What they don't teach you in school AND SHOULD!

13 Mar

I want to start by asking a question:

Why weren't we taught anything about money in school?

It's simply not in the curriculum. This question is for another post for the future. 

Let's talk about credit, shall we? My goal here is to explain the various aspects of Credit in a concise way (not off to a good start am I? ) Hang tight! You need to come up ^^^^ to 50,000 feet in the air, then it becomes very clear. Ready? Here goes. 

So your Credit Score is simply a mathematical formula that lenders (think Credit Cards, Cars, Mortgage) use to sum up your risk profile. Not to be cold but to a bank you and I and the rest of the working world are just a number. Your credit score tells a potential lender how likely you are to pay them back. That is it. So what makes up a credit score? Keeping language vague and in voodoo speak makes it sound all so complicated. I come from Blue Collar people and I can't stand inefficiency so I'm going to go over personal credit factors as simply as possible. Startinggggggggggggggg. NOW!

Age of Credit- This is the amount of time you have had credit (average). If you got your first credit card 10 years ago and your second one today. Your average age is 5 years. 

Late Payments aka Payment History- The amount of late payments you've had. (if you take one things away from this, heed these words) DO.NOT.PAY.LATE. EVER.EVER.EVER.EVER.EVER. One late payment is the equivalent to giving a totally healthy person food poisoning. No matter what lead up to it you're gonna feel some pain. 

Total Accounts- This is essentially a useless one. It's about how your accounts are used. (more on that below)

**Time Out** I am about to be BRUTALLY  Real from here on out. If I were talking to you this is the portion where I'd ask 'how honest can I be with you?" It's also the portion that could boost your credit score 100 points in a few months. 

Hard Inquiries- For some reason (probably original thesis on no financial education in schools but I digress). Anyway, the majority of people I talk to think that an inquiry is this awful thing. When you get a cell phone? Inquiry. New car insurance? Inquiry, set up new cable/internet....? Inquiry. In real estate terms- Average person buys a house every 7 years. 1 inquiry per 7 years. How many cars, cell phones and cable services have you purchased in 7 years?

"Utilization" - All this means is what amount of your available credit (revolving) are you using. 

**Revolving, think credit card. 

If you have ONE credit card with a limit of $5,000 and it has a $3,000 balance on it. Your Utilization is 60%  (3000/5000)= 60%. 

60% Utilization= Bad. To a potential lender this says "This persons boat is at 60% of it's capacity to hold water, it is not greater than a 50% chance they will sink' *Score goes down* 

Here is the part that will have you looking up in curiosity as you eat your lunch today. Same story as above but with a subtle change.

If I open up another credit card for $5,000 (and DON'T use it) well then I have a $3,000 balance but I have $10,000 in available credit. (3000/10,0000)= 30%. A few clicks of the key board and a little self control and my "Utilization" will drop from 60% to 30% and my credit score will go up in a straight line. 

I bet, like me , you'd trade all the stuff you learned about 15th Century European history and the food pyramid *cough..hoax, lies cough* for the knowledge of the last paragraph before you turned 18.

Thank you for reading. it means the world to me. Please don't sue me. LOL. I want to leave you with a quote from a man that changed my life. 

"My Banker has never asked me for my report card" - Robert Kiyosaki

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