Last year I wrote a short entry about the importance of knowing your credit score.

I’ve been subscribed to a service (MyCreditInform), which allows me to look up my credit score at any time, as well as giving me some good pointers and advice on WHY and HOW certain items in my credit report are affecting my score, and DETAILS on what accounts I have open, balances, etc.  There are also what-if tools which allow me to “test” things like “What if I cancel this particular card” or “What if I pay this card’s balance down to less than 50% max limit”, etc.  Overall I’ve been rather happy with it.

I DO know we are allowed to get a FREE report from each of the three credit reporting agencies once a year.  If you time each of the three out across the year, that’s a free report every 4 months. The government webpage describing free access to credit reports is here.  The site they refer to is AnnualCreditReport.com which will give you access to all three reporting agencies.

A new (free) site I recently heard about on Clark Howard’s national radio program is CreditKarma.com which seems to have LOTS of the same tools a MyCreditInform for evaluating why your credit score is what it is.  As well as showing what your current score is, and many other goodies.  The only thing this site doesn’t seem to do is give you all the full details about exactly what accounts you have open, and specific account history.  Again, you can get that free at AnnualCreditReport.com (total 3 times a year) or for a small monthly fee at MyCreditInform.com (unlimited).

Anyway, one of the MAIN reasons I wanted to write this particular entry was because last quarter my score had been up around 790, but has now dropped to near 760!  Of course, I had to look in to why, and found some (now obvious) information I thought I’d share to perhaps help others.

The main reasons for the rather large drop is because I was looking to get my first Discover Card and Home Depot credit card to have a few more different types of cards, and since one of my earlier cards was closed out on me (due to inactivity).  So, I have those 2 new inquiries showing on my report, PLUS now that I have them (and they are brand new), they are adding to a reduced “average age” of all my cards, which is now at about 3.5 years.  Since I got a late start with my credit (had been always paying cash), my oldest card is only 8 years.  Along with that, I got 2 other credit cards a few years ago, which now means 4 new accounts in the last 24 months which is having an additional negative effect.  On top of the credit cards, I’ve been looking to buy a new house (property) and not being very picky, so the “looking” has been going on since last October, and so now there have been 3 hard credit inquiries for that spread out over the last 12 months.  And something I hadn’t thought of…. I have a balance (owe something) on 50% of my cards.  Now THIS is a bit odd for a negative, because I do pay off the full balance of all my 12 cards each month, but because 6 of them currently have some balance (even $4 and $12) they are seeming to have an effect.  According to CreditKarma.com, 29.7% of their users have 11-20 cards, but I’m surprised to see that even 21% have 21-30 cards.  I also just finished refinancing my current house with a new lender, and while there is no clear sign of the effect, I am sure that plays in a little as well.

Overall, I’m not worried about the current drop.  As the 2 new cards get some time passed they won’t affect the average age as much, and the new cards will help to build a higher score, and help to keep current usage under 50%.  The hard inquiries will drop off in several months, and I’ll finally make it over 800 for the first time! — I’d say by next Summer that goal will be reached.

Some final info (as found on Credit.com)… Payment History accounts for 35% of your score.  Amount of Debt accounts for 30% of score, which is calculated as Total Balances / Total Credit Limits = Your Revolving Utilization, and so having more cards while keeping balances low can have a dramatic effect.  Types Of Accounts determines 10% of your credit score which can be a bit confusing, but described well here. Basically the message here is to have a wide variety of accounts (mortgage, auto, credit card, student loan, signature, etc) – and even historical (closed) accounts count.  Having a mortgage is a “must” (the page says) and auto loan counts big too.. as well as “not too many” credit cards… avoid finance companies… but a lot of this Account types section is more fuzzy than Payment History and Amount of Debt.  Age of Accounts (oldest account and average) makes up 15% of your score.  And finally, (hard) Inquiries over the last 24 months make up the last 10% of your score. A VERY good description and example of how inquires can be bad is seen near the bottom of this page.

Hope this helps someone else too!

