Laid off 101

Understanding the factors that determine your credit score and how to build and maintain your credit during turbulent economic times.

I think all of us realize how important it is to build and maintain a good credit score. While most of us know it’s important, I get the feeling that many people don’t have a firm grip on how the scoring system works and how to use it to their advantage. Just because the economy is tough, or you fear being laid off or were already the unfortunate casualty of a layoff, does not mean that you cannot continue to build and maintain a great credit score. Continue reading for some insights into how to do this.

Just a reminder as we start: scores of 740+ are generally considered excellent, while scores below 620 are considered poor.

Factors driving the score

Before you can build a great credit score, you need to know what the rules of the game are. Below are the five primary drivers of credit score and their percentage relative importance:

(1) Timeliness of payments (35%)

Late payments negatively affect the score.

(2) Amount of debt in relation to total available credit (30%)

The closer you are to maxing your cards, the worse your score.

(3) Length of credit history (15%)

The longer your credit history, the better your score.

(4) Variety of credit lines (10%)

A good mix of different credit lines (mortgage, auto, credit card) is good for the score.

(5) Recent credit applications (10%)

Too many new accounts or applications in a short space of time is bad for the score.

7 solid tips for building a good score

1. One very effective method is to keep your credit card balance at less than 10% of the limit.
2. The higher your credit limit, the better for your credit score. You can approach your credit card company periodically to request an increase in credit limit. (Obviously, if you battle with financial discipline and controlling your spending, don’t ask for a higher limit.)
3. Make sure you pay your bills on time. If you are going to miss a payment, call the company and let them know. They may be willing to work with you.
4. Length of credit history is largely determined based on your oldest open account — so keep your oldest accounts open; don’t close them if you switch to another bank, etc. Credit cards are separate from checking accounts, so you can easily change the bank you keep your checking account with and keep your credit card with the previous bank.
5. Do not apply for multiple credit cards or store credit cards in a short period of time. Aside from this affecting your score, having many credit cards also makes your finances more difficult to manage.
6. Having at least three different lines of credit seems to be necessary to support a higher score. Avoid having multiple lines of credit of the same type (e.g. many store credit cards), as this negatively impacts your score.
7. Having a mortgage goes a long way in positively impacting your score.

5 ways to maintain your score in difficult times

1. Keep a listing of all your lines of credit, the minimum monthly payments, and the payment due dates. Incorporate these payments into your monthly budget.
2. Assess all your lines of credit, identify any where you are past due on payments, and pay them immediately if possible. If not possible, initiate communication with the creditor to let them know about your situation and ask for some grace. At the same time, look into whether you are eligible for a debt consolidation loan.
3. After making your overdue payments, pay down any lines of credit that are maxed out or close to their limits. A line of credit that is close to maxing out is very bad for a credit score.
4. Adjust your lifestyle and living expenses so that you have cash available to pay down debt.
5. Stop applying for new lines of credit, and especially don’t apply at a number of different stores. Work with the lenders you already have a relationship with.

 Image by: crocidillicus