My FICO Score
Credit Score Pareto Chart
Again, this is the Pareto Chart for your credit score. Companies use Pareto Charts when analyzing processes that need improvement. They help determine the defects behind the processes and the changes that will make the biggest impacts the fastest without having to fix everything at once. If you address the factors that cause the most problems, you will see drastic improvement quickly. The highest factor is on the left and the lowest factor on the right. The line shows the cumulative effect as you go across the chart. For your credit score, the most impactful factors are 'Payment History' and 'Utilization Rate', which make up 65% of the score. Therefore addressing these factors first will give you the biggest bang for your buck.
I dive into a Pareto Chart example, in the first post of this series. Essentially, if you address the issues that make up the majority weight of the problem or thing you are trying to improve you will see the greatest improvement early on.
I am calling you to use the Pareto Chart I have created for your credit score and then analyze what you can do to tackle the biggest factors affecting your score so you can get to the 800s.
Credit Card Factors in Order of Significance:
We’ll continue on with Age of Credit and then Account Mix and New Accounts
Age of Credit is measured differently across reporting agencies but some things hold true for all of them. Some credit reporting agencies use the oldest account age, and some use the average account age. Whichever they use, you want this number to be as high as possible. This is why I added my younger brother to my credit card when he turned 18, so he could start building his credit age early, and you can actually add people younger depending on the specific credit card rules. There are a couple things I’ve done to keep my average age up, even when I was getting rid of my consumer debt.
I am all about cutting cards and using cash if you can’t seem to get credit card use under control and not abuse having the card. When I went through Financial Peace University (FPU) I brought in my problem cards and cut them up, excited to change my habits and my life. Everyone cheered and cut their cards also! One such card that I cut up was an Express retail card, but when I went back home to close the account, I looked at my credit report information, I found that this was one of my oldest cards. Concerned about how this would affect my Account Age, I opened Excel and made a list of all my credit cards and the years since they were opened. I then removed my Express card from the list and saw that my average would greatly decline. I did this for several credit cards looking to see which cards I should close or keep to benefit my Average Age. I ended up closing a few accounts, some I had cut the card in my FPU classroom, some I had not, but I only closed accounts where it benefited my average. For cards like my Express card, where I had cut it up but wanted to keep the account open, once I had paid off the balance and committed to stop abusing the card, I called the company and had them send me a replacement card in the mail.
Mary has 5 cards and is looking to improve her score
and her life by cutting some cards. Her cards are below:
Mary has cut up her Discover, Target and TJ Maxx cards and has a debt snowball plan to pay those cards off in 13 months! Should she close them all once they are paid off? I would ask Mary why she opened those specific cards and advise her based on those answers. Mathematically speaking, I’d say close the Target and TJ Maxx only and get a boost on the average. But if Target is her primary store for food and clothing, and will truly pay off the card as she uses it, I would tell her to keep it open and keep getting the 5% discount on her purchases. If she told me using the card had slipped her back into debt again, I’d ask her if the 5% savings is really worth being in debt? Probably not.
Onto Account Mix
This category looks at the number of accounts, the types of accounts and how many are in each type. Types include credit cards, personal loans, student loans, mortgage, etc. The key here: diversity is better. I have had many types of credit and just need to add that mortgage loan to the mix.
I am definitely not saying go get more debt, but if you do find yourself needing a car and can’t buy it on cash, then consider adding an auto loan or personal loan. Do NOT get debt you don’t need, and when you have debt, pay it off as fast as possible. Note that you need at least 6 months of reporting for the loan to impact your account. My first car salesman told me this when I was amped up to pay off my first car in 3 months (this was long before Financial Peace University, I was destined to join the Debt Free Movement before I knew it existed).
And for the last factor, drumroll please! New Accounts.
This is fairly self explanatory. This refers to opening new credit cards or loans. This biggest thing here is that when you get a new debt, you will often get a Hard Inquiry. You have to be very strategic here. With age, you can close the account and improve your average but even if you close a new account, the Hard Inquiry lives on. If you look in your Credit Karma App you will see that you’re good with having two or less. Side note: Credit Karma isn’t paying me in any way, I just truly use them for my regular credit score checks.
I manage these Hard Inquiries using strategy. The hardest thing here is that some bills and apartments will run your credit and there is nothing you can do about that if you need the bill or housing. I also voluntarily took on a Hard Inquiry with my cell phone bill because having a good credit score gave a discount on our family plan. I use this strategy with this category if I am looking to get a new line of credit:
If you do want a new credit card, many websites offer simulators to show the likelihood of you being approved. If you are unlikely to get approved, check a different option. There is no need to add Hard Inquiries just to get a rejection on your New Account request. Also, if you are getting a new card, consider getting a card with a different company to better your Account Mix. I do not apply this advice to Chase though, because I’ve saved thousands by combining their card points for travel. So, with everything, you know your situation and should proceed with the knowledge that helps your situation.
And that’s all for this Pareto Chart-inspired series on credit scores. I hope you’ve taken some tools to add to your financial toolbox. Many blessings, much favor, and wisdom to you!
1. “How Your Credit Score Is Calculated.” How to Calculate Your Credit Score - Get Credit Report - Wells Fargo, www.wellsfargo.com/financial-education/credit-management/calculate-credit-score/.