Exploring the credit scoreboard, luck, and risk

Welcome to the Intentional Dollar weekly newsletter — great work taking this small step to move your money forward. I’m Logan, a Certified Financial Planner™, and I’m excited you’re here!

What’s inside?

• One tool to experiment with

• Two quotes from others

• Three questions to dig deeper

• Four lines of poetry for the point

_{One tool to experiment with:}

The Credit Scoreboard:

What’s your credit score?

If your score came to mind without digging, nice work. If we were to press deeper and ask for the pieces that add to create this score, would you know the answer?

Before we dive into these components, let’s zoom out and see why our credit score matters in the first place.

Your credit score is like a point-in-time grade for a class. On any given day, your class grade is an aggregation of various homework assignments, quizzes, tests, and projects you’ve completed over time.

This grade is a proxy indication of how well you’ve learned the material with the aim of conveying a short-hand, arbitrary, lettered proficiency. We even augment some of the letters with “+” and “-” to further class proficiency.

Your credit score is the same, except instead of parents or teachers determining educational proficiency, banks and lenders judge your financial proficiency.

Lenders use this score to categorize how risky you are. The higher the score, the lower the risk you present to the bank. The risk in this sense is default on a loan. Your riskiness to the bank is directly tied to how much they charge you in interest — interest is the cost of money.

Here’s the direct relationship:

Higher credit score → Less risk → Lower interest rate on loans (good)

Lower credit score → More risk → Higher interest rate on loans (bad)

Like the grade you maintain in a class, increasing your credit score is a bit of a game, and a game you can win. The stakes of this game are high — by building a good credit score, you can easily save yourself tens of thousands of dollars.

If you have no credit score or a low credit score, don’t fret. A bad class grade doesn’t mean you’re unintelligent, it just means you didn’t meet the standards for that specific class.

To understand how to build better credit, let’s look at the five individual pieces (and weights) that make up your total credit score.

1. Payment history (35%): This is the most important factor that goes into your score. To build good credit, or maintain your good credit — don’t ever miss a payment. Missed payments will sink your score. Strategy: pay a small expense, like a monthly subscription service with your credit card, and set the card on autopay.

2. Credit utilization (30%): Calculated on how much credit you use as a percentage of the credit you have available. Try to keep credit utilization for each card at 30% or lower of your available limit. Strategy: if you know you are going to be breaching 30% on a card, make an early payment to reduce your balance. Requesting a balance increase can also lower your utilization, just ensure it doesn’t increase spending.

3. Length of history (15%): Your credit age, so start early for yourself and your children. Avoid closing out cards that might have long credit histories on them — this can lower your length of history — this will lower your credit utilization and decrease the age of your credit history.

4. New credit inquiries (10%): Too many of these will lower your score. If you need to borrow money, avoid applying for an influx of new credit on top of the needed loan.

5. Your credit mix (10%): Lastly, this weighs the various types of credit you own — student loans, mortgage, auto loan, credit cards — and a diverse mix with timely payments shows you have a higher credit worthiness.

How could a good score save me money?

For most people, a home mortgage represents their largest single source of debt. The table below shows various interest rates attached to different credit score bands (based on October 2023 data) — it’s critical to build your score.

Additional information to consider:

• After establishing credit lines, freeze your credit on all websites (Equifax, Experian, Transunion) — this will help protect you from identity theft.

• Credit cards aren’t bad. If used appropriately, they will protect you from theft, build your credit, reward you with points/cash back, and provide purchase protection.

• Use your credit card as you would a debit card; don’t spend if you don’t have.

Unlike a fixed grade from a class that lasts a short semester, we fortunately get to work on our credit scores and improve them throughout our lifetimes.

_{Two quotes on luck:}

Opportunity creates opportunity, and the more you do something, the luckier you’ll get. To this extent, your luck is partially your own creation.

_{Three questions on adding value:}

Money flows when value shows.

1. What additional ways can I add value at work?

2. What investments can I remove, subsequently adding value to my portfolio?

3. How might I make life easier for someone today?

Which question stuck with you? Questions like these are spotlights for the mind. Reply to this email and let me know which one shined light on a previously dark cave.

_{Four lines of poetry for the point:}

Contact Me:

Content ideas, questions? Reply to this email or reach out to me at [email protected]