Throughout the course of our time together, you’re getting to know a chap we’re calling “Darnell.” He’s a friend of the site, and he’s sharing some of his financial experience – the good, the bad, and the ugly; mostly from the latter two categories – with us.
It’s also time for a periodic check-in with Darnell. At or around the tenth of every month, the folks at Capital One share his updated credit score with him. He’s been able to get this service for a few months now, and he does say that it’s a big help in tracking his finances, especially as he rebuilds (like a lot of our readers) from the Great Recession.
Yikes, the score DROPPED!
Darnell was perplexed – that’s one of the reasons he pinged us so quickly.
As the screengrab tells us, he’s been hovering over 600 – and went as high as 621 – for the past few months. A 24-point drop is pretty big. So we thought we’d help him dig a little deeper.
Understanding Your Credit Score
Okay, first the basics – you can see the range over there and it’s potentially rather large – from 300 (or so; we’ve not heard of a score THAT low, ever) all the way up to 850 (sterling credit, the best possible; and, no, if you’re rich, you don’t necessarily have a high score, nor if you’re poor is your score necessarily low).
Actually, the next screen grab will tell you a little more about the range, and where people potentially fall:
Darnell is officially BELOW AVERAGE. Bummer, eh?
But how did this happen, what will it look like next month, and what are the steps Darnell can do to take matters into his own hands?
Ranking what has impact
Another screen grab, and this one was very interesting to us. The upshot?
Some things are going to be out of your hands.
For instance, Darnell tells us that he did, indeed, look for a car earlier this year. Well, the auto dealers must have reached out to every lender known to man, because he gets a “D” in the “Recent Inquiries” category.
But what’s key to understand is that “My Grade Overview” is listed, top-to-bottom, in order of IMPACT ON YOUR SCORE.
That means that things like “Available Credit” and “Recent Inquiries,” while unflattering to see in the “D” range, aren’t as big a deal as the stuff at the top of the list.
This seems more important to stress:
On-time Payments have the most impact on your credit score. Age of accounts next, then “Credit Utilization,” or the percentage of available credit that you are actually using.
Don’t worry if it’s a little confusing…
Pay on time, don’t cancel old cards, and don’t use all of your available credit.
Darnell can’t change item one overnight. And item two is out of his hands, to some extent – though canceling his first credit card is likely coming back to haunt him.
The score – created by TransUnion and provided to Darnell by Capital One – could, however, be impacted by paying off some balances. Within reason. (The tracker tool says 30-35% is the target number – if you have $500,000 in credit, your balances should total up to $150,000-$175,000. Don’t laugh at those numbers – things like mortgage balances are factored in.)
But, you might ask, if “Recent Inquiries” is a category he can’t do anything about, and he gets an “A” in “New Accounts,” so it probably doesn’t make sense to open another account…what, pray tell, SHOULD HE DO?
One thing to consider RIGHT NOW:
Time for our final screen grab.
One glorious thing with the tracker is the ability to run projections – “If Darnell did X, Y would result.”
Darnell, at our urging, ran a few projections and sent us a bunch of screenshots. (I prefer the term “screen grab,” but also thought we’ve overused it.)
What’s funny about this last piece is that, even though it’s down on the “totem pole,” there’s quite a bit Darnell could do right now to make his score go back to where it was before.
Paying off his credit card balances – $955 in his case – would mean Darnell’s score would be 622.
Granted, we have said here that there are some things you can do with a poor score; and we’ve also said that 610 is some lenders’ cutoff between sub-prime and prime.
As far as “overnight” changes, this is, without a doubt, the most realistic thing Darnell can do to get back on solid footing, score-wise.
Advantage: Guru Dave Ramsey, who has long advocated debt snowballs. And, I’ll take this a step further – not only would this particular debt snowball help Darnell make things happen by psychologically telling him he can get rid of a small credit card…Darnell will also have the psychological benefit of a higher credit score.
Now, Mr. Ramsey says your credit score shouldn’t matter at all – you should try to get completely out of debt, own your home free and clear, and pay cash as often as possible.
Darnell doesn’t think this is realistic – at least in the next several years.
So building the psychological benefit – the WIN – behind getting a higher score…that can lead to smarter spending, saving, investing and earning habits for Darnell.
What about you?
Do you understand your credit score at least a little better?