CREDIT 101: Build and Protect Your Score

Presented by: Alexa Glanzel, CFP®

Contact Alexa: Direct 315-333-1315

Imagine your credit score is like a report card for how good you are at borrowing money. The higher your score, the more trusted you are by banks and lenders, which means you can get better deals on things like loans for cars or houses. By following these three steps below, you can set yourself on the path to becoming an “A+” student in credit.

Pay Bills on Time

Let’s say you borrowed a car from your friend. It’s fair to say that your friend would expect you to return their car on or before the date you agreed to return it, right? Well, the concept of credit is no different. Think of a credit card as borrowing money. The bank lends you money (up to a certain limit), and they expect you to pay it back, on time! When I say, "pay bills on time," I mean that when your credit card company sends you a statement saying you owe money, you need to send them the money before the date they tell you it's due.

Why is this important? Because if you pay late, it's like telling your friend, "Oops, I forgot to give you your car back on time!" If you do that often, your friend might start to think you're not very reliable and will not want to lend their car to you in the future. Banks think the same way. If you consistently pay your credit card bills late:
- Banks will see you as someone who might not pay them back reliably.
- Banks will charge you extra (late fees and interest) which is a penalty for not paying your bills on time.
- It hurts your "report card" score, which in this case is your credit score.
Payment history = 35% of your score. This is the super critical part! Imagine your report card for being good with money has different sections, and payment history is the biggest piece of the pie! It's like the "Did you give the car back on time?" section. If you always pay on time, this section gets a high grade, and it makes your overall score go up a lot. If you pay late, this section gets a bad grade, and it drags your whole score down a lot.
- This means that the single most important thing you can do to have a good credit score (that "report card" that helps you get good deals on loans) is to ALWAYS, ALWAYS, ALWAYS pay your credit card bills on time. Tips for paying your bills on time:
  - Set up reminders on your phone.
  - Put a sticky note on your computer.
  - Set up automatic payments if your bank allows it (so the money leaves your account automatically when it's due).

Keep Balances Low

Let’s say that when you borrowed your friend’s car, the car had a full tank of gas. Yet, whenever you’re driving with someone else in the car, the gas gauge is constantly on "E" because you're always using almost all the gas in the tank. Even if you fill the gas tank up often, the fact that you consistently run it so low makes people wonder if you're eventually going to run out of gas and get stranded. Think of a credit limit as a full tank of gas. The bank lends you a certain amount of money, and while the bank expects you to use some of the money, they do not expect you to constantly spend it all and run on “E”.

Credit Utilization Ratio: This is a fancy term for how much credit you’re using compared to how much credit you have available. For example, if your credit card limit is $1,000 and you owe $300, your credit utilization is 30% (300 ÷ 1000 = 0.3 or 30%).
Why Low is Better: Credit scoring models look at your credit utilization as the second biggest piece of the pie, about 30% of your credit score. When you keep your balance low—under 30%, and even better under 10%—it shows lenders you’re not relying too much on borrowed money, and you manage your credit responsibly. In other words, there is never any fear that you will run out of gas and be stranded, because you’re never utilizing the entire tank of gas.
High Balance Hurts: Just like how other people might worry that you will eventually be stranded when constantly driving on an empty gas tank, lenders might think you could have trouble paying them back if you use a lot of your available credit, (especially close to or over 30%). This makes your score go down.
How to Keep it Low: Pay off what you owe each month and don’t spend too much on your credit cards. The lower your balance compared to your limit, the higher your credit score tends to be.

Avoid Unnecessary Inquiries

I’m sure by now we’ve all heard this line at least once in our lives while standing in the checkout line. You know, the line that goes, “Congratulations, you have qualified for a *insert retail store’s name* credit card! If you sign up right now, you will get 15% off your order today!" What a deal, right? Everyone loves 15% off American Eagle jeans!... Except for the banks and lenders reviewing your credit score. Not because they don’t also love discounted jeans every now and then, but because their prospective customer (you) might love them a little too much. Let me explain.

Money Reputation: Whenever you apply for a loan or a new credit card, the lender always wants to inquire about your credit history (and yes, that includes that American Eagle credit card that you seemingly applied for within seconds). Think of this as the lender doing their due diligence and checking your “money reputation”.
Each Inquiry is like a little red flag. If you have just one or two inquiries, it's usually not a big deal. Your money reputation might drop by a tiny bit, like losing .5 points on a 100-point test.
But too many red flags quickly make lenders suspicious. If lenders see lots of red flags in a short time, they start to worry. They might think: "Why does this person need so much money so fast? Are they in trouble? Are they desperate?”. And while you may have thought you were just saving yourself 15% off your new pair of jeans, you actually were opening a new line of credit in your name. Now, the future lenders of your house and car loan think that you need the $10,000 of available credit on your American Eagle card, which is cause for concern when they are deciding whether to lend you additional money.
Being suspicious makes your money reputation go down more. When lenders get suspicious, your credit score (your money reputation) takes a bigger hit. This is because people who apply for lots of credit at once are statistically more likely to have problems paying it back. So, if you really want a discount, it’s best to try and wait until that 15% off back-to-school sale instead of opening a new credit card.

Alexa Glanzel, CFP® is a financial advisor at Weller Financial Group, located at 6206 Slocum Road, Ontario, NY 14519 and can be reached at 315-333-1315. Advisory Services offered through Commonwealth Financial Network®, a Registered Investment Adviser.