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Understand A Credit Score. Is It Really Me?

There’s something you’ve probably heard of, nodded your head at a party when someone mentions their number, and have relatively little understanding of how or why it changes on a dime.  Today we’re going to learn how to understand a credit score, and what role it has in your life.

Scared?  Hush honey, Mama will provide.

A credit score really isn’t so hard to understand, once you dig into all the things that fully comprise it.  It’s like a Robert Kincaid financial snapshot of your life.  It’s captured in an instant, and it only exists until the next snapshot is taken.  

By understanding this score though, and how it gets put together- you’re going give yourself more options and more opportunities in life.  A higher score can get you lower interest rates on loans, which can save you mountains of money in the long run.

How Do You Measure, Measure A Score?

To understand a credit score, let’s start at the very beginning: a credit score is a number typically between 300 and 850, and it’s designed to show lenders and creditors that you have responsible credit behavior.  Have you read On The Right Track. Strategies For Paying Down Credit Card Debt?

Credit scores are used in evaluating things like, what kind of mortgage could you get to buy a property with, or an interest rate on a car loan from a vendor.  

And who calculates these scores?

The three (sisters) nationwide credit bureaus do.

Equifax, Experian, and TransUnion.

understand a credit score

These groups are credit history collectors, and collect data from across credit cards, student loans, auto loans, and more.  Again, it’s that financial snapshot from Mr. Kincaid, mere minutes before the breathtaking penultimate number, It All Fades Away.

They tend to update their data once a month, and the credit factors they care about include things like “payment history” – if you’re carrying a loan/credit card balance, they like to see that you pay your minimum payments on time, as many times in a row as possible.  They measure your average age of credit history – how long you’ve had credit cards open, or student loans (the longer the average age, the better!).

They like to see a snapshot of a responsible looking person.

Here’s an example of how a good credit score might help your financial future.

Life Is How The Score, Goes By!

Coalhouse Walker Jr. has always been the most responsible gentleman in regards to spending his money, mostly because of the way he was raised, to enjoy a life of Lagom (a nod to my own Swedish grandmother).  He has his financials in check, tracking his income and spending, things like that.

He keeps no balance on his credit cards, paying them off in full every month.

He drives a beautiful Model T Ford.  There’s a small loan on the car, but Mr. Walker Jr. makes his payments on time.

Just going to pause the story to say that credit scores were not around during Mr. Walker Jr.’s time- they would be first utilized decades later in the 1950’s.

BUT if they were around then, Coalhouse would have an outstanding credit score, let’s say he has a score of 820.

So let’s say modern day Coalhouse Walker Jr. is ready to buy a house in Champaign, Illinois- and he goes to the bank to apply for a mortgage.  He intends to put 20% of the price of the house down as a mortgage payment, and this house costs $300,000.  He’ll put $60,000 down and borrow the remaining $240,000 from a bank.

The bank (lender) looks at his score and says, “You have excellent financials in order sir, we’re pleased to offer you a 3% interest rate on a mortgage for this home.”

Coalhouse is over the moon.  He is imagining his new life in this house, and the memories his family will eventually make there.

So now knowing that, let’s look at the other side of the same coin.  Into the multiverse we go.

Graffiti Pete is swiping that credit card like it’s no one’s business- but honestly it’s not his fault.  He’s gotta spray paint to get his name out there, to get a job spraying paint- so in order to do that he’s gotta buy spray paint.  The swiping goes on.

He’s had a rough go of it, and has missed a few payments here and there as well.  Meanwhile, he’s opened up more and more credit cards which has exacerbated the problem- and the credit bureaus don’t love seeing missed payments.

But Pete has some money saved up, and he recently got a gift from a family member- so he’s decided it’s time to get serious, and he’s going to buy a house in Champaign, Illinois as well.

It’s the same kind of house, on the same block that Coalhouse found his house.

Pete goes to the same bank Coalhouse went to, and speaks with the exact same banker, who says to Mr. Graffiti, “You have satisfactory financials in order sir, your credit score is currently at 680, and we’d be pleased to offer you a 3.6% interest rate on this mortgage.”

Pete is elated!  But wait a minute, did you notice how Coalhouse got a lower interest rate than Pete for having a higher credit score?

But it’s only .6% right, what could that actually matter in the grand scheme of things?

For the same 30 year loan of the same amount of money at an interest rate of 3.6%, Pete will pay the bank $152,813 in interest over 30 years.  Meanwhile at 3%, Coalhouse would pay the bank $124,265 over 30 years.  That’s a difference of $28,548!  

This is why it’s important to understand a credit score.  It can have a huge long-term impact on your finances, and ultimately can be used to your advantage.

Finale Thoughts

The moral of the stories of Coalhouse Walker Jr and Graffiti Pete- think of where they both ended up.  They both got approved for mortgages, and they both were thrilled with the deal they got. 

Wondering what your score might be? There are a number of free services out there that can help. I personally use Credit Karma, check it out here.

Everyone’s situation will be different, and when you go off and look up your credit score with this new understand, you might feel frustrated about where you are now, today.

Don’t forget, it’s just a snapshot.  

It’ll be different next month, and the month after that, and so on.

So use the time in between to your advantage.  Work on making those monthly payments.  Keep you credit cards as close to zero as possible, with the goal of paying them off in full every month.

It will improve over time, and open up new possibilities for you.  You’ll get there slowly but surely.

Is It Really True?  Yes creative financier, yes it is.

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