If you're like me, you've wondered at some point how they come up with that strange "credit score" that all of our borrow, and many of our payments are affected by, if not controlled by. I was browsing the Experian site, and came across the following.

30% of your credit score is based on your credit usage
Credit usage refers to how much money you've spent on accounts that have credit limits, such as credit cards. Also called a utilization rate, it measures your total balances compared to the total of your credit limits. High credit usage or utilization rate is a strong indicator of credit risk and can lessen your ability to gain new loans.

31% of your credit score is based on your payment history
The most significant factor in determining your credit score is your payment history and making your payments on time. Late payments remain on your credit report for 7 years from the original delinquency date. The original delinquency date is the payment date that was first reported late by your creditor.

15% of your credit score is based on the age of your accounts
Having a lengthy credit history shows lenders you have an established record of managing your debt. Closing older accounts, such as credit cards could negatively impact your credit score. Experian retains closed accounts with no negative information associated with them for 10 years from the date they are reported closed. As a result, positive credit information remains on your credit report longer than most negative information, such as late payments.

14% of your credit score is based on the types of accounts you have
There are four basic types of credit: Real Estate Loans, Installment Loans, Credit Cards, and Retail Cards. Having a good mixture of credit types along with high quality accounts, such as a mortgage loan, shows lenders you can manage your credit responsibly.

10% of your credit score is based on inquiries or "credit checks"
Every time you apply for credit, a "hard inquiry" is placed on your credit report. Having too many hard inquiries could indicate to lenders that you're trying to overspend. Hard inquiries stay on your report for 2 years.

So that's at least how one bureau does it.

Anyone who has listened to Dave Ramsey (insert evil or triumphant music here, depending on your proclivities), knows he suggests "baby steps" for paying off your debt.

As a reminder, his steps are:

1. Save $1000 for an emergency fund.
2. Pay off all consumer debt sans mortgage.
3. Save up 6 months of expenses.
4. Put 15% toward retirement.
5. Save for kids' college.
6. Pay off your mortgage.

The last time we were paying off debt - and now we're doing it again, but that was last month's biotch - we didn't follow his plan for the debt snowball (lowest balance to highest balance). We also didn't follow the debt tsunami (highest interest rate to lowest interest rate). We followed the "loans then lines of credit." DW and I figured it's easier to not ask for another loan (paperwork) than to leave a credit card alone (swipe! cha-ching!).

Fast forward to now. DW just bought a new car, made some home improvements, is buying some furniture, and loaned some money to DD2 and her DH for their new house home improvements. So, we have consumer debt again as well as our mortgage.

So, we're on baby step 15:

We're paying off her new loans at a good clip (yes, already): Baby step 2
We're saving up the emergency fund again: Baby step 3 (total: 5)
We're putting more than 15% toward retirement (baby step 4: total 9)
And we're paying down the mortgage (Baby step 6: total 15)

This is possible because the "great car compromise" included NOT buying another house. We aren't building that fund until baby step 15 (or at least through "9") is done. I think we've already got step 3 back in place, more or less. I still have the "float" and there is still quite a bit of "furniture money" in the checking account, so I'm not worried on those lines. I would like a bit more cushion, though.

We should be back on an even keel - only car and house, with full EF - before the end of the year, with both the car and house still being attacked quickly.

Many of you have seen and commented on my rant about DW spending and using our debt cards - they certainly aren't credit cards - to do upgrades and changes around the house.

Yesterday, my portable scanner failed. It just doesn't work anymore. I've had it about four years, and I used to use it all the time. Well, about 8 months ago, my portable printer failed. It didn't really fail, but the ink "spilled" (I don't have a better word for it) inside the printer so it leaves a colorful "trail" along one edge of the paper, and that trail is just not going away.

Anyway, I use these a lot when I travel for work, but I haven't been able to use the printer for nearly a year. So, why haven't I bought a new printer? And why did I almost cringe when I thought about buying a new scanner when I decided it was actually broken?

I think the pendulum has gone too far, and I've become too averse to spending money. I think I need to loosen up more and go a bit back toward my old spendy self, just not all the way toward my old self. I'll just have to remember to remove the ink cartridges when I pack up my printer. And that scanner... well, this will be my fourth one in the last 12 years or so. I guess the scanners are just consumable.

There's no "shopping around" over here for anything. Many of the stores have Ramadan sales going on now, so I think I'll go out today and see if any of the electronics stores have printers and scanners on sale. I'm not holding my breath.

Arrrrgh! Just got off the phone with DW.

Begin rant

DW and I used to have very significant non-mortgage debt. Through diligence and dedication, we paid off or sold off well over $100K in a relatively short period of time. We've been "except for mortgage" debt free for quite a while, and the money has been going to retirement accounts and investments since then, as well as accelerating the mortgage pay off.

