Your Credit Score

Your credit score is a number that helps others to understand your financial health. It is used by lenders, landlords, medical providers, and others to predict how likely you are to make payments on time. It is increasingly used by potential employers to predict what kind of an employee you may be. Your credit score can affect whether or not you can get loans, what your interest rate will be, whether or not you can rent an apartment, even whether or not you would make a good employee.


A good credit score can save you money and make your life easier. A poor credit score can make a serious impact on your life. Do you know how your score is calculated?

Around 35% of your score is based on your payment history. It includes how many of your accounts are past due, how many are paid on time, whether or not you have delinquent accounts, and how long a time period you may have had overdue bills.

Around 30% of your score is based on the amount you owe creditors. An important part of this score is how much credit is available vs. how much you owe. For example, if you have a credit card with a $1000 limit, your score is higher if you have an unpaid balance of $100 on that card vs. $900.


Around 15% of your score is based on your credit history--how long you have owned a particular credit card. Cards that you've owned a long time and managed well reflect positively on your credit.

Around 10% is based on the number of credit cards you have recently opened. Applying for or opening several cards at once makes it appear that you may be in need of credit to survive--not a good signal.

Around 10% is based on the mix of credit used (mortgage, credit card, auto, etc). A mix of credit is better for your score than only one type--don't buy a car with a credit card!

To improve your score:

-don't carry a balance on your credit cards. It is a myth that carrying a balance on your credit card improves your credit score!

-don't open multiple lines of credit "just in case".

-don't open multiple store credit cards to get a percentage off of that day's purchase.

-make all of your payments on time.

-don't ignore past due bills.

-when possible, don't buy things on credit that can and should be saved up for.

Other things to consider:
-for the healthiest score, owe as little money as possible and pay your bills on time.
-not all credit accounts are the same. Medical bills are weighted differently than, say, a credit account at the local shoe store.
-your credit score DOES NOT include your age, gender, occupation, where you live, religion, or salary. A potential lender may ask for proof of your salary, but it is NOT part of your credit score.
-bad credit scores can be improved.
-check your credit score once a year to make sure there are no mistakes or identity thief issues. These are the three main credit report companies: Eperian, TransUnion, and Equifax. Do not give personal information to a third parties who offer to get a free report for you!

The Time Value of Money

There is a principle in economics which teaches that saving money over a period of time results in impressive gains. That principle is called "The time value of money". Here is the way Provident Living explains it:

"Gradually build a financial reserve, and use it for emergencies only. If you save a little money regularly, you will be surprised how much accumulates over time."

See for yourself using this financial calculator from the Provident Living Website:

http://www.calcxml.com/do/sav07?skn=38

For example, if you save $100 a month at 8% for 20 years, and you are in the 25% tax bracket, you will end up with $46,791. Do you wonder why 8% is used? That seems a little optimistic in today's climate! However, according to Provident Living, 8% is the average return on money between 1926-2007. Note that those years include the Great Depression, as well as many recessions. Some years are better then others! Of course, 8% is not a guaranteed return, but financial preparedness is a cornerstone of family security. You can enter your own information on the financial calculator-including your current interest rate and monthly contribution. The time value of money means people who start saving early for future purchases, expenses, retirement, etc. are at an advantage as their money works for them. If you neglected saving early, you are not off the hook! As President Gordon B Hinckley taught: “Set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts” ("To the Boys and to the Men," Ensign, Nov. 1998, 54).

Remember a regular, consistent savings plan is part of being prepared!

The Cost of Credit

It may be surprising for you to know how expensive it is to borrow money from a credit card and how long it takes to pay off a credit card balance. There are many good tools for figuring out the true cost of credit. On your search engine, enter “Credit Card Calculator”. Choose a website for calculating your personal credit card debts.

For my example, I used this website: http://www.bankrate.com/brm/calc/MinPayment.asp. According to this calculator, if you owe $1000 on a credit card that charges you 18% interest, and make only the minimum payment each month, you will pay a total of $2115.41 ($1000 principle + $1115.41 interest) and it will take a whopping 153 months (12 years, 9 months) to pay off completely! And that assumes you don’t add any new charges. If you make more than the minimum payment, say $100 a month, you will pay the loan off in 11 months and pay $91.62 in interest. That saves you $1013.79 in interest and 11 years, 10 months in time. The church’s Provident Living site has many other tools to help you manage your finances. Check it out! You can link to it from this blog.