David

For the past several years I’ve found it VERY important to keep a good credit score. Not only for the obvious of being able to buy something on credit, but I’ve found that potential employers might look at that information too, as well as other establishment, housing, etc. With identity theft so rampant these days, and your credit score being so important for more aspects of our lives than most people know… I do highly recommend you keep tabs on it on a regular basis. I am set up with a site that allows me access to my score and report at any time.

This month, it looks like this:

Your Current Equifax Score is: 777

Over time, your score has changed as shown:

738   743   746   777   Apr ‘07 Jul ‘07 Oct ‘07 Jan ‘08

I just talked to a friend of mine over at MyTVmusings.com who has recently found an interesting new “game” to play which is suppose to help increase your blog ranking over at Technorati.com. So far (2 days) it seems to be working a little for her, but it also means she (and all others) will need to be posting a HUGE list of links every 30-60 days as a blog post.  Something I am sure any normal readers/subscribers of their blogs will not really care for.  So, I’ve come up with a little experiment that might just do the trick for her…. keeping the unsightly post away from her readers while still bringing the bonus of a higher ranking.

My little test starts with THIS blog post and I’ll keep you updated with how things turn out. (in the comment section here)

If this DOES work, I’ll have a new, spiffy way to increase blog traffic. :)

Family

Every Tuesday (for now) I have tentative plans with my father and sister that we meet for lunch. Dad’s been passing it up a bit more often than I’d like, but he’s going through a lot right now. He’s moved in with HIS father, who is turning 94 in a couple months, but is deteriorating rather quickly. It seems within the last week or two my grandfather is starting to lose more bladder/bowel control… and/or maybe it’s just that he can’t get himself up to go to the restroom, and has not been asking my father for help as much as he should be? Anyway, my father was stuck cleaning up today’s “mess”. My sister also mentioned he was looking for some service to keep the house clean, and also someone to do things like bathe and groom my grandfather. I decided to offer MY help for doing some of the house work. If he’s gonna pay someone, it might as well be me… I’ve got more free time than I know what to do with right now. So, I spent 3 hours over there doing some cleaning.. WOW, did it need the work!

10k run

In other events… i’ve not done my running today (yet?), but will probably continue to post the progress on my ActiveBrain (My Little Experiments) blog. So if you’re interested, be sure to check for details there.

Stocks

During lunch I got a text message about a stock (CMED) dropping below $23.15, which was the price to sell short, but I was at lunch (and then at Grandfather’s house), so didn’t make any trades today. Possible a very good thing as the stock then proceeded to climb almost to the stop price! But, I’ll watch what it does early tomorrow, it could be an AWESOME opportunity to sell higher as long as it doesn’t break above $23.42, but I’ll post more about that on the Financial Jetstream blog.

Second Life

Today on Second Life, it looks like another L$200 from camping. Also, at lunch my father told me he was bringing in about US$100/mo from his efforts!! Also that he’s starting to experiment a little with renting out some land. Maybe there’s some way I can help him promote that. hmmm.

After 2 weeks of watching technical stock market analysis videos, Brian Shannon over at Alpha Trends has broken through my thick skull and opened my eyes to probably a much more proper way to view my trading. As more of my posts reveal (here and on my other blogs such as Financial Jetstream), I’ve been trading for a couple years now… with, I suppose more or less the idea that I should really (REALLY) try to do extensive research in to a stock before getting in. And then I would get rather frustrated with my lack of skills when the stock I’d picked went against me. I know I’m new at this, with a whole lot more to learn, but some times it just seems like no matter how much work/study I do, it will not be enough. A lot of that also comes from me watching other traders who ARE a lot more experienced continually make wrong predictions. And all these traders/analysts are saying different things about the market or even the same stock. It’s enough to make me want to pull out my hair!

However, today, it clicked… as Brian gave some insight to what he thought two stocks might do in the near future. He tossed out the idea for a stop, and also a target price, and the key words being “Here we have 17 cents of risk, for a potential gain of 90 cents”. On the next stock, the same words “Here we have 22 cents of risk, for a potential gain of $1.40″

Whoa! There it was! The idea that we don’t really know for sure which way the market will go… ever.. no matter how good you are, and perhaps picking stocks could be similar to flipping a coin (well, hopefully slightly better odds), but if the usual loss is 20% while the gains are 80% or more, the odds are WELL in your favor of coming out far ahead of the game (even on that 50/50 coin toss).

