Game of Good Credit

How to win big and achieve the credit score you really want!

Your credit can be significantly affected by the moves you make everyday, so it’s important to understand how your credit score is calculated and how creditors and lenders use your profile to assess your risk as a borrower. The more you understand the game, the more likely you are to win consistently to achieve and maintain the credit you really want and need.

The five factors that affect your score

As mentioned in the video, there are 5 factors that affect your credit score and some are more important than others. Basically, each factor has a “weight” in how much it impacts you score. Factors with more weight need to be focused on closely, while you keep the others in mind so you can avoid making moves that hurt you.

  1. Credit history, 35%
  2. Credit utilization, 30%
  3. Length of credit history, 15%
  4. New credit applications, 10%
  5. Types of credit in use, 10%

This is why it’s so important to keep your credit history positive by always making payments on time, while taking steps to keep your unsecured debt minimized because these two factors have the most impact on your score, by far.

How to calculate credit utilization

“Credit utilization” and “credit utilization ratio” are two terms that simply refer to the amount of unsecured debt you currently have relative to your total available credit line.

Creditors consider this an important factor because if you’re maxed out on all of your credit cards, that usually means you’re a high risk borrower – even if you’ve never actually missed a payment to affect your credit history.   The rationale is that a borrower who’s charged up to their limit is essentially one financial speedbump away from financial distress.

Even though that borrower may be keeping up at the moment, if they lose their job or have a serious medical emergency, they don’t have any breathing room on their bills or credit. So those borrowers are more likely to miss payment and eventually default if they’re in debt right up to the limit of the total credit they can afford.

Your credit utilization ratio isn’t difficult to calculate:

Current total credit card balances / total available credit limit x 100

So if you have three credit cards each with a $1,000 credit line, then your total available credit limit would be $3,000. If you owe $800 on one credit card, $400 on another and $300 on the last then you total current balance would be $1,500. Using the calculation above, your credit utilization is 50%.

While $1,500 may not seem like an overly large amount of debt, it IS a significantly large when you consider it’s 50% of the credit that borrower has available. This level of debt would likely have a negative impact on that borrower’s credit score. In fact, you ideally need to have less than 10% utilization to maximize your score.

Debt relief solutions can be good or bad

If you’re in debt – particularly credit card debt – there are moves that you can take for debt relief that can be good for your credit like credit counseling and enrollment in a debt management program. However, there are also relief options that are automatically bad for your credit. This includes debt settlement, where you settle up with a creditor for less than the full amount owed.

That’s why it’s so important to avoid procrastinating when you’re facing challenges with debt. The earlier you start looking for relief, the less likely it is that the solution you use will impact your credit negatively. Catching a debt problem early helps assure you have the widest range of solutions available, including all of those options that have a neutral or even positive affect on your score. The longer you wait, you may limit the number of solutions you can use and you’ll have a longer game to play to get back to a good credit score.