How Credit Works

…and When to Pass on the Perfume

by Billie Jo Clark

(originally published in FLOSSIN Magazine Volume 10, #1)
The road to understanding and building good credit can be full of potholes, stop signs and sometimes even fender benders. There are enticing offers from credit companies which may lead you to believe that you can have whatever you like, right now. While some of these offers justifiably help build your credit history, (i.e. car payments, mortgage or credit cards), buying into too many of these temptations can detour you far away from a healthy credit score. Case Study, MYSELF.

At 20 years old I had been in the work force for approximately two years. This showed stability, an indicator that credit card companies looked for in a person when granting revolving credit, (credit that does not have a fixed number of payments.) One day I decided to go shopping. With only about 50 dollars, I wound up at the perfume counter where I noticed they had a special on my favorite perfume. As I eyed the beautiful bottle, sprayed my wrists, and let the aroma engulf me, I realized that if I fell to temptation and purchased the perfume, it was going to cost me most of what I had in my pocket. Feeling a little sad, I turned to walk away when an eager sales associate said, “Wait! Do you have a credit card?” I told her “No”, and she responded with, “All you have to do is fill out this application, and I will check to see if you qualify for our store credit card, plus it could give you 10% off today.” Have it today and cheaper? What a wonderful thought. “How much will I get?” I asked, and she smiled saying, “Usually the minimum amount is around $250, but because you have had a job for a while you may get more.” The twinkle in my eye came back to life and I quickly scribbled down my information. To my delight, I was approved. Not only did I receive a generous amount on that first credit card, but I repeated this process at several other department stores that same day! I had simultaneously launched my journey into retail shopping therapy and credit card catastrophe. As credit card offers flooded in, I applied to my hearts content and soon was living the high life. I COULD BUY WHAT EVER I WANTED. I kept wondering the whole time why hadn’t my parents just put everything on credit cards? I would have been the best dressed kid in school securing my popularity and future all at once. It wasn’t long before I was smacked with the ugly truth aka THE BILLS. I hadn’t taken the time to learn until too late that the higher my balances got the higher my payments got. Soon I was swimming in debt and even worse, I got laid off unable to make even the smallest of payments. As bill collectors hounded me and my credit score took a nose dive, I wanted to crawl under the covers and hide. This was not the way things were supposed to be. Why didn’t someone warn me?

Financial literacy is a learned behavior but who is teaching it? Parents? The school system? I for one hadn’t learned from either source and now it was up to me to be a wise consumer and figure out how to get back on track. It took about eight long years, but I finally managed to wipe my slate clean and reverse the damaging effects of my ignorance.

Playing the credit game can be mastered, even while having SOME of the things you want right now, but it starts with understanding what exactly makes up your credit and determines your score.

The top five influencers on your credit

1. 35% of your credit is based upon -Payment History -Making your payments on time is the biggest part of your credit score so having 30, 60, or 90 day late pays can lower your score significantly.

2. 30% of your credit is based upon -Debt Load -This is how much debt you owe versus how much money you make. A rule of thumb says that about 20% debt of your total income rates as excellent and anything above the 30% zone starts throwing up red flags.

3. 15% of your credit is based upon -Length of credit history -The length of time you have had your accounts open is 15% of your credit score. The longer your accounts are open the better.

4. 10% of your credit is based upon-Recent Credit Applications -This is how many people have checked your credit because you have applied for charge cards or loans. Also known as inquiries, to many of these can lower your credit score.

5. 10% of your credit is based upon -Types of credit -Having different types of credit such as auto or home loans (instalment credit) in addition to a charge (revolving credit) is good because it shows a balanced credit history.


About the author: Billie Jo Clark is a speaker and educator in the fields of finance literacy. Currently working for Reliant Financial Corporation out of Fullerton, California, she can field any credit related questions through email at info@flossinmedia.com attention Billie Jo Clark