We were left with our only debt being a relatively low mortgage principal due. Late last year, I had worked out an amortization schedule on that (remember, I'm still an Excel nerd), and determined we could pay the whole thing off in less than a year. I ran some numbers on a refinance and determined that the interest rate reduction wouldn't cover the closing fees over the period we could reasonably expect to pay off the loan.

Fast forward to now. DW is back in the US setting up home again in our "old" house, and she's spending like a Congressman who doesn't have an opponent for the next term. Between the BMP loan to the kids, a new bed (gotta be Tempurpedic, not just memory foam), a new garage door (yeah, that's an emergency, right?), repainting the outside of the house that really doesn't need it except for cosmetic reasons (paint is for protection, not beauty), the two sets of new French doors, and her new car LOAN... well the EF is gone.

She's starting to use the credit cards. I told her that I'm NOT cashing in any of the mutual funds for this (after tax, no penalty, but we're not going to touch any retirement funds until we retire). I guess now she's going to buy all new furniture and probably have the driveway re-paved.... Sorry, that's hyperbole and frustration, not actual plans. At least she hasn't mentioned all new furniture (yet?).

Anyway, all the work to get us out of debt is being thrown away. I let her get the car loan in a compromise, and now she's continuing - no accelerating - the spending without any more compromise.

To top it off, she's even asking to decrease the amount we had agreed to pay toward the mortgage in the "great car compromise." For that one, I told her a flat-out "No, we're going to pay the amount we agreed to." I even "threatened" to pay the note from here rather than transferring the monies to her account which has all the autopays. She agreed to keep that compromise, but I think that she just wants to make those Jones next door envious.

End rant

Now that I have that out of my system...

There's nothing she's doing that we hadn't planned to do over time, but she wants to do it all right now. The problem is that she's putting us back into debt and also killed our EF at the same time to do it.

Does anyone have any advice for me when I talk to her next time? I swear, this feels like she's an alcoholic who skipped out on an AA meeting to go to a bar.

I was going to go to bed, but I checked my credit score on Credit Karma just now. In my April 20th post about credit scores, I said that DW had a credit score approaching "deity," while mine was close to 100 points lower than hers. Her score was so high, I'd think that folks would PAY her to borrow from them.

When we went to the US, we got a new car for her. This put two new inquiries onto my account; that should've been just one, but I'm not worried about the inquiries. Inquiries are "negative" in effect on credit ratings. We also borrowed a healthy amount, increasing our debt-to-income ratio, which is another "negative."

So, what was the result of adding two negatives to my credit record? The score went up to nearly DW's level after nearly six months of just sitting where it had been.

As I said in the comments to the April post: I just don't understand credit scores or how they work.

CreditCardFree posted an article about her friend spending her tax return on unnecessary items.

http://creditcardfree.savingadvice.com/2013/03/22/backwards-...

This got me thinking about how I used to view things. I started to reply in the comments, but my "reply" turned in to a longer post than CCF's original musings. That, in turn, spawned this post.

In the US, and probably much of the developed world, "available credit" has become synonymous with "money." Think about how you were before you devoted yourself to paying down your debt: As long as you were still below your credit limit, you could afford to buy something.

Did you not think "I still have room left on my credit card, so I can afford this?"

From this revelation, I realized that "available credit" has become conflated with "money." If you thought that the two were the same thing, then there would be absolutely no reason to pay off debt with your tax return. Follow the reasoning in the next paragraph.

I have a $3000 tax return. I have a $12000 balance due on my $20000-limit credit card. Therefore, I have spending power of $11K. If I pay off my debt with my tax return, I have $0 in cash, and $9K due on my $20K balance. Therefore, I have "spent" my tax return for no gains in my ability to buy things. Therefore, I have "wasted" my tax return for nothing.

How many of you had thought processes similar to the preceding paragraph? You may not have thought it through quite so logically (self-anointed nerd, here), but does it not encapsulate how you actually thought about money and credit? They're the same thing in the minds of those who have not had the epiphany that "debt is bad" that most of us writing in the blogs on SA have had.

And this is why most folks don't understand us, and most folks are not paying off debt, and why most folks are going to panic again when the next downturn happens.

Money does not equal available credit. If you realize the wisdom in referring to them as "debt cards" instead of "credit cards," then you understand why we're paying off our debts. Maybe we should all start calling them "debt cards" instead of "credit cards" when we talk to others. Maybe we can start a trend that has a positive effect.

More likely, though, we'll get talked about behind our backs for not knowing the "right" words for those plastic swipe things.