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Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

The previous post concerned Purchasing Managers with Warehousing Responsibility.  This deals with the related topic of inventory.  As noted in the case of warehousing responsibility, we are often thrust into the inventory world with zero knowledge of how to manage this important responsibility.  ABC  In terms of inventory management, the most commonly used system is the ABC classification, an inventory categorization method which consists in dividing items into three categories.  Typically:

  • ‘A’ items constitute 20% of the items but accounts for 70% of the annual consumption value of all items.
  • ‘B’ items – 30% of the items accounts for 25% of the annual consumption value of the items.
  • ‘C’ items – 50% of the items accounts for 5% of the annual consumption value of the items.These classifications and amounts are somewhat arbitrary and can be adjusted.  Many enterprise software systems have an inventory module.  Often, Inventory, like Purchasing, is a “bolt-on” upsell.  Such an addition is almost surely worth the price if used and managed.

ABCSecured “A” storage can be created by fencing off and locking sufficient space for high value items, including production parts and equipment delivered to central stores but destined for a other locations.  ”A” items need to be carefully controlled to make sure that sufficient material is on hand and replenishing stock is ordered in sufficient time to get delivery when needed. “B” items are next in order of control with “C” items requiring the least attention.  Higher value assets should be more tightly controlled and definitely signed in and out for control as well as costing purposes. Inventory on the shelf is money on the shelf.  Current assets are defined as “convertible to cash” within 30 days.  If not, the inventory item must be moved to Long Term Asset and discounted to lower of cost or market.    If purchased assets cannot be used or sold, money has been wasted and is a loss. It drags on working capital and becomes a source of “phantom” loss or other forms of inventory shrinkage, the term used to describe the loss of inventory due to theft, damage, obsolescence, spoilage, etc. Security Secured ‘A’ storage can be created by various means.  Chain link fencing is common.   The ‘B’ and ‘C’ items do not need as much security but must be stored orderly and in a fashion that demonstrates control.  Big contributors to this system’s success are neatness and cleanliness.  Disorganization encourages disrespect, neglect, and theft. In conjunction with a warehouse system, an organization can engage in meaningful inventory practices, including periodic cycle counts.  Cycle counts can be augmented using barcodes.  There are other inventory techniques such as Perpetual versus Physical, Sampling, etc, but these can be explored once the warehouse and inventory management is under control. Not every item must be centrally stored Explicit in the model of warehouse and inventory management is that not every asset and delivery needs to be stored in one central location and then distributed to other locations.  It is unnecessary for many common goods like office and janitorial supplies, bottled water, and PPE, to cite just a few to be centrally stored. Companywide pre-negotiated agreements with partner suppliers leads to of Vendor Managed Inventory (VMI).  Not only would this free up warehouse space but streamline processes, improve efficiency, and reduce costs.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Many of us in purchasing, particularly those in smaller companies, often have responsibility for warehouse operations.  In that we in the purchasing world tend to have little training, we are often thrust into the warehouse with zero knowledge of how to manage this important responsibility. 

Let me cite the case of a good client.  It had two warehouses, referred to as “the larger and the smaller”.  My client representative, the new Purchasing Manager, also had warehouse and inventory responsibility so we devoted ample time to unraveling the mess. He did not know why they had two warehouses.  Both were disorganized, messy, and unsecured.  Expensive portable (easily stolen) assets were strewn amongst copy paper, toilet paper, bottled water, and trash.  Nothing was labeled by name and no bar codes existed.  Many items were apparently dumped on the floor.  Upon closer examination, much of the stock in this “Tomb of the Unknowns” was unusable, obsolete, or unidentifiable by current employees.  Shelving was poorly organized.  Worse yet, although the walk doors were controlled by key pad access, the overhead doors beside them were unlocked and easily opened.   

 

messy warehouse example

messy warehouse example

Some parts were apparently bought and either not needed or not used.  One carton bore a shipping date of nine months earlier and was shipped via 1 (next) day delivery.  The box had never been opened. 

