“SAFETY NET” Credit Scoring Factor

Lenders and credit card companies use your credit score to help determine how likely it is that you will pay back the money they lend you. Fair Isaac Corporation, the creator of FICO credit scores (the most commonly used credit scoring system) has a breakdown of the relationship between your credit score and your chances of being a “Good Player” vs. a “Bad Player” (see chart here).

So, your credit score reflects an estimate of how well you’ll be able to manage your credit in the future. Your past credit usage and mistakes factor into this score of course, but most people don’t realize that approx. two-thirds of your credit score is based on your current situation.

Your “current situation” means:

1. Are you paying your current bills on time?
2. Do you have a good “safety net”?

What Is A Safety Net?

So what is a credit “safety net” and why can’t you find this term mentioned anywhere else? If a “safety net” is so important, why hasn’t any other “credit improvement” website or article ever mentioned it to you before?

The reason is because “safety net” is my own term that I like to use to describe what a significant portion of the credit bureau score is based on. To me, it breaks down some difficult concepts into an understandable idea. You see, when you’re trying to figure out how to raise your credit score and people start talking about “Debt Ratios”, “High Credit Limits vs. Available Balances exceeding 30%”, or “Installment Trade Lines vs. Revolving Trade Lines”, it can get a bit confusing. I like simple terms and concepts, and thinking about these concepts in terms of a “safety net” makes it simple and easy to understand.

Just what is a “safety net”? Usually, you associate a safety net with a circus acrobat or tight-rope walker. The safety net is strung out under them in case something unexpected happens. If everything in their routine goes according to plan, the acrobat will never have to use the safety net. It’s only there – JUST IN CASE!

Your Credit Score Reflects Your Safety Net

It’s the same thing with your credit. If you have available credit that you can fall back on JUST IN CASE, then if something unexpected happens you will be in much better position to handle it. And your credit bureau score will reflect whether or not you have such a credit safety net. Here’s an example:

You have a credit card with a $1,000 high credit limit that you use wisely and sparingly which you faithfully pay off the balance in full every month on. One day, your dog Fluffy jumps off your apartment balcony and breaks two legs. You rush poor Fluffy to the vet who can fix up ol’ Fluffy in a hurry for only $600. Of course, you want to take care of Fluffy, but $600 is more than you have in your rainy-day fund.

Poor Ol’ Fluffy! But you have a safety net in the form of a credit limit you can use.

Without having that credit card spending option available, your only choice is to write the vet a check using the money you were going to pay your other monthly bills with, which means you won’t be able to make those payments on time – or at all that month. But because you have this available credit to fall back on, you can take care of Fluffy AND keep paying your other bills on time. That’s the kind of thing we’re talking about.

Related Articles:

• Should You “Opt Out” of New Credit Offers?
• Credit Card Debt
• Free Credit Reports
• The Anatomy of a Credit Score
• Credit Scoring with Your Credit Card: Magic Number is Still “30”