To prove this point I wrote a short little Perl script:

perl -e '@a=(10000,10000,10000,10000,10000); $t=1; while ($t<500){ foreach $a (@a){ rand()<.5 and $a*=.8 or $a*=1.3; $a<50 and $x=1} printf "%3d = %12.1f %12.1f %12.1f %12.1f %12.1f\n",$t,@a; $t++; $x==1 and exit }'

which simulates 5 accounts starting at $10,000 each, and then makes 500 trades with each of them. There is a 50% chance to lose 20% of the accounts value and a 50% chance to gain 30% of the accounts value during any trade. I ran this script 40 times to simulate 200 accounts doing this trading, and found that only 5 times in 200 did the account value drop below $50. To me, those are pretty good odds of success on a supposed 50% chance of gain/loss per trade. What makes this work is that when you do win, you win more than you’d lose… and THIS simulation is only with a win of 30%.

Just for fun I created another script:

perl -e '$loss=.0116;$win=.0496; for ($c=0;$c<100;$c++){$a[$c]=1000}; $t=1; while ($t++<1000){ foreach $a (@a){ $a==0 and next; rand()<.5 and $a*=(1-$loss) or $a*=(1+$win); $a<50 and $a=0} }; $bust=grep($_<100,@a); $loss=grep($_<=1000 && $_>100,@a); $fifty=grep($_<=1500 && $_>1000,@a); $double=grep($_<=2000 && $_>1500,@a); $more=grep($_>2000,@a); print "BUST: $bust\n","LOSS: $loss\n","FIFTY: $fifty\n","DOUBLE: $double\n","MORE: $more\n";'

Which sets up 100 accounts with $1000 each, then makes 1,000 trades in each of them. Each trade has a 50% chance of failure or success where it will lose a smaller amount than it will gain on a win.

Test #1: (the $23.15 stock with $0.27 risk (-1.16%) or $1.15 gain (+4.96%) after 1000 trades in 100 accounts are:
BUST: 0 (left with under $100)
LOSS: 0 (left with from $100 – $1000)
FIFTY: 0 (left with from $1000 – $1500)
DOUBLE: 0 (left with from $1500 – $2000)
MORE: 100 (left with more than $2000 – double the start)

Test #2 – now with only a 3% gain … after 1000 trades in 100 accounts are:
BUST: 0 (left with under $100)
LOSS: 0 (left with from $100 – $1000)
FIFTY: 0 (left with from $1000 – $1500)
DOUBLE: 0 (left with from $1500 – $2000)
MORE: 100 (left with more than $2000 – double the start)

Test #3 – now with only a 2% gain … after 1000 trades in 100 accounts are:
BUST: 0 (left with under $100)
LOSS: 0 (left with from $100 – $1000)
FIFTY: 0 (left with from $1000 – $1500)
DOUBLE: 0 (left with from $1500 – $2000)
MORE: 100 (left with more than $2000 – double the start)

Test #4 – now with only a 1.5% gain … after 1000 trades in 100 accounts are:
BUST: 0 (left with under $100)
LOSS: 0 (left with from $100 – $1000)
FIFTY: 1 (left with from $1000 – $1500)
DOUBLE: 2 (left with from $1500 – $2000)
MORE: 97 (left with more than $2000 – double the start)

Test #5 – now with only a 1.3% gain … after 1000 trades in 100 accounts are:
BUST: 0 (left with under $100)
LOSS: 6 (left with from $100 – $1000)
FIFTY: 22 (left with from $1000 – $1500)
DOUBLE: 28 (left with from $1500 – $2000)
MORE: 44 (left with more than $2000 – double the start)
…. which means you STILL only have a 6% chance of losing any of your principle and almost a 50% chance of more than doubling your money.

After these tests I can obviously see a better picture of why the risk-to-reward numbers are SO vital, and it’s not something I was taking in to account on my trades in the past.