Much smaller equipment was stored or perhaps abandoned outside a shop door.  The shop manager identified them as junk that is scavenged for parts.  These small assets ($1,000 or less) are generally not worth repairing as replacement is usually cheaper.  

Larger walk behind and other machinery ($15,000 to $20,000) was slated for repair as time allowed and rotated in as time and personnel permit.  However, the lack of identification, prioritization, and general informality portrays a system with little to no control. 

No tags to identify specific problems needing attention were in evidence.  Since there are so many units, an obvious question is “Who knows what needs to be done?”  

Recommendations 

  1. An ambitious campaign involving separate but related elements of management, inventory, security, technology, purchasing, accounting, and business controls must be implemented.  Barcoding, appropriate software, upgraded technology, etc, are co-requisites.  All stored assets must be labeled, tagged, and purged periodically.
  2. Without Item Numbers, there is no way to track how much money is being spent on individual units.  It is possible that some units are repaired at costs in excess of replacement.
  3. Consolidate warehousing operations in the larger warehouse.  Doing so would open up the space in the smaller warehouse to other purposes.
  4. Appoint a new receiver who should be located within the warehouse.  Provide a modular office with climate control.  These are routinely fitted with heavy weight bearing roofs for mezzanine storage.
  5. Store high value assets in a secured area as well as lower value items that would be subject to pilferage otherwise.
  6. All the tools of technology must be available.  Some training may be required.  Some of the main features of the new inventory system are:
  • All incoming deliveries should be bar coded and bear PO Number and Part (Item) Number
  • When swept by the reader wand, it should automatically be uploaded into inventory, the PO closed and payment scheduled
  • Upon receipt of major purchases for jobs, received deliveries should be automatically credited to inventory and then debited to the job cost when it its barcode is swiped as it leaves the warehouse for delivery to the job.

       7.      An elevated loading dock may become necessary as suppliers change their delivery habits due to new negotiated agreements.  Some delivery vehicles may not have lift gates and  some  may require (certainly, a 45 foot trailer forklift availability to unload.  Hoisting equipment is needed in the warehouse in any event so this should not be a problem.

8.    Some of existing shelving and racks are adequate for the moment but as material is increasingly relocated to the warehouse, new racks and shelving may be needed.  To maximize the storage, this will mean that some material is stored out of visual and hand-accessible range.

9.    A long established Warehouse Management System technique is to deploy a Radio Frequency Identification (RFID), sometimes called “proximity” system.  A barcode request is input into the system and the retrieval vehicle (high-bay lift) is guided to the location.  In large systems, the vehicle is guided automatically, but in small systems, an audible signal grows in intensity as the operator reaches the desired bin/pallet location is neared.  Apropos, larger pallet size racks and shelving may be needed for pallet deliveries.

10.   Essential elements of this system are orderliness, labels & signage, barcodes, and software.  Also, parts storage bins should arrayed in an organized fashion on shelves.  Each should bear the name and Item Number, manufacturer, and sometimes project number, either a jobsite or capital expenditure project.  In many cases, voice recognition software allows items to be accessed using verbal commands.

Click here for a companion post, Purchasing Managers with Inventory Responsibility.

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

During a recent consulting engagement, the issues of warehouse and inventory management arose.  The client was eager to organize its operations and address centralized and decentralized purchasing and warehousing functions.

My consulting practice usually finds trouble with these supply chain practices. 

Four significant issues affecting warehouse and inventory operations were noted: Receipt of Goods, Inspection of Goods, Delivery, and Freight.  Each of these is the subject of Uniform Commercial Code(UCC), the controlling authority in the US in the matter of the purchase and sale of goods.    

Receipt of Goods

Under the UCC, Receipt of Goods occurs when buyer takes physical possession of the goods.  In most cases, receipt takes place when customer unloads the delivery vehicle.  Receipt could also take place at the supplier’s facility when a customer vehicle picks up the goods. 

The UCC imposes some duties of due diligence on the receiving party.  The receiver must immediately observe the physical condition of the crates, packaging, pallets, etc., before signing a written receipt for the delivery agent, either supplier’s driver or third party transportation supplier  A “clean receipt” with no comments about condition make it difficult to file damage claims later.  

