For today's edition of “back to basics” month at Get Rich Slowly, we're going to talk about credit scores. What is a credit score? Why should you care?
As you go about your life, you leave a trail of transactions. You take out a mortgage, you buy a new car, you use your credit card to buy new clothes and your debit car to purchase groceries.
Every month, your creditors — the companies to which you owe money — send info about your recent activity to a variety of credit reporting agencies (commonly referred to as credit bureaus). Each agency collects this info into a file called a credit report.
Your credit report is a history of how well you've managed your credit. It contains info about where you've lived, how much you've borrowed, and whether you tend to pay your bills on time. It also notes if you've ever filed for bankruptcy.
The credit bureaus — Equifax, Experian, and TransUnion — sell your credit report to other businesses so they can decide whether to lend you money, sell you insurance, rent you a home, or give you a job.
Credit reports may be boring, but they're vitally important because they provide the basis for your credit score.
How to Get Your Free Credit Report
The U.S. government has mandated that consumers be allowed to view their credit reports from each of the three major reporting agencies once every year. This is easy to do via the free AnnualCreditReport.com website. (Beware of scammy lookalikes. This one is the official government-sanctioned site.)To get your report, you need to provide some basic info like your Social Security number. You might also need to answer some questions about current and/or past accounts. Sometimes these questions get tricky if you don't have quick access to your files. (When Kim had to check her credit report recently, she couldn't remember the amount of her mortgage payment from 2005. Her request was denied.)
If you'd like, you can obtain reports from all three credit reporting agencies at once. Or, you can stagger your requests, possibly requesting one report every four months from a different agency.
Your Credit Score
While your credit report collects info about your debt history, your credit score is a single number that summarizes all of that data.
Credit scoring has been around for decades in one form or another. It only became widely used during the 1980s after a fim called Fair Isaac (now known as FICO) developed a new type of credit score called a FICO score. The mortgage industry recognized the usefulness of credit scores, widely adopting them in the mid-1990s. Other industries followed suit.
To generate your credit score, FICO takes bits of data from your personal credit report and compares this info to similar data from millions of other people. FICO then uses secret formulas to squeeze all of this information into a single number, which can range from 300 to 850. This number is a measure of risk. It gives lenders a good idea of how likely you are to pay them back. They use it to decide how much to lend you, what interest rates to charge, and what terms to set.
Note
Although the FICO score is the most widely used credit score — used in over 90% of U.S. lending decisions — it's not the only credit score. Other companies offer competing credit scores, and FICO (the company) offers a variety of specialized scores to measure things like how likely you are to declare bankruptcy, close an account, and so on.Take a company like Credit Sesame, for instance. Credit Sesame offers a variety of credit-monitoring tools including a free credit score. But Credit Sesame does not use a FICO score. The company uses the VantageScore, which was developed by the three major credit bureaus as an alternative to the FICO score.
Confused? Don't sweat it. The important thing to remember is that we often talk about “your credit score” like it's just one thing when it's actually many credit scores.
“A bad or even mediocre credit score can easily cost you tens of thousands and even hundreds of thousands of dollars in your lifetime,” Liz Weston writes in Your Credit Score. “You don't even have to have tons of credit problems to pay a price. Sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender's high-risk category.”
A high credit score will get you the best interest rates on credit cards and loans, including mortgages. With a low score, you'll pay higher fees and interest rates.
Here's an example from FICO:
Bad credit can cause a downward spiral. One money mistake leads to bad credit, which costs you more money and leads to more debt, which drops your credit score…and so on. But your credit history doesn't just affect your ability to borrow money. Nowadays, it's used by insurance companies, landlords, and even employers.
- Some insurance companies use a specific credit score (known simply as your insurance score) — combined with other info — to gauge how likely you are to file a claim. A lower score can lead to higher insurance premiums.
- When you try to rent a home, your prospective landlord may run a credit check. If your credit score is low, she may see you as a high-risk tenant and ask for a larger security deposit — or simply turn down your application.
- Current and potential employers can pull your credit report if you grant them written permission. This is especially true for which security is important. To some employers, a good credit record shows that you're less likely to steal from the company, to take bribes, or to reveal sensitive information.
As you can tell, your credit score can have a very real impact on your life. But how is your credit score actually calculated? Let's take a look.
The Anatomy of a Credit Score
According to FICO, your credit score is determined by a variety of factors that predict how likely you are to repay the money you borrow. Your credit score tracks 22 pieces of information from five broad categories:
- Payment history (35% of your FICO score): Do you pay your bills on time? If you pay late, how late? How long has it been since you missed a payment? How many times have you had problems? The more responsible you've been, the higher your score.
- Amounts owed (30%): How much credit do you currently have? Of that credit, how much are you using? How many of your accounts have balances? The less of your available credit you use, the better your score.
- Credit age (15%): How long have your accounts been open? How long has it been since you used them? The longer you've had accounts, the better your score.
- Credit mix (10%): How many different types of credit accounts do you have? (The two main kinds are installment debt like a car loan or a mortgage and revolving debt like credit cards.) How many do you have of each type? Your FICO score will be higher if you use a mix of different kinds of credit. (This is the only weakness to my own score. I don't have any installment loans at the moment.)
