Plotting a course when you need a little money
Your credit score defined
You can be the nicest, most neatly dressed, most polite person in the world with a solid job and a glowing letter of reference from your grandmother, but that won’t guarantee you’ll get that mortgage, car loan or even credit card. When you fill out an application for that loan, the loan manager is going to pull a credit report, and on that report will be your credit score.
Wikipedia defines a credit score as “a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person, which is the likelihood that people will pay their bills.” Whenever you apply for credit, employment or housing, information on your application is sent to a credit bureau. Experian, TransUnion and Equifax are three credit bureaus that compile your credit history information. Although these organizations use different calculation methods to come up with a credit score, no matter which method is used, your credit score tells a potential lender or landlord how likely you are to pay your loan or rent on time. It also helps a potential employer verify your identity and other personal information.
Exact calculations are proprietary, owned by each credit bureau, but here’s how that three-digit credit score number generally breaks down:
- 35% is based on your payment history—if you make payments on time, your score is higher
- 30% is based on outstanding debt—the lower your balances are, the higher your score
- 15% is based on how long you’ve had credit—a long history gives the lender a snapshot of your paying behavior and how likely you are to continue being a good risk
- 10% is based on new credit—starting new credit usually has a short-term negative effect on your score
- 10% is based on the type of credit you have—having different kinds of credit, such as installment loans along with revolving lines of credit, makes your credit score happy
Why is your credit score important?
Unlike golf, a low credit score is not great. A low credit score can stop you from getting a student loan or could jack up the interest on a loan. The good news is, if your credit score is low, you can work on it and make it better. Like a do-over! Here are some steps you can take:
- Pay your bills on time—even if it’s just the minimum amount due.
- Hang on to old credit accounts (they don’t need to be active—they contribute to your history).
- Review your credit report and contact the appropriate credit bureau to fix any errors.
- Reduce your credit card balance as soon as you can to less than 75% of the limit. (25% is preferred.)
- Be careful who you authorize to review your credit report. Read applications carefully to understand what your signature is authorizing. (You can check your own report with no effect.)
- Don’t open any new credit accounts prior to a large purchase such as a mortgage.
Free credit reports
You are entitled to one free credit report per year from each of the major credit bureaus. Visit annualcreditreport.com. You can view your credit score as well, but you’ll have to pay a fee for that. creditkarma.com offers a free credit score (just ignore those pesky ads on the site).
NSF stands for Non-Sufficient Funds, a code you may see on your account statement if your credit union processed a check for you even though you didn’t have enough money to cover the check and didn’t have an overdraft set up. Check with your credit union to be aware of the fee, but always be aware of where your account balance is at!
Think of this as an awesome backup plan. If you withdraw money from your ATM, use your debit card to make a purchase or write a check for that $20 you owe your brother, and for some reason you don’t have cash in your account to cover that transaction, the money will come out of the overdraft portion of your account.* The next time you check your account balance, it will appear as -$27.88. This means you are overdrawn. Your next deposit will pay this amount back first, and the remainder will appear as a positive balance. You may have to pay a fee for an overdraft, so talk to your credit union first. The best solution is to see if that check cleared your account before you buy that pizza. If you’re low on funds, pb&j is an OK Plan B for dinner.
Overdraft line of credit
This is like an overdraft, only bigger. It’s also like a loan, only not specific. An overdraft line of credit is a pool of money at your disposal should you need it, although you typically need to transfer the funds into your checking account to have access to it. When you use these funds, you pay interest on them. A monthly amount needs to be repaid for your account to be considered “paid as agreed.” While this is not a preset dollar amount, it’s often a percentage of the outstanding balance. This is sometimes referred to as “revolving credit” due to the ability to repeatedly borrow and repay the funds. Lines of credit are generally in amounts greater than $1,000.
Credit cards are really lines of credit that you have easy access to—by way of that little plastic card that is accepted almost everywhere. Because of this convenience, credit card companies can charge a lot in interest. You can get credit cards from your credit union (at a reasonable interest rate), from a bank (at a higher interest rate), and from most retail companies (at sometimes crazy interest rates). Along with the interest, you may also be charged an annual fee. This fee may cover additional card benefits, such as insurance on your purchases or a rewards program. Read through credit card information carefully before deciding on which card best suits your needs.
Credit card tips
- Try to never use your credit card for a “cash advance.” These transactions usually carry a separate and higher interest rate, and possibly additional fees.
- On average, credit unions tend to offer the best credit cards, with interest rates close to half what the big banks charge!
- Leave home without it! Keep your credit card at home in a safe place to avoid the temptation of making large purchases with money you don’t have.