Any apparent damage should be noted on the receipt and co-signed by the driver of the delivery vehicle.  Multiple photographs should be taken immediately on the receipt site of and emailed to the supplier with a copy to CI Purchasing.  Include a photo of the label which should bear the P.O. number, item or part number, bar codes, and other relevant data.  The P.O. time stamp memorializes the day, date, and time of receipt.

Returning to Terms and Conditions (T’s & C’s), the phrase of “Receipt of goods is subject to final inspection.” should be made part of the boiler plate that should apply to purchase of all goods.  For paper bound suppliers, the receiver should have an inked stamp for paper receipts issued by the shipper or third party transportation firm stating, “Receipt of goods is subject to final inspection.   

Inspection of Goods

Once the apparent undamaged condition of packaging is determined, the next step is Inspection of Goods.  In addition to a detailed assessment of physical condition, questions to address are:

  • Did the supplier fulfill all of its commitments
  • Were the specifications met
  • Are the quantities correct
  • Is the entire shipment of uniform quality
  • Was the order over or under shipped

 The right of the buyer to inspect goods is virtually inalienable.  Sometime before the buyer is required to legally accept the goods, there must be an opportunity to inspect, according to Section 2-513(1) of the UCC.  

In most businesses, it is usually impossible to suspend other operations in order to immediately inspect the goods.  Moreover, the supplier or third party driver must depart to make other deliveries.  Without wandering off into the tall grass, it is best to require inspection before and as a condition of payment.  This requirement should be made explicit in your T’s & C’s.

Should you buy goods subject to rejection due to temperature variations, impact energy, or positional changes, Temperature Watch, Shock Watch, and Tilt Watch are options to explore. 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

One of the most common tags and keywords in this blog is Total Cost of OwnershipIt is usually applied to private sector businesses as the underpinning principal of professional procurement.  However, governmental units, including the Pentagon and most recently, the State of Nevada have used TCO as the basis of awarding publicly bid construction projects.  This win of TCO is likely to herald many more victories of concrete over asphalt pavements.

According to a story published 23 February, 2015 in ENR  , the leading periodical in the construction industry, Nevada awarded a major paving contract to a higher bidder because it offered a lower TCO.  “Citing long-term life-cycle costs”, Nevada DOT chose a contractor whose $83 million price was $3 million (3.5%) higher than the lowest bidder.  Concrete pavement is superior to asphalt in reducing rutting and potholes. 

TCO, Concrete, and Asphalt Pavements 

Mary Martini, NDOT District 1 engineer is quoted in another press report as saying, “We opted to use concrete, which federally funded studies show costs 13% to 28% less in the long run than using asphalt.” The concept of life-cycle costs has long been known to state governments but they have been slow to adopt it.  

The cement industry  and concrete industry  have long maintained that concrete roads and highways are less expensive in term so TCO.  Some folks confuse cement with concrete.  Cement is the ingredient (about 15%) that binds together and, aggregate, water, and additive to form concrete.  concrete does not exist without cement.  Understandably, the asphalt pavement industry has an opposite view.  Based on the federal studies, it is fair to assume that concrete pavement will continue to make gains at the expense of asphalt. 

There is also an argument raging over which material is more sustainable.  Both sides mount formidable arguments but the concrete position is more persuasive.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Pamela Yip is the MONEY TALK writer for the Dallas Morning News.  Her 09 February 2015 story  introduced a man with a high (above 760) credit score who was driven to overtop the 800 plateau.  Yip wisely pointed out that since he had already attained the 760 “gold standard” rating, it was not worth hiring a consultant to drive him over 800.  

I could not agree more.  We have often discussed credit rating as it applies to the purchase of automobiles.  My online course, “How to Buy a New or Used Car”  stresses the importance of good credit.  The higher your credit score, the lower your interest rate and the more favorable the terms are.

So how do you increase your score?

The story point outs the most obvious path, that of paying your bills on time, better yet, early.   Here are some others that may or may not be common sense.

