Your credit score is like an assignment you had in high school for a major grade. Your teacher gave you a breakdown of what you needed to do to get an A+.
For example, your major grade essay may have had a similar breakdown:
- Grammar – 25%
- Content – 25%
- Research notes – 25%
- Presentation – 25%.
How well you perform in each category gave you the points you needed to get your grade…70%, 85%, 95%, etc.
Your credit score is calculated similarly:
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit History – 15%
- New Debt – 15%
- Credit Mix – 15%.
Let’s do a deep dive into the highest percentage and impact on your score, Payment History. Knowledge is power can seem cliché-ish but it is so very true. The more you understand a thing, the better you are able to take control of it.
How important is it to you to take control of your financial health?
If you are trying to buy a new home or get approved for a car loan without paying an arm and a leg in finance charges, it is CRITICAL for you to take control of your financial literacy. You really have no choice but to take ACTION.
So let’s get started.
The biggest portion of your credit score grade is Payment History and it is worth 35% of your “grade”. Most people understand that they need to pay their bills on time. That makes sense.
I would ask you to consider how important that is and how it affects your credit score. One late payment will sink your score up to 100 points! Yikes! Going back to the example of a grade, you would automatically be given an F for that portion of your score. That would bring your major assignment grade down significantly even you scored high in the other areas.
If you continue to ignore the bill (phone bill, medical bill, credit card bill, etc.), it will eventually be charged off and sold to a collection agency. The original company or creditor will get a tax write-off AND report it to the credit bureaus. The collection agency pays pennies on the dollar and now attempt to collect the debt from you. You now got a double F for this portion of your grade! The only more derogatory item you could get on your report is a bankruptcy.
The key is to do everything you can to avoid late payments. Avoid them like your life depends on it…because it does. I remember when I fully understood what I needed to do to score an A+. Somehow, the automatic draft for a personal loan did not get paid. When I received an email from the company, I called them immediately. They informed me that my payment was going to be reported as 30 days late. I got frantic. I had been paying on time for almost 3 years! I was finally getting my credit score thriving. I could not control the emotion. I explained to the representative that I had no idea they had not been paid. He said he couldn’t help me. I got on the phone with the supervisor and continued to plead my case. Ultimately, being proactive and passionate got me off the hook. My account continued to report positively with no late payments.
Don’t just ignore a debt. It is best to reach out to your creditors if life punches you in the face with a job loss or some other life event. Be proactive and let them know what is going on upfront. Often times, they will work with you. Sometimes they will extend the due date out further. They may have a payment plan that prevents the debt to go into collections.
Unfortunately, once your account goes into collection status, paying it off is not the best course of action. You would think that paying it off would make your credit score go back up but it does not. The negative mark will stay on your report for a minimum of 7 more years. I know. It is so frustrating. 7 years??!! It’s like the teacher that allows you to update one of the 2 F’s you received for this portion of your score. AND you can only update one of the F’s to a 70. You know what I’m talking about if you’ve been in the public school system and ever needed a do over. This is the equivalent to paying off a collection. It still shows up and drags your score down but an underwriter for a home loan may give you a few points for at least paying it off.
There are strategies to challenge the accurate reporting of the collection on your report. These strategies are 100% legal and can help remove the collection from your report.
You’ve heard of credit repair agencies. Some companies can help you improve your credit profile by getting negative marks removed. They typically will charge you an initial set up fee after they initiate your profile with their company. Afterwards, you would be charged monthly for their services. Estimates suggest that most people pay for approximately nine months.
I have personally gotten results years ago with a credit repair agency. I was out of $700 and my score tanked again. Why? Because I had no grasp of how important it is to MAINTAIN a good profile. I had no idea how my score worked.
I’m back to the old adage of Knowledge is Power. When you understand your credit for yourself and fully wrap yourself in the concepts, you will never look at your credit the same again. It will be an ongoing process that will become second nature to you…kind of like combing your hair. It has to be done if you don’t want to walk around looking crazy.
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You CAN do it!