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Friday, December 3, 2021

Column: Why credit matters

“They say a man should always dress for the job he wants, so why am I dressed up like a pirate in this restaurant?”

Oh, the unsolved mysteries of life.

If you don’t know what I’m talking about, go YouTube “Free credit pirate commercial” and then continue reading.

Whether it’s from our parents or a certain actor in a variety of outlandish scenarios, we’re all told about the importance of having good credit, but the reasons why are seldom clearly explained. Of course, the warning to avoid selling chowder and iced tea to tourists works for some, but for everyone else, here are the reasons why you should pay attention to your credit score.

Let’s begin at the beginning. Your credit score is a number from 300 (worst) to 850 (best). You won’t receive a credit score until after six months of using credit, such as having a credit card, when a computer algorithm will determine your starting score based off five factors. There are many common misconceptions about what affects your score. Age, marital status, race, employment, income, education and whether you have been turned down for a loan do NOT affect your score.

The first and most important factor is paying your bills, with an emphasis placed on most recent ones. This accounts for 35 percent of your score. Unlike that time your friend lent you $10 when you found yourself at Burgers & Brew without cash at two in the morning with a jalapeño burger calling your name, the time in which you pay back is important. Obviously, the best case is to pay your bills on time. Slightly worse is paying them late. Not paying is bad, but filing for bankruptcy is infinitely worse and, as far as your credit score goes, should be avoided if at all possible.

Second in importance is how much money you owe versus how much credit you have, known in “the biz” as your debt-to-credit ratio. Money owed includes charges on credit cards, mortgage payments, car loans, personal loans, etc. The amount of credit you have is easily calculated by what the cap is if you max out all your credit cards.

Next is simply how long you have had credit. So if you don’t have an account yet, you should open one even if you don’t plan to use it. That’s because the longer you have an account (and keep it in good standing) the better your credit gets, especially if you stick with the same company. Length of credit history accounts for 15 percent of your score.

Having a mix of credit amounts to 10 percent of your score. Variety isn’t just the spice of life; it’s also one key to a good credit score. People who have credit cards, mortgage loans and car payments are perceived as less risky then someone with just credit cards. Having a lot of diversification makes you appear better and more responsible with money.

The final 10 percent comes from how active you have been in looking for new credit. Typically, people who are searching for lots of loans are in a less secure financial situation than someone not looking for loans. This is especially true for people who are about to file for bankruptcy, as they attempt last-minute efforts to prevent filing.

So why does your score matter? Well, whether you know it or not, your credit score is directly related to the interest rate you receive when you try to get a loan, insurance or new credit card. The higher your credit score, the better (read: safer) you look to lenders, and the better rate you will receive. Anything over 700 is considered good, while below 580 needs to be improved. Bad credit won’t just get you a bad rate; it might prevent you from getting a loan at all, or a high-limit credit card.

Now if you’re a college student you may think none of this relates to you yet, right? Wrong. If you ever bought a cell phone, applied for a serious job, needed to set up PG&E, rented an apartment or even got braces, it’s a pretty good bet that your credit score was checked.

The most important thing to know is that credit scores can easily contain mistakes. If you’re one of those people who doesn’t bother to check your credit reports, you should listen to that iced tea-serving pirate and go to freecreditreport.com and start now.

If you’d like DANNY BRAWER to help you with checking your credit score, let him know at dabrawer@ucdavis.edu.

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