Credit Cards          

  •  Pay off the balance in full every month

The interest rates charged are the highest allowed by law and the card companies move their offices that allow the highest rates.  If you cannot pay the balance off every month, you have a spending discipline problem, not an income problem. Borrowing money on your credit card is a bad idea and an expensive practice.

  •  Do not obtain multiple card accounts

You are not increasing your credit availability so much as depressing your credit score.  The ratings companies look at the total credit available to you and will penalize your score if you have too much debt available that can be serviced by your income.

Further, each card introduces the chance for late payment and default.  If you only have one (two max) card, you are far more likely to pay the balance off every month on time.  Besides, doing so will convince the credit card company to grant our request for credit line increases.

Home mortgages            

  •  Do not buy more house than you can afford.

Bankrate.com states, “As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income.

  • Pay half of your monthly mortgage every two weeks

This will amount to making 13 months’ worth of payments per year.  For instance, assume your monthly payment is $1,000 and is due on the last day of the month.  Pay $500 on the 15th day and another $500 on the last day of the month.  Since there are 26 two-week periods, you are effectively paying.                      

  •   Apply the excess to principal

Talk to the mortgagee about your plan to pay every two weeks and specify that you want the excess to be applied to principal, not prepaying the mortgage.  According to interest rate.com,  “A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you pay only $153,813 in interest — a savings of $32,699.”

Auto loans                Bankrate.com  claims that , “Not more than 20 percent of monthly income, say experts. And that should include payments on all the cars you own, whether you have one vehicle or six. And we’re talking about your take-home pay, not your gross income.”

Following this advice will drive your credit score very high.

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Readers may recall a blog post in August 2014 that referred to the dangers and borderline illegal practices of subprime auto loans by Jessica Silver-Greenberg and Michael Corkery of the New Your Times.  They are at it again, shedding light on the sleazy title loan world in their collaborative story “The title loan conundrum”.   

These title loans usually come with usurious interest rates, so high in many cases, that the borrower never gets out of quicksand of debt.  The story mentions a woman who needed $1,000 to cover debts so took an auto title loan.  Two years later, she was $992.78 in debt and her vehicle was repossessed for non-payment.  Due to the 171% annual interest rate, she still owed virtually the entire amount and had lost her car.   

A NY Times investigative study found that interest rates ranged between 80% and 500% including fees.  When customers are unable to pay off the debt on time, a new round of fees is triggered as the debt is refinanced.  Another study reported in the story was done by the Center for Responsible Lending in Durham, NC.  It found that 1 of every 6 title loan borrowers will have their vehicles repossessed.    

The moral of the story 

The sad tales related in this story testify the sinister underbelly of commerce, organizations preying on the vulnerable and under educated.  What is worse, the victims are almost exclusively economically disadvantaged.  While some states are cracking down on title loans (and pay day loans as well) we all have an obligation to protect ourselves. 

Learn about your personal credit and how to buy and finance carsBe a responsible buyer so you do not depend on feckless well-meaning but generally incompetent bureaucrats to protect us.

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

The subject of subprime loans for automobile purchases continues to be troublesome.  A recent press account sounds the alarm.  Susan Tompor of the Detroit Free Press authored “Miles to go on car loanswarned against expensive six to seven year car loans The Tompor story cites a 28 year old auto worker trying to buy a $33,000 Dodge Charger using $10,000 down and no more than a 5 year loan.  She writes that Experian the credit bureau, that 40.3% of new car loans ranged from 61 to 72 months and that another 25.7% range between 73 and 84 months.  The average term for all new car loans was 66 months or 5.5 years.   

According to the story, a three year car loan for $28,000 at 4.5% accrues about $2,000 in interest but the same loan at six years rings in at about $4,000.  Car loans are available around 3%, lower for high credit scores, on short term loans of three years.  Since the risk of default is inherently higher on loans of five years or more, the interest rate is likely to be higher.   

