FICO and You: Making It Work

There are many people who view their credit card as a tool to carry them between paychecks, while others might see it as a card of instant-gratification. For the old-timers, lines of credit and borrowing money was highly discouraged. This demographic knew the history of the Great Depression and what can happen when the money dries up, but yet with the economy on the uptick after experiencing the Great Recession, the baby boomers and millennials think financial instability is a thing of the past. Since there is a lot of media attention on the millennials and their campaigns for equality and better wages, you would think that they are averse to having credit lines and living off borrowed money. Recent surveys are showing somewhat of the opposite. The companies conducting research on the financial health of America have found many things concerning American debt, and one report on credit health has shown that millennials are becoming more comfortable with swiping the plastic.

Debt Trends in the U.S.

The millennial generation, or those between the ages of 23 and 38, has increased its average credit card debt by 7% in the last year. Among all generations assuming more debt, the millennials have the second-largest increase. The national average for credit card debt among millennials was about $4,712 as of the first financial quarter in 2019. Although this still about $1,500 less than the national average of $6,028, the fact that millennials rank near the top of increasing credit card debt throughout the last year, it could signal a more alarming trend. It would seem that the younger the consumer, the more likely there will be a comfort and reliance on credit lines to fund lifestyles. Consumers between the ages of 18 and 22 are called Generation Z, and this population beat the rest of the consumer with an average credit card debt increase of 11% over the last year. Baby boomers and silent generation watched their national credit debt average go down about 1%. As a whole, while millennials have relatively low credit card debt numbers, the trend shows that they will continue to increase their credit card debt as they age. The millennials in Alaska currently carry the higher averages in credit card debt, with the average person have around $7,726 in debt at the beginning of 2019.

Ignorance or Irresponsibility?

Rather than blame credit card spending on irresponsibility, consider how few people realize the impact of healthy credit. On a survey that was conducted online and included participation by over 1,000 people, 37% of the respondents admitted that they either somewhat agreed or strongly agreed with a statement that shows complete ignorance of how a credit score is determined. Although it was just a small sample of the population, it is estimated that millions of Americans aren’t sure of how their credit score is computed, what impacts it, and how it affects areas of daily living. In spite of admitting they didn’t know about their score, many participants (about 8 in 10) correctly assumed that paying your bills and how much debt you carry compared to the credit you have available are the two primary factors affecting your score. In their own way, they seemed to understand the basic points of a credit score are to pay your bills on time and keep all your debt low.

Improving Your Score

While these are two areas of concern for creating a favorable score, things like the type of credit account open, the length of the credit history, and how often you apply for credit lines are also factored into your score. Even more confusing for some is the breakdown of a good score vs a bad score. Scores under the FICO system range between 300 to 850. Most prime lenders will consider a loan application if the score is 700 or up, although you will get the best lending rates is your score is around 750 or higher. Anything under 650 is considered problematic, but closer to 500 means your credit is almost nonexistent. For those who have more problematic scores, the team at FICO announced the release of a new scoring system, which allows consumers to link their private bank account information to their credit report. Many credit experts are calling this a game-changer because it can help those with low scores receive an immediate boost in their overall score, depending on their income levels.

If you are hesitant to reveal such personal information to credit agencies, you still have other options for improving your score. Responsible financial behavior is the key to a great credit score. Rather than following a trend of spending more, the goal should be to spend less while you earn more. When it comes to your credit score, your FICO number is the most important. It is estimated the 90% of all lending or credit decision in the U.S. rely on the FICO scores. If you want to know how to improve these numbers, you need to know what the determining factors are.

FICO Scoring Factors

As far as FICO is concerned, they are worried about your payment history, credit utilization, length of credit history, new credit, and credit mix. The company relies on the three major credit reporting companies of Equifax, Transunion, and Experian and calculates the data from their reporting into one number.  Payment history is the largest category taken into account, totaling about 35% of your score. If you are consistent about paying your bills on time, you will have a huge advantage in your scoring. Your balance on your credit limits equals about 30% of your score, so having a credit card at max utilization is damaging to your score. Your best way to improve your score is to keep your balance low, and show responsibility with your credit usage. Credit history and new credit is another 25% of your score, as well as credit mix equally 10% of your score. These categories are a little more forgiving than the first two, but they are all important for giving you the best credit health possible.

Credit health should be just as important as your personal health. Don’t give in to the trends in spending more and enjoying life now. Consider your financial future and make practical, long-term decisions that will give you the most financial security.

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