Know Your Credit Score

Top 5 Essentials for Being Financially Fab

The Financially Fab lifestyle involves being confident, making wise decisions, planning for the future, and enjoying what you have now.  Those skills are acquired overtime, and they start with a solid foundation. To set up that foundation, this week’s blog begins a 5-post series about the Top 5 Essentials for Being Financially Fab.  Each week, I’ll post another part of the series.  You can join the conversation by adding your personal stories, asking questions, or making comments.

The Top 5 Essentials Are . . .

  1. Know your credit score—the bank does, you should too!
  2. Track down your cash
  3. Knockout fees
  4. Save!
  5. KISS – Keep It Simple, Stupid

WEEK 1  – Know Your Credit Score—the banks does, you should too!

Your credit score is revealing!

  • Why is your credit score important?  It’s the financial equivalent of someone knowing your weight and dress size—no, not the weight listed on your driver’s license—your real weight.  If you don’t already know your credit score, you should. The banks do. Your credit card company does. You should too!
  • Banks use your credit score to rate how likely you are to repay credit.  The higher your score, the less risky you seem, and the lower your interest rate.  The information complied to develop the credit score is contained in your credit history, also called a credit report.

What’s credit history?

  • Your credit history lists information about your current credit accounts (loans, credit cards, etc.).  This includes whether you’ve missed payments or paid late, the number of accounts, the maximum limits, how much is owed, and other details. I told you it was revealing!  The difference between having a higher or lower credit score can hit your wallet hard–by affecting how much interest you pay.  If you have a higher credit score, you can pay less interest for the same amount of credit.  Just check out the example below.  Interest rates vary with the economy and individual circumstances, and the example below uses current rate information.

Imagine that you take a spring break trip and pay for travel, hotel, shopping, and entertainment with your credit card for a total of $700.  You pay only the minimum required, $20, until it’s paid off.

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Low Credit Score (from 581 to 660)

Annual Interest rate 20%
Time required to pay trip About 4 years and 5 months
Interest paid $360, over 50% of the $700 trip cost
Total cost with interest $1,060!

You’d be paying over $1,000 for a $700 trip. What?! $360 dollars extra!

Excellent Credit Score – (741 and above)

Annual Interest rate 10%
Time required to pay trip About 3 years and 6 months
Interest paid Only $132, paying 63% LESS with a better credit score
Total cost with interest $832

The 1st essential to being Financially Fabulous is figuring out your credit score.  Once you know what it is, you can start avoiding those high interest rates and stop throwing money at credit card companies and banks.

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Act Now – Get Your Score!

Everyone with credit has a score. Find out yours! There is only one official source for your FREE credit report, www.annualcreditreport.com. The only official source for your credit score is www.myfico.com.  You can also scroll over the links in the top right column of this page for more information about both websites.

The banks know your credit score.  If everybody else knows the number on the scale, the real number, you should too.

Share your experience.  How did you feel after looking at your credit score?  Were there any surprises in the credit report?

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7 responses to this post.

  1. […] most Americans don’t plan for major purchases.  Instead, they charge their credit cards and pay 15% to 30%  in interest for years after making the purchase.  When you’re Financially Fab, you plan ahead and have ready […]

    Reply

  2. I have to be honest. I’m not too worried about my credit score. But then I have little need to borrow money, and have reached the point where I can self-finance most things I need. If I was just starting out, it might be a different story.

    Reply

    • Great position, to be able to finance your lifestyle with cold hard cash. I saw on your bio that you have been investing for many years and follow John Bogle. Thanks goodness for Bogle entering the world of finance. Vanguard’s low-fee index funds really do fit the needs of most individual investors.

      You may need credit to buy a house, car, boat or other major purchase. At that point, a high credit score and diversified credit could improve your loan terms. If you have a large emergency fund and no major purchase plans for the next 7+ years, then your credit score can drop down on your list of financial concerns. Enjoy.

      Reply

  3. Posted by Daniel on February 26, 2010 at 8:22 am

    Thanks for the information. I have two quick questions. Does your credit report show recent payments you’ve made on each account? Also, how does the amount you pay monthly affect your credit, if at all? For example, if I pay the minimum balance on my card (e.g. $20) for two months, then pay a larger amount when I get my quarterly bonus (e.g. $200), would making three monthly payments of $80 be more beneficial for my credit to show that “I am more credit worthy because I pay more consistently?” Thanks, and I look forward to reading the next four posts!

    Reply

    • Daniel,

      Great to have you on the blog! And, nice use of the term “credit worthy.” That’s the type of reasoning that leads to being Financially Fab.

      • Your credit report doesn’t show each monthly payment. A section in the report lists your most recent payment, but most credit card companies leave it blank. No worries about monthly payment details hitting the report. 😉

      • For information to hit your report, the account holder (in this case your credit card company) sends the data to the three major credit bureaus that create credit reports. It’s a hassle to report every transaction for every customer, so account holders usually report when people have new accounts, increased credit limits, spending beyond the limit, missed/late payments, and other bad credit habits.

      Now that you know, go ahead, get your credit report. In the links section in the top right-hand column, you’ll see why http://www.annualcreditreprot.com is the only official FREE source for your credit report. Once you have more information about your credit, you have more power to get banks to lower your interest rates and cut your fees. Yes, you’ll be keeping more of you cash!

      Let me know how it goes.

      Reply

  4. Posted by am1983 on February 23, 2010 at 9:33 pm

    Great info. How do I change my credit score? What is a reasonable credit score for a young working professional who doesn’t have the longest credit history but has no blemishes on his or her financial record?

    Reply

    • Am1983,

      Great follow up questions. How do I change my credit score? To answer that, I’ll explain what makes up our credit score.

      Payment history – 35%
      • The #1 way to improve your credit score is to pay on time! The more recent the issue (late payment, collection, or bankruptcy), the more it affects your score.
      Debt level – 30%
      • This is how close you are to your credit limit. A rule of thumb is to use about 30% of your credit limit.
      • A trick I use is calling my credit card company once a year and asking to increase my credit limit. I keep spending the same amount, and because my limit is higher, my debt level is better! 😉
      Length of credit history – 15%
      • A longer credit history is better because it provides more information. You should avoid closing older credit cards.

      Inquiries are 10% and the mix of credit is the remaining 10%. I recommend that you focus on payment history and debt level. Make sure each payment arrives before the due date! Use 30% or less of your total credit.

      2. What is a reasonable credit score for a young working professional with no credit blemishes?

      Since the length of credit history is only 15% of the score, you can have an excellent credit score and be under 27. I reached an excellent rating (741 or higher) as a senior in college and opened my first credit account as a freshman. As long as you follow the factors above and stay blemish free, you credit score can be very high.

      Reply

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