Your credit score is your financial reputation. It is the only accurate picture the world – and you – has of how you handle your money. And we all know a picture is worth a thousand words. We should never become obsessed about our score, but we should all understand what it means so that we can make good financial decisions that will move us forward and not backwards in the area of our finances.
Last week, we talked about the biggest part of the pie – your payment history which makes up 35% of your score. Today’s factor makes up 30% – which means that just these two things make up almost 2/3 of your score. In my mind, that means that they are pretty important. These two things show us very quickly how we handle our finances. The first factor shows whether we honor our commitments and use tools such as budgets and spending journals to make sure we can follow through on our promises. It also shows whether we are prepared for emergencies when they arise. The next factor shows us how much we rely on debt in our finances. Let’s take a look at factor number two!
Part 2 – 30% of your score is your credit utilization. This is the percentage of your credit limits you use. For example, if a credit card has a limit of $5000 and you have a balance of $1000, your utilization is 20%. Here is a huge factor when it comes to the utilization percentage – it is the balance as of the statement date. This means that even if you pay your cards in full every month, your utilization can be high. In a minute, I will share a tip on how to avoid this.
The ideal percentage to keep a good score is 30% and below. However, if you stay below 10%, your score will get a boost as that is considered excellent. If you are a person who relies on debt to buy stuff, it may take a while to get this into a good position. The only way to do this is to pay off your debt. Unlike part one where you could start today and see results pretty quickly, this will take a little longer based on where you are and how much credit you have access to. If you owe $400 on a $500 limit, you can knock that 80% down in one month. But if you owe $5000 on a $10,000 limit, it may take months to get that 50% down. This factor isn’t about timing so much as it is about the math. And depending on where you are getting your score from, your percentage can be based on each individual account or can be an overall average of accounts.
There are two keys to helping this as soon as possible – one if you are a pay in full person and one if you are a debt person. If you pay your card in full every month, the key is to make sure that your payment post before the statement date. Paying it off then can be the difference in an 80% utilization and a 0% utilization. Big difference! If you are a debt person, the best thing you can do is start attacking your debt smallest to largest. This will start to show zero percentages on cards and will lower your average utilization. This will weigh heavy on the positive side especially the more you pay down.
The one thing you need to know about all of the parts of your credit score is that what is done is done. You can’t go back and change it. However, you can make better decisions going forward which will begin to outweigh the bad ones. Trying to do it all can seem very overwhelming which is why I wanted to talk about the top 3 factors so that you can begin there. You may not be able to start paying everything on time immediately if you have struggled with this for a while, but there is no better time than today to sit down, list out all of your bills with their minimums, set up a budget and begin to make it happen. Doing this will automatically improve your utilization – lower debt = lower utilization. You can do it! I was $200,000 in debt making just $10,000/year with a 560 credit score when I started the process. And look at me now – debt free, making way more than 10 grand, and my score is over 800. It is not impossible and I hope that these small tips that I will be sharing will help you to start the journey now.
Credit is a part of life – we need it for things other than debt in today’s world. It is your financial reputation. And it’s okay if your reputation is scared a little right now. Just make the decision to start over – start today making one better financial decision, pay one bill on time, pay one debt off, anything! Today is your day!