September 22nd, 2011
Credit Score Lessons from “Moneyball”
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**It’s Sports Week here on the Credit Karma blog! Each day we’ll bring you a post about sports to help kick-off this Fall sports season.**
The upcoming movie “Moneyball”, based on Michael Lewis’ book of the same name, is about the famed Oakland A’s general manager Billy Beane and his use of sabermetrics to run his team successfully yet frugally.
The movie chronicles the way Beane (played by the handsome Brad Pitt) found quality players by assessing their skills using in-depth statistics instead of traditional baseball fan favorites like home runs or RBIs. By focusing on more complex statistics, Beane was able to create a competitive team on a significantly smaller budget compared to larger organizations with bigger payrolls, like the New York Yankees.
This same logic can be applied to your credit score. Similar to a baseball player’s batting average, your credit score is a 3-digit figure that everyone loves to obsess over. But sometimes it’s more valuable to delve deeper into the math behind those numbers, in order to learn more.
Let’s take a look at the world of sabermetrics, and how it can translate to a deeper understanding of your credit score.
Batter up: credit utilization rate
Instead of focusing solely on a player’s batting average, followers of sabermetrics also consider the BABIP (batting average on balls in play), which calculates a player’s batting average without taking strikeouts into consideration.
The same way BABIP can be used instead of a batting average, your credit utilization rate is a way for lenders to assess how you’re actually using the credit available to you, rather than just looking at the number of accounts you have.
Your credit utilization rate is calculated by totaling all of your credit card debt and dividing it by the amount of total available credit on your credit cards. In order to score a good credit utilization rate under 30%, take some time to really consider if you’re using the credit available to you both effectively and responsibly.
Base hit: debt to income ratio
Rather than relying on a player’s RBI (runs batted in) statistic to determine their hitting ability, sabermetrics proposes using OPS (on-base plus slugging percentage), which is a more metrics-driven approach that combines a player’s rate of getting on base with how many runs they drive in.
Similar to how OPS is considered a more accurate way of measuring a player’s hitting ability, a consumer’s debt to income ratio can be a better insight into the amount of credit risk they pose to lenders.
The debt to income ratio compares the difference between your monthly income and the amount you spend to maintain your debt each month. The lower your debt to income ratio, the lower the credit risk. To keep your debt to income ratio at its lowest, pay careful attention to the amount of debt you are accumulating and work hard to pay it off in a timely manner.
What does it all mean?
While your credit score determines your creditworthiness (similar to how a batting average can dictate a baseball player’s salary), it’s really the various components of your credit score, the nitty-gritty stuff, that determines your overall credit rating.
Just like the A’s didn’t need a big payroll in order to acquire good players, you don’t need a lot of credit to prove your creditworthiness. All you need is an understanding of the statistics behind your credit score, and know how to make those figures work in your favor.
Give credit where credit is due,
Danielle Belfatto, Karma Contributor
Interested in calculating your credit score stats? Check out Credit Karma’s report card for all the details.
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