None of us is alien to the fact the credit history affects our lives in many ways than we can imagine. In my previous article, I discussed how one can use his credit card to improve his credit score.
The problem is, people look at their credit scores in isolation. They shouldn’t. The scores that we have on our credit reports can be improved if we make it a goal to raise it, and bring our lifestyle in sync with this goal.
In this article, I’ll lay down some suggestions that can make it happen.
Living condition and credit utilization
Credit utilization is one of the few important metrics that FICO considers when assigning you a score. I discussed credit utilization in my previous article. In case you are not very familiar with the idea, you can give it a look.
The perfect credit utilization rate is between 10 and 20%. More than 20% is safe but not recommended. More than 30% is a risk alert. The less you use your credit card, the better. But at the same time, your credit limit should be high. Now unless you bring changes in your lifestyle, the credit limit-lower usage combo is difficult to maintain.
That’s because a high credit limit is tempting. Preventing yourself from spending freely, when you are at a shopping mall, or in a restaurant is not easy at all. But as I said, lifestyle changes are necessary for a better credit score.
Student loan
We have the best schools in the world, but the course fees of undergraduate and graduate programs are often quite high, and getting a scholarship is incredibly difficult. The question is if you take a loan, would that affect your FICO score.
There’s no definitive answer because the graph below shows it’s perfectly possible that someone has a student loan of over $50000, and at the same time, getting a score of 800 on his credit report.
FICO may not treat a student loan any different than it treats a mortgage loan, but the delinquency rate of student loan has been increasing at a rapid pace. So, live a frugal life and look for additional earning opportunities, so you pay off the loan as quickly as you could.
Understand the difference
It’s less of a lifestyle change and more of a perspective change. Most people make a mistake. They don’t discriminate between instalment loan and recursive loan. Remember, FICO considers your payment history when it assigns you a score. In fact, your payment history makes up 35% of the overall FICO score.
When FICO checks payment history, it considers both instalment loans as well as revolving loans such as the credit card debt. However, it takes instalment loans more seriously. If you don’t promptly pay down the revolving loan, then that’d affect your credit history, but being a defaulter on an instalment loan such as a mortgage loan or a student loan might damage your credit score severely.
Hence, if you have a mortgage or student loan to pay, make it your immediate priority, and shift the focus from your credit card outstanding balances, even though the latter is important too.
Equal importance
What I am going to advise in this paragraph, might appear to be in contrast with what I’ve advised in the previous paragraph. My advice is give equal importance to installment loan and revolving loan. It’s true that an installment debt is different from a revolving debt. It’s also true that not paying an installment debt can damage your score seriously.
Nevertheless, if you ignore the revolving debt, you’d score low in the credit mix category. A person with impressive credit mix is one, who pay down all sorts of debts, without discriminating. So, acknowledge the difference, but don’t delay paying off any of these two types of debts.
Account maintenance duration
You need to show FICO that you are consistent. One of the factors, considered by FICO is the duration of your account. The rule of the thumb is, the longer the better. This simply means if you are new to credit, in other words, if your account doesn’t have a long history, then FICO is likely to give you a low score.
Don’t close an account if you have been maintaining it for long. For the same reason, make sure you don’t have a dormant account. If you do, then activate that account asap. Change yourself if you are an impulsive and forgetful person. Otherwise, your credit score will decline.
Summing up
This article explains how FICO score is linked to factors related to one’s lifestyle. Being frugal, vigilant and consistent can help you to have a shiny credit score.
So many women stay married to their spouses that they really don’t love any more, due to financial constraints only. And for the children.
So, here is a woman who “takes the big plunge” and divorces her abusive husband, and he throws her under the bus. She can not work due to disability, and he stops all her credit cards. Leaves balances unpaid. Her Social Security checks are barely enough to feed herself and her children, and he does not pay Child Support for two years. So she racks up her OWN credit cards she’s had since before the marriage.
Eventually, the credit card balances are maxed out, she can’t even pay the minimum amounts, the collection agencies are calling her, and 5 years after filing for divorce, it’s still not over. She has no settlement but Pension Plans.
She has debt, debt, repossessed car, forced sale on home, 2 years of no Alimony (until State garnished wages), tons of bills, and $300 leftover after bills. She even lost her daughter to him, through lies of child abuse. What can we tell her that will help as a long-term plan to improve her score say 5 years from now?
P.S. Now we understand why women stay with their cheating husbands, and just sleep in separate rooms. Women have always been victims of financial need.
You are so true. Financial abuse limits the woman from becoming independent.