

Scores above 700 usually are sufficient for the best rates on a mortgage, car loan, and credit card approval. Keeping it well above that, once you get there, should be a goal.

How to improve your score? Let’s check each element.

Column 2: Number of accounts—10 percent of credit score

The second column is the number of accounts, which contributes about 10 percent to your credit score. But unless you have no credit at all, this doesn’t matter (except as it relates to credit utilization, which we will get to below). This can include your credit cards, a mortgage, and car loans. It’s unclear to me whether it includes student loans, since I don’t have them.

I happen to have a fair number of credit cards because of travel rewards, but it has no bearing on my credit score.

While my score does go down slightly when I open a new card, it bounces back and usually higher with a month or so. So, if you are in the market for a mortgage or car loan, you may want to avoid opening any new credit cards. But ahead of time–say a year or two– it could actually make sense to open a few credit cards. Let’s cover that in when we get to “revolving utilization.”

Column 3: Length of Credit—15 percent of credit score

This shows the amount of time that you have a credit history. Mine is over 30 years long. This is the reason I would never close my oldest credit cards.

Length of credit accounts for 15 percent of FICO score. So, for instance, we opened the kids’ credit card years ago so that you could have a longer credit history than you could by opening a card once you turned 18. And fortunately, it did help your credit scores by giving you a longer “length of credit” than other people your age.

How to improve length of credit: Apart from the passage of time, it’s important to note that you should never close your oldest credit cards. If you are concerned because an older card has an annual fee, you can usually downgrade to a no annual fee card.

Column 4 “Inquries”—10 percent of credit score 

More inquiries, or credit checks, will reduce your score, and this number affects about 10 percent of your credit score. This is why you shouldn’t apply for 10 credit cards all at once.

What to look for: if this number is higher than you expect—say, you only applied for one credit card in the last year, and this number is 5 or something higher, it’s worth looking into by pulling your credit report. We will get to credit reports next time.

The number here means the number of “hard inquiries” on your credit. So, if you applied for a car loan, mortgage, or credit card, you would have given permission to have them check your credit. That’s a “hard inquiry” or “hard pull.” (This is different from a “soft inquiry,” which is when advertisers target you for credit card or other credit offers. That has no effect on your credit score).

How to improve: this is not a very big part of your credit score. Unless you are applying for a lot of credit at one time, this won’t have a big effect on your credit score.

Column 5: Credit Usage—30 percent of your credit score

Now we arrive at categories that have a much bigger impact on your score.

Revolving utilization, or credit usage, is one of the key elements in your credit score—accounting for about 30 percent of your score. Understanding this and paying attention to this can really pay off (pun intended!) in a higher score.

It’s also called “utilization” or “credit usage.” Credit usage is a simple math problem: your card balances (what you have charged and not yet paid off) divided by the amount of total credit (what you could spend) on your credit cards equals your credit utilization percentage. 

Chase and Discover say that less than 30 percent utilization is ideal, but you should strive to get this number as low as possible. As an example, my credit usage (credit utilization) is usually right around 3 percent.

What that means is that I am using 3 percent of what I “could” be charging on my credit cards. The current balances on all of my credit cards at this moment total only 3 percent of what their limit is. 

Let’s use, for an example: a person who has only two credit cards: a Discover and a Citi card. 

The credit limits are:

$3,000 on the Discover credit card.

$7,000 credit limit on the Citi credit card.

That means her utilization or credit limit would be $10,000 ($3,000 plus $7,000). 

If there were $100 charged on the Discover since it was last paid, and $900 on the Citi credit card since last paid, the total utilization (or credit usage; what the person is actually using) would be $1,000 out of the $10,000, or 10 percent ($1,000/$10,000). Still very respectable numbers, but even lower is better.

How to improve this: one way to increase your credit utilization total, and, by default (assuming you spend the same no matter how many credit cards you have), is by responsibly opening a credit card. That will increase the credit usage or utilization total.

Using the example above, if our person with the two credit cards applies for and is approved for a Chase card with a limit of $10,000, her total utilization is now $20,000 ($3k Discover plus $7K Citi plus $10K Chase).

So, assuming the amount charged on all of the cards is still $1,000, the credit usage is halved. Her credit usage is now 5 percent ($1,000 divided by $20,000, or .05), instead of 10 percent, as before.

Even if you don’t use a card, the credit limit on that card gets added to your other ones, and increases your total credit limit, and therefore lowering your utilization limit. That’s why I recommend, for people who are responsible with credit cards, to consider opening new cards from time to time.

At the very minimum, don’t ask your credit limit to be reduced when it is raised. If you have a good record of paying your bills on time, the amount you can charge will increase by a little or a lot by the credit card issuer, over time. As long as you’re not spending “to the limit,” this is a good thing.

Missed Payments: 35 percent of your credit cards

Obviously, paying bills on time is a high priority, and it has a big impact on your credit score. If you miss paying a credit card (even the minimum payment), your score will take a hit. Having a system for paying your credit card bills is a good idea.

A “missed payment” does not include only paying the minimum amount due on your card. If you owe $2,000, but your minimum payment is $40, and you pay $40, you are fine in this category.

Even if you carry a balance (and a large balance, unfortunately), you will not be “dinged” for your credit score. But here, once again, is Mom’s advice that has little to do with your credit score, but is arguably a much bigger goal/personal finance practice: pay your credit card bills in full.

The gold rule of credit cards: pay them off in full and on time, every month.

I know you know this, but it cannot be said enough. There is no reason to “leave” the charges there for any reason, and incur all the interest (in the 20 percent range! Or higher! It’s highway robbery!) that credit cards charge.

There’s a relatively uncommon—but shockingly seen a fair bit—misconception I’ve seen in the personal finance space that you should keep a “balance” on one or more of your credit cards to “improve your score.” But that is complete and utter nonsense. 

How to avoid either getting a “missed payment” ding to your credit score, or a huge interest bill for only partially paying a card? Have a system for paying your bills.

I don’t even wait until my credit cards are due—I just pay them the day I get the notice of the bill. That’s just the way I run things, but you can do it other ways. 

For instance, some people use auto-pay the total for each credit card they have. That can be smart, and assuming you have enough in your account, it guarantees you will never have a missed payment. I don’t happen to do this because I want to be able to look over the charges, make sure I have enough in to cover the bills in the account I pay from.

Also, the default for auto-pay is I think on the due date, which I don’t love because I just want to see it’s paid well ahead of the due date. I guess if you’re going to use autopay, or if you do, I would recommend setting the “pay” date to a week or so before the due date so there’s no mixup.

Next time: Credit Reports! Let me know if you have any questions on credit scores.

Interesting/Notable:

A Gentler, Better Way to Change Minds

Sheet Pan Pancakes with Mixed Berries

This looks interesting but I wonder if it would turn out as good as it looks? This is the original recipe on which it is based.

An Action Item: Check Your Credit Score

As detailed above, it is very easy these days to get a full picture of what your credit score is, and see if you have any areas that can be improved. At minimum, you could note your credit score, and check it again in a month. It truly takes very little time, and you can follow along with the details above to see where you can improve or at least stay steady.

What are you doing this weekend?

So, now that it’s Tuesday, what are you planning for the weekend? It’s Labor Day weekend, so remember to plan for something that extra day!

I’m going to suggest trying to cover four “F”s to get ideas flowing:

*faith—when are you going to Mass?

*friends—what friends will you see or connect with?

*food—any fun recipes you plan to try, or restaurants you plan to visit?

*fun—anything interesting you are going to play, watch, or do this weekend? Now’s the time to think it through, and put it on the calendar (even informally).