That same $28,000 loan at three years carries a $832.91 monthly payment but the six year loan falls by almost half to $444.47.  So you pay half the monthly rate but rack up twice the total interest.  That would not seem to be much of a bargain and probably would not be done if more car buyers recognized the financial impact of poor decisions.   

What is the allure of the long term loan? 

The long term loan depresses the monthly payment so an unwitting buyer can be persuaded that the lower payment “buys more car.”  This is utter hogwash but many buyers proudly proclaim this mantra as justification for their ill-advised purchase.   

What is worse, no matter if the interest is simple, compound, pre-computed, or almost any other form, the interest curve is steeper in the early years when most of the monthly payment applies to interest.  It is generally about half way through the term of the loan when most of the payment applies to principal. 

In the online course, How to Buy a New or Used Car,we speak of “being upside down” on a car loan.  This happens when a borrower owes more on the loan than the car is worth.  We also cite the average statistic that a new car loses half of its value to depreciation in the first three years. This means that if you finance a purchase for six years, not only will you be upside down, but you will be much worse off because the steep interest curve in the early years keeps the loan value much higher than would the three year loan.  

Is the rising price tag on vehicles forcing buyers to seek longer term loans?

Of course not.  No one is forcing anyone to buy a car they cannot afford.  If you cannot pay off a car loan in three years, do not buy the car because you cannot afford it and you are putting yourself at financial risk.   Buy a different vehicle, including a used car, which is more in line with your budget, cash flow, and ability to service the debt.

 

 

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

In my public seminar days of the 1990s, my “hook” opening began with, this spoof question, for which I requested a show of hands. “How many of you, when you were young, grew up dreaming that when you got big, you were going to be a purchasing manager?”  The rooms filled with chuckles and guffaws.  On very rare occasions throughout the two thousand or so seminars, someone would raise his/her hand to spoof me!

The majority of “purchasing” practitioners fell into the job (back then it was considered a job as opposed to a profession), mostly by circumstance rather than by choice.  I liked to tell the audience that “Their reward for hard work and accomplishment was a sentence to purchasing! 

I would then go on to tell them that purchasing was the Rodney Dangerfield of business.  Despite the fact that purchasing represents 90% of operations for a firm that earns 10%, and that purchasing is the most efficient and largest generator of profitability in all of business, “I tell ya, we just get no respect.” 

The purchasing profession has changed radically since then.  I began doing education and training seminars two decades ago.  It was a great proving ground for sharpening public speaking skills.  The American Management Association (AMA) recruited me to write and deliver a Negotiation program.  It must have been good as it is still in use today at the seminar company which bought out the Kansas City subsidiary.

Since I was a purchasing expert, AMA also asked me to write and deliver a two day Purchasing program.  Since my style was energetic and zany, my resemblance to Mel Brooks was a daily comment which I took as a complement.

There was general resentment and disregard of purchasing because the internal customer did not understand or appreciate what value purchasing brought to business.  Attendees would volunteer that coworkers thought that anyone could do purchasing.  “What’s the big deal?  Just get three prices, do the bump and grind, and off in a cloud of smoke!”  Yeah, just like that.

I am proud and happy that the view of procurement has changed.  Leadership from within the profession is largely responsible for its own ringing successes.  One of the economic facts in our favor is what I previously contended, that purchasing is the most efficient and largest generator of profitability in all of business.

A story by Susan Avery entitled Procurement Changes in Past 10 Years cites these stats from a 2013 industry survey:

  • In 2013, 67% of procurement professionals have college degrees; the majority of which are business degrees
  • In 2003, just 67% held degrees
  • In 1993, the figure was 61.2%, mostly in business.
  • Procurement professionals are roughly the same age on average. In 1993, the average age was 44 years. In 2003, it was 46 years.
  • 70% of procurement professionals in 2013 are 45 years or older
  • In 2013, 40% call the CFO their boss
  • In 2003, just 6% worked for companies with this reporting structure

The inescapable conclusion is that purchasing pros are profitability leaders.  It is equally important that we pursue professionalism as demonstrated by certification designations.

