What Makes up a Credit Score

Transcription

Steve Currington: This is stevecurrington.com and the Steve & Tyler Show episode number 42.
[background music]
Speaker 2: Welcome to the Steve and Tyler Show with stevecurrington.com and Tyler Wilburn.
Steve: Who negotiated the contract for you?
Tyler: A realtor.
Steve Currington: Oh, you are pretty smart. Good for you men.
Speaker 2: They’re talking about everything you need to know about mortgages, home loans and more. Nobody knows mortgages like these two. Get ready because here’s Steve and Tyler.
Steve: What’s up Tyler?
Tyler: Hello.
Steve: Guys, I just want everybody to know that as we start this podcast Tyler is doing his nails in the studio.
Tyler: [laughs]
Steve: We’re trying to talk about what makes up a card score and I think Tyler literally, If I wasn’t here, he might have like a little buffering nail polish.
Tyler: Probably. I need a cuticle pusher.
Steve: A thing to note that when you’re doing a podcast and it’s not on video, then your podcaster could be getting a full manicure or giving themselves a full manicure while they’re doing the podcast. Just know that that’s happening in the background. Today we’re talking about Tulsa mortgage lender loans, right Tyler?
Tyler: Oh yes.
Steve: Stevecurrington.com here. We’re talking about what makes up a credit score. We talked about, in previous podcast, really focused on our revolving credit, right Tyler?
Tyler: Yes.
Steve: Anybody can Google this and we should do this just as an exercise. I’m going to go to Google while we’re live here on the show and just look up what makes up a credit score just so you guys. So guys, what makes a credit score? You get the FICO, myfico.com; there’s lots of different websites but basically, there’s a — Oh, this is a good article. This is a good article, let’s look at this one.
FICO’s five factors; this is like a website called credit cards.com. This is somebody that’s written this. That’s maybe like a Steve or Tyler who calls himself an expert, so I’ll just preface it with that but we’ll look at it and we’ll see if their information is valid and it is looking pretty good. Here we go.
35% of your total credit score is based on your payment history; making the repayment of past debt is the most important factor in calculating the credit score according to FICO. Past long term behavior is also something they use and then credit evaluation which we talked on in the previous podcast of how you use your revolving credit represent about 30% of your score and so if you don’t have any revolving credit, you don’t have 30% of your score.
The link of your credit history is another one that represents 15% of your score. A lot of people think that, “Tyler, I’ve got credit for 30 years and that one like payment must quote it.” No one cares that you’ve good credit for 30 years. What they care about is what you’ve done in the last 24 months, and it’s only 15%. Literally, think about that. “I’m brand new, I’m 19 years old, and I’m establishing my credit. I have a new account opened and I don’t have a lot of credit history, I just don’t.” 15%, who cares? You have 85% of your score to build. You want to know that.
Four and Five is new credit and a credit mix, and each of them represents 10% of your total score. Does that equal to 100%? You’ve got 20; you’ve got 15, that’s 35. Then you’ve got another 35, which takes you to 70 and you get 30 which takes you to 100. So you’ve got revolving credit representing 30% of your score, you’ve got your payment history making payments on accounts, and then you’ve got the mixed up credit and opening up new credit.
A lot of people will say, this is my favorite thing, to note here. Maybe I should say this is the most annoying thing that I hear. “Well Steve, I have this car loan and I just paid it off, so I know that will help my score. I mean my score should go up.” I’m not trying to be rude but I just want to go, “What?” Like why do you think that’s going to help your score? You paid it off, now it’s part of your credit history. We just said like new credit, linked of credit history, 10% for new credit and credit mix and link to history is 15%.
Now you took an account that you have a good payment history on that might be representing 35% of your score and you moved it into — it’s a closed account, now it’s part of my credit history. So what makes you — oh here’s one. “Well, that I had that account on, it was a 48-month loan but I paid it off earlier. I paid it off in like 30 months. I know that’s going to help my credit.” No.
Tyler: No.
Steve: No. No. No. You know why? Because you get rewarded by the credit bureaus and by the creditors who by the way fund the credit bureaus, that’s how they’re there, by making payments. And guess what; do the math here. The more credit makes you have, the more types of credit you have, the more interest you pay. Maybe that’s the conspiracy theory; the more interest you pay, the more likely you are to have a higher credit score.
