What’s in a Credit Score?

December 12, 2014

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Three things had to happen to give women access to credit: Recognition of women as separate people from their husbands, access to high-paying jobs, and changes to discriminatory legislation. Amazingly, these three things didn’t really ignite until the Equal Credit Opportunity Act (ECOA) was enacted in 1974. Before that, when it came to cash and credit, for the most part, women had to marry to get it or inherit it!  

It wasn’t until women gained access to credit that they joined the consumer rally and were able to make major purchases on their own, like homes, investment real estate, and other financial assets. Today, to truly capitalize on this access to credit, a woman must know her credit score. A score of 850 is a perfect score. Less than 1 percent of all Americans have a perfect credit score, so we’re not advocating perfection; however, you should strive to be as close as possible.

Your credit score may affect the ultimate cost of any major purchase. This graph uses rates from Bankrate to illustrate the cost of buying a home under various credit scenarios. Note that one home buyer ultimately pays nearly $700,000 and one pays $500,000 — for the same house! The difference? Her credit score!

While credit cards are an alluring, more convenient alternative to cash, as well as to debit cards (because credit cards offer better consumer protection), it’s important to maintain an attractive credit history. The misuse of credit can lead to expensive interest, fees, and spiraling debt. Thus, many Americans unintentionally convert short-term debt to long-term financial debt by sustaining large credit card balances, compounded by fees and interest.

If you’re unsure where you stand, there are three primary credit reporting agencies: TransUnion, Equifax, and Experian. Each agency issues their own credit report and interested parties may check any of them, if you are applying for a loan or insurance, co-signing for a family member’s loan, or applying for a job, as long as you’ve given permission. Checking your federally mandated free report at Annual Credit Report may give you some insight into your credit score.

However, your credit report is not the only indicator. There are five major components of a credit score.

1. Bill Payment History is the largest factor in determining your credit score. Your credit score will go down if you have a history of late payments and penalties. Further, late payments stay on your report for seven years.

2. Credit Utilization accounts for the second largest factor. It refers to how much of your credit lines you are using. Your credit score will go down if you have high balances relative to your limits. Paying off your credit card in full each month should help alleviate the problem, but some credit cards report your balance to the agencies in the middle of a billing cycle instead of at the end. (Translation: Before your payment has been applied.) So, using two cards at 50 percent utilization might be preferable to maxing out one card all the time.

3. Length of History is just as it sounds. How long have you been a borrower regarding auto and home loans, and/or a credit card holder? The older your history, the better! This means youths are automatically disadvantaged, but don’t let that deter you from starting out. Obtaining a credit card with a small balance that you use sparingly may gradually build your credit score.

4. New Accounts and Credit Mix account for the lowest proportion of your credit score. New Accounts records whether or not you’ve recently opened a large number of new credit cards or loans, so it’s a good idea to space out requests.

5. Credit Mix is about the types of credit cards and loans that you have. A good mix of credit cards, mortgage, student loans, and auto loans may actually help increase your score if you are keeping a good payment history.

Remember, your credit score is affected by any credit held in your name: individual, joint, or co-signed. If you decide to get married, it’s important to note that the credit score that lenders use will not be your separate score or an average of yours and the object of your affection. Rather, it will be the lower of the two. You might want to add his credit score to your spec sheet when searching for the most suitable mate! What’s in a number? A lot.

More often than not, women are savvy about protecting their score and seeking out conscientious partners.  For a bit of fun advice pertaining to vetting potential relationships, check out this video.

Securities offered through FSC Securities Corporation, member FINRA/SIPC. Advisory and insurance services offered through Stavis & Cohen Financial, a registered investment advisor not affiliated with FSC Securities Corporation.

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Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither FSC Securities Corporation, nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Deborah Stavis is a member of the DailyWorth Connect program. Read more about the program here.