Credit

For 3 months, my wife and I used the zero-budgeting system (we still are), aggressively saved 40% of our income and it was a great short term plan. But we cannot sustain this savings rate because we have DEBT!! Yes, you read that right, we have debt from multiple sources.

Before I dive into debt, and lay out the plan that we have set for repayment, I would like to touch on credit cards and credit score, because America runs on credit.

I personally know so many people, especially immigrants in debt due to incorrect credit card usage. Most of us are not taught what credit is and how to earn good credit. My mother told me to open up a credit card as soon as I turned 22 because it will help me with my credit, and I did. That was the extent of knowledge that I had about credit cards and credit score. I opened up a credit line and did not use it for a full year, I received a letter in the mail saying they are going to close my account, so I started using it … and I did not stop for 5 years! I misused my credit card  and racked up $19,000!!! Crazy right?!

But, I. Am. Not. Alone, and you are not either.

To utilize your credit card wisely, you have to understand what a credit score is, what factors contribute to your score and why this is important. 

A credit score is a number between 300-850 that is based on a statistical analysis of a person’s credit files and represents credit worthiness.

In short, are you able to pay your bills on time and repay the loan?

There are many different credit scores and scoring numbers; the most widely used credit score is a FICO credit score, calculated by the Fair Isaac Corporation (https://www.ficoscore.com/home).

Credit scores are important because they can significantly affect your financial life, positively or negatively. A high FICO credit score will give you access to credit at more favorable terms as well as lower insurance premiums. The average FICO score often used by lenders is:

• Excellent: 800 – 850
• Very Good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579

So, what goes into a FICO score?

1. Payment history – counts for 35% of your credit score and is a good reflection of whether you pay your bills on time. Paying your bills on time is very important, regardless of how much debt you are in, always pay on time! 
2. Total amount owed – counts for 30% and takes into account the percentage of credit available to you that is currently being used, this is also known as credit utilization. For instance if you have a max credit card of $500 and only have $30 left to utilize, you are not doing good fam, pay that off.
3. Length of credit history – counts for 15%, longer credit histories are considered to be less risky since more data is available to determine payment history. My longest credit card will reach 10 years this year!
4. Types of credit – counts for 10%, shows if you have a mixture of car loans, mortgage loans and credit cards. Having a mixture of different types of loans over a long period of time increases your score. I have it ALL!
5. New credit – counts for 10%, how many new accounts opened, how many credit inquiries and when the most recent account was opened. Opening new accounts too quickly will lower your credit score, allowing a good gap in between accounts. For instance, I opened my first credit card in 2011 and 5 years later I opened my second one. In 2013 I bought my first car on credit, and in 2017 I bought my first house. As you can see, my new credit accounts have always been spaced out. 

So maybe you are currently in debt and wondering what you can do to improve your score.

First I encourage you to check your credit report to make sure everything that has been reported is correct; think errors and identity theft. You can check your credit report for free annually at annualcreditreport.com from each of the three major credit bureaus.

Second, pay your bills on time. On-time payment history accounts for 35% of your credit score, you can automate payments to make sure they are always paid on time. Late payments remain on your account for up to 7 long years.

Lastly, maintain low balances on your credit cards and open new credit lines only as needed; having too many credit accounts can also harm your score (see number 5).

If you are having issues paying your debt, do not fret. I’m here to encourage you to start small and keep going.