I have multiple accounts that I’m managing, monthly I’m paying, I’m paying interest on, then I have a good credit score. If someone tells you to go pay off an account and that’s going to help your credit score, take the nearest item that you can get your hands on and smack them with it because they are not correct.
Here’s the other one, “I have a collection account Tyler. It’s –” Let me just back up. I wish I could talk to people before they call me, like I wish I could get into their head and say, like be that voice like you’re the devil and you have the — you know the angel is on your shoulder? I want to be like the angel on their shoulder that says, “Don’t do that. Call Steve, call Steve.” Because if you can just call me first before you go do stupid things, not stupid things, uninformed things I should say.
Here’s another thing happens every single day. Every single day this happens. “Hey, I wanted to see if I can get qualified for a home loan, I saw your really cool add for Tulsa Mortgage lender on Google or on Facebook, and I really love your little collateral thing. It’s so cool. You guys are funny. I watched your videos that are on your Facebook and I watched the videos that are on your website, they’re really cool but hey, I just paid off all my bad debt and I’m ready to buy a house.”
Just like that too and on the other end of the phone there’s me, literally, this is me hitting my head on my desk.
Tyler: [laughs]
Steve: And I’m like, “No, please don’t tell me you just went and paid off all your bad debt.” Because here’s the thing; I tell people this all the time. If you have a moral obligation to pay something, like, “Hey, I owe this”, like, “I tried to stood up, it’s my debt.” Whatever it is and you feel like, I need to pay it. Then pay it, by all means. But if you’re paying it because you think it’s going to help your credit score, don’t pay it. If they’re suing you, if you’re getting your judgment, if they’re [unintelligible 00:08:05] check, pay it.
If you’re paying it because you’re thinking, “Oh, I’m going to pay off all my bad debts and it’s going to raise my credit score.” You’re wrong. In fact, it’s weird, it’s really weird, but some people will have collection accounts with balances and they’ll have a decent score. Like if they don’t have any open accounts, and they don’t have any collections, their score ticks. I don’t know how you get all six or four credit score and all you have is a collection of accounts, right Tyler?
Tyler: Yes.
Steve: We just looked at one the other day, had a six or for credit score. All they had was directory accounts. That’s it. And anything that they had that was open that wasn’t directory the last reporting day was in 2007, literally eight years ago. Here’s what happens, this is the fact of the matter; you have a medical collection maybe it’s 500 bucks maybe it’s 1500, maybe it’s 1000, it doesn’t really matter. Maybe it’s 87 bucks, doesn’t matter.
No one has reported any information on this account, the creditor or whoever owns it since 2012, it’s now 2016. Basically, this just sits on your credit, and it’s just rotting. It’s just sitting there. It’s like, “Hey, whose is this collection.” It’s aging, it’s older, they haven’t reported now in four years and you’re like, “Oh, I’ve got to get this collection paid off.” Again, if you have moral obligations to pay it, pay it.
Here’s what happens; these people get some money, they get their tax refund, they get whatever they like, “I’m going to go pay off my debts so I can feel better. So my score will come up.” You go pay that $1500 medical collection Tyler, from four years ago, what happens?
Tyler: It’s start pouring like a paid collection now.
Steve: Boom. Now they’re like, “Oh, thank you so much for paying. Let’s report that to your credit that it’s paid.” So now you have a collection account that formerly didn’t exist really on your credit because it was 48 months old and we literally looking at the biggest weight on your scores is the last 24 months of payment history. It’s really not hurting you that bad but now you paid it. So now all it does is that it shows up as a paid collection as of yesterday.
Well it’s a computer. So all the computer sees is now there is an active collection that’s now zero. So guess what happens, your attempt to get your credit score to go up, all you did was hurt yourself. And so that’s why I cringe and I bang my head on the desk and I literally draw a square. I put an x and I place it here and I just go whack, whack, whack because — not because I think the person not smart or whatever, it’s just because gosh I wish I could have talked to you two weeks ago.