January 23rd, 2015 | Tags: , , ,
Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

My consulting business largely depends upon clients reaching, by whatever means, the conclusion that the supply chain is the most fertile source of profitability. It is true that efficiency and cost cutting demand more attention in economic downturns but such should always be front of mind inn an enlightened business organization.

When economic times are good, management’s temptation is to keep growing the top line (revenue) while simultaneously neglecting embedded costs. When the “Musical Chairs” commercial tune inevitably grinds down, attention turns to the supply chain, where it always should have been, whether good times and bad.

My company slogan is, “Sell for a dollar, save a dime; save a dollar, earn ten dimes”. The math and economics are straight forward and simple as shown in this graphic, which demonstrates the effect of both purchasing and sales on profitability.

There are two ways to increase profits; increase sales or decrease costs.  Assume a business grosses $1 million per year as shown in this graphic. It is scale-able for $10 million, $100 million, $1 Billion, $10 Billion, etc. For simplicity

• The components of sales are Material and Labor shown in the first column

• In each of the next three columns, add those two together to compute the Total Cost

• Subtract the Total Cost from the Sales to compute the Profit in the bottom row

• The Effect line in the bottom row shows the impact on savings

The second column is the Base. We will measure results compared to the Base. The third column shows the effect of increasing sales by 10%. Material and Labor rise a proportional 10% (neglecting minimal savings from leverage). The net effect is a 10% increase in Profit.

But, look what happens when Costs are reduced by 10%. Material and Labor drop by the proportional 10%. The net effect is a whopping 90% increase in profitability! There is no razzle-dazzle here. It is straight forward economics and arithmetic.

Back to Efficiency and Reducing Costs

Of course efficiency and cost cutting should be addressed by management in good times and bad. The undeniable truth is the same for the supply chain as famed bank robber Willie Sutton once observed, “That’s where the money is.”

January 16th, 2015 | Tags:

 

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

We have noted the importance of a good credit score in the purchase and finance of new or used cars.  A good credit score is also an advantage in applying for credit cards or mortgages.  The rule is that the higher your credit score, the greater amount of credit and more favorable rates and terms is available to you. That does not mean you have to use your available credit.

The gold standard is a score of 850.  Five criterion affect the calculation and each has a different weighting.  These are:

  1. Payment history                   35%
  2. Amount you owe                  30%
  3. Length of credit history      15%
  4. Types of credit used            10%
  5. New credit                             10%

 Payment history is the most important criterion because how you paid your bills in the past is the best indicator of the future pattern.  It helps to pay off installment credit early (cars and mortgages).  You can do this by making supplemental payments each month.  For example, if your mortgage payment is $1,500 per month, pay $1,750 and apply the supplemental $250 to principal.

 The amount you owe deploys a “credit utilization ratio”.  It divides the mount of credit you have by the amount outstanding. The closer to 100%, the worse it is.  Another example is credit card debt.  If your credit card limit is $20,000 and your average monthly balance is $4,000, your 20% credit utilization ratio drives up your score.  To be explicit, never charge more on your card than you can pay off by the due date.  Carrying a balance will cost you huge interest charges and damage your credit rating.

 The length of credit history is straight forward; the longer the view, the more comfortable the risk assessment.  If you are a college aged person or parent of one, take on a credit card and use it carefully.  It will help to build your credit history so you will be ahead of the game when you apply for a loan.

 The type of credit used demonstrates management of your debt load.  The various types of loans you have, or have had, are examined.  Do you pay the mortgage and car loans because they would otherwise be repossessed, while not paying debt like college loans or the full balance on credit cards.  This would lower your score.

 New credit taken on has a deleterious effect on your score.  If you are constantly in search of new credit sources or have many credit cards, this will depress your score.  I have one corporate and one personal credit card with large limits that I almost never approach.  The closest it ever came was when I put the purchase of a new car on my credit card because the dealer could not give me the title.  Although rare, failure to provide a title does happen.  I wanted to be certain that he did not have my money and my car! 

You might not be able to accomplish everything at once, but begin working on improving your credit score.  Minimize credit that you use and pay it off as soon as you can.