By Mr. Samuel D. Coston, Financial Readiness Program ManagerApril 25, 2016
Learning how credit works is imperative to being fiscally sound. Whether you are the President of the United States or a regular guy or gal, your credit score is your mark of excellence.
A person's credit score is a single numerical evaluation of his/her credit worthiness. The credit-scoring agency used predominantly in the United States is the Fair Isaac Corporation (FICO). These credit scores range from 300 to 850, and is your reputation in the marketplace. A good credit score is 660; however, an excellent score is 750 or higher. Achieving a credit score above 750 is a phenomenal feat that will just make you feel good.
Companies use an individual's credit score to determine how people manage their available financial resources (money). Credit scores are used for various reasons by entities such as banks, mortgage companies, apartment owners, and employers. In fact, service members possessing a security clearance can tell you that a low FICO score could result in additional questions related to financial stability. Everyone who resides in the United States possesses a credit score, and that score is used to determine various loans interest rates.
How does the average Great American achieve an excellent credit score? There is no secret formula; you have to purchase items on credit. Achieving the 750 will cost a person thousands of dollars and years of being diligent in paying debt obligations on or before the due dates. However, please think before you make that "want" versus "need" purchase. Developing a phenomenal credit score should revolve around purchasing items you need and have very little to do with items you want. Use your credit worthiness wisely. Excessive debt has been the cause of serious medical illnesses such as, ulcers, migraines, back pain, anxiety, depression, and the not-so-good heart attack. Anyone who has attended one of my "Financial Fitness" briefings has heard me say, "Somewhere between the car you want and the car you need is the right car." Choosing wisely will help to create and/or maintain the comfort and security of being able to handle the payments to achieve good credit.
Credit scores are based off five major factors: payment history (35 percent), amounts owed/credit utilization (30 percent), length of credit history (15 percent), types of credit (10 percent) and new credit (10 percent).
It is important to note that there is a 30 percent rule related to revolving credit or open credit (credit cards). For example, if you possess a credit card with a $3,000 limit, and you maintain a $1,000 balance for the next 20 years, you credit score will not drop. However, if you maintain a balance on your credit card for 6-8 months that is greater than 30 percent of the maximum amount authorized, then you notice a gradual decline in your credit score at approximately the eighth-month mark. When one of the credit bureaus-- Equifax, Experian or TransUnion-- provides your credit report to FICO to analyze, it's business, nothing personal. Given this fact, and the fact that you and I both understand that 35 percent of your credit score relates to paying your bills on time and credit utilization, do the right thing my fellow Soldiers, brothers and sisters: Pay your bills on time!
Research has shown that individuals who use a high percentage of their available credit limits are more likely to have trouble making some of their payments on time and/or in the near future. Let this not be you, because you and your family members are special. In 2014, the entire United States population was estimated at 318.9 million citizens, and out of those millions of people, only 1.5 million served in the Armed Forces, defending the United States of America and most of the free world. While defending your country so bravely, defend your credit score, too. And remember: Never be shy when it comes to talking about your money because being penniless does not equal happiness. Thank you for your service to our nation.
"Know what you owe, and know why you owe it!"