Taylor: People don’t know what they don’t know.

Steve: Yes. We call that — there are stages. It’s unconsciously incompetent. You just don’t know what you don’t know. I’m trying to move into the consciously incompetent stage for some people you realize you don’t know some things and then call an expert that knows so that you can avoid paying, period. You can avoid paying because every single situation when that happens, we wish we could go back and reverse it.

And so do they when they find out the rules. Period, I mean it just is — it’s just is what it is. It’s how it happens. That’s what is sounds like in our heads like-

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Steve: That’s called bomb blast. So we’re talking about credit scores. We’re talking about what makes up a credit score 35% again is your payment history. 30% is revolving credit. Think about that Taylor. 35% is your payment history, 30% is revolving credit. And that literally between those two items, it represents over 60; I mean it’s 65% of your score. Revolving credit guys, revolving credit; if you don’t have a credit card, get one.

You don’t have to be a knuckle head about it. You know what I mean? You don’t have to like, “I got in trouble because I injected up all amounts on my credits.” But if you don’t have one, you’re not going to have the best credit score, it’s 30% your score. It’s double what it counts for. This is your link to the credit history. It’s triple what it counts your credit makes up you having your new credit.

It’s nearly the same as what they’re going to count for your payment history. And so if you don’t have any revolving credit, you’re going to be toasty. It’s just your score is going to be what your score is going to be but it isn’t going to be the best score it’s going to be. Be all that you can be. Get revolving credit. That’s what I’m saying.

So just be aware of the fact that if you do have revolving credit, you’re going to have a better score and if you don’t have revolving credit, you’re not going to have a better score and then as we’ve talked about previously. Then on top of that, there’s how you use that revolving credit and if you’re maxed out on all your credit cards, your score is going to be significantly low because we look at a ratio of your balance versus your available credit and the higher your balance is versus your available credit, it doesn’t matter if you’ve got a 10,000 dollar limit, it doesn’t matter if you have a 500 dollar limit.

All that matters is percentage of balance versus available credit. So if you have a thousand dollar limit on all your credit cards and you have a 900 dollar balance you’re at 90%. If you have a 100 dollar balance and a thousand dollar limit, you’re at 10. Taylor, what do you think the difference and just take your educated guess, between me being at 90% over my available credit and me being at 10? What do you think the net effect is going to be on my credit score?

Taylor: It can be pretty big. I mean really it could be 15 points, it could be 40. It’s just depends on your-

Steve: It depends on your credit profile. But if someone has a — and we’ve seen this before. If someone has a 705, they’re going commit to a loan they’re trying to qualify for the best rate and they’re at 90% of their credit utilization on their credit cards, that’s like a pay those things off. And here’s the cool thing; we have to pay for it but there’s a thing called, a what if simulator and I can literally just go plug it in.

Then I could say pay this card to this and if you pay this card to this, your score is going to go up this many points. And so if you give it to an expert that knows what they’re doing, they can tell you specifically what you need to do in order to get the best score so you qualify for the best Tulsa mortgage lender you could possibly get with the best rate and then you’ll be a happy camper.

So don’t make assumptions when it comes to credit. I’m going to recap three main things; don’t pay up bad dept, because you think it’s going to increase your credit score. Just don’t. Okay? Don’t avoid credit cards that represent 30% of your score. And don’t over utilize your credit scores. So what that mean or your credit cards, so what that means is just because they give you a thousand dollar limit doesn’t mean you need to have it hanging out at 999 bucks every month. You use it, pay it off, pay it down. Don’t carry a balance more than 24% of the available credit or if you do, just know you’re credit scores could be low.

That’s itm that’s the whole thing. If you need more information about that, you can go to Stevecurrington.com. Thanks for listening to our podcast, I’m Steve Currington, Taylor Wilburn, the Steve and Taylor show and talking all about credit scores, hope you enjoyed it. Have a good one.

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