- New credit (10%): Have you opened new credit accounts recently? How many? Opening new accounts may ding your score, especially if you open many at once.
For some folks — like young adults who don't have a lengthy credit history — the weight of each individual category may be a little different.
While FICO shares this broad overview of how they determine scores, the actual formulas are confidential. If you want more info, download the free “Understanding FICO Scores” booklet from FICO.
How to Get Your Free Credit Report
Even a decade ago, it was tough for a consumer to get her credit score. They were considered top secret info. It was a Big Deal to find some sort of hack that let you see your number.Nowadays, there are a variety of ways to see your credit score for free. Both my Capital One credit card and my Chase credit card, for instance, give me access to my credit score. On those rare occasions I need to make a large financial transaction, I'm almost always offered my credit score.
And, of course, there are now companies like Credit Sesame, which are set up to offer consumers a variety of credit-monitoring tools, including a free credit score. (I've been watching my credit score with Credit Sesame for a while now. It was 804 a year ago. It was 810 in November. It's 814 now. But I still get a “D” for my account mix. If I had other types of credit, my score would be higher.)
What Is a Good Credit Score?
According to FICO, the national average FICO score is 695. While the company doesn't share detailed stats about credit scores, they have published the following guidance:
- A FICO Score of 800+ is considered exceptional.
- A FICO Score between 740 and 799 is considered above average.
- A FICO Score between 670 and 739 is considered average.
- A FICO Score between 580 and 669 is considered below average. (Many lenders will still approve loans with scores in this range.)
- A FICO Score below 580 is well below the U.S. average and shows that you're a risky borrower.
Each of these ranges (or quintiles) contains roughly 20% of the American population. (About 17% of the U.S. has a score below 580, for example, while 19.9% have scores above 800.)
Last February, I signed up for a new credit card. My banker was chatty and we had an amusing conversation about credit and credit scores.
“Your credit score is 804,” he noted. “That's unusual. The average credit score is below 700. You also pay off your balance every month. That's unusual too.”
“It is?” I asked.
“You bet,” he said. “Something like 90% of our credit card clients carry a balance. I can tell we're probably not going to make any money off of you, but that's okay. You can't win them all!”
Although income is not a direct factor in computing credit scores, there is a strong correlation between household income and credit scores. The more a person earns, the higher her credit score is likely to be. Age is also a factor (which isn't surprising since you have to build a credit history to have a good score).
How to Improve Your Credit Score
Simply knowing your credit score doesn't do you a lot of good. If you're not happy with your score, you can take steps to improve it. My pals at Stacking Benjamins just published a podcast interview with Farnoosh Torabi about the keys to raising your credit score. From my reading, these five factors are important in giving it a boost:
- Pay off your debt. According to credit expert Liz Weston, “The most powerful thing you can do to improve your credit score is to reduce your credit utilization.” In other words, reduce your credit card balances. FICO reports that about one in seven people who carry credit cards are at over 80% of their credit limit. “Below 30% is good,” Weston says. “Below 10% is better.”
- Pay on time. According to Weston, if your FICO is 780, a single late payment can drop it 100 points. If your score is 680, a late payment can cut it 70 points. If you miss a payment, don't panic. Do what you can to get current and stay current.
- Only open new accounts you need. Don't open a store charge account just for kicks or because the salesman pressures you into it. New accounts are only a small part of your total score, but they do have an effect. Keep new accounts to a minimum, especially if you're planning a big purchase (such as taking out a mortgage).
- Don't close old accounts. It's okay to cut up old cards or to free them in a block of ice, but to maximize your score, keep the accounts open. If you have to close an account or two, close newer accounts before older ones.
- Keep tabs on your credit report. Even if you do everything right, your credit score can take a hit from identity theft and other forms of fraud. Even simple errors can hurt your score. Check your report regularly, and correct any problems you find.
Here's a final word of advice: Don't obsess over your credit score. Sure, it's important, but ultimately it's a number for lenders, not for you. A less-than-perfect score isn't the end of the world.
I just spent the weekend in a group of 58 early retirees. Many of these folks have more than a million bucks in the bank but have lousy credit scores because they do things like travel hacking. They're not worried because they know their credit score is just one piece of the puzzle.
If you struggle with compulsive spending, it's far better to cancel your credit card accounts and take the hit to your credit score than it is to risk getting buried deeper in debt. The bottom line? Be smart with your money and your credit score will be fine.
Next Steps
If credit scores are important to you or interest you, I recommend Liz Weston's Your Credit Score. Whether she likes it or not, Weston has been pigeon-holed as one of the top credit score experts in the nation. Her book is packed with great info on how credit scores work and how to improve yours.I also recommend checking your credit score regularly. I pull mine whenever I check my credit report. But I try to to look at it every month or two, even if I'm not checking my credit. I use one of my credit card accounts, if I think of it while I'm doing my finances. Otherwise, I just pop into Credit Sesame.
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.
I listen to Dave Ramsey, and he makes the FICO people quite upset by stating that you don’t need a score. Good thing, since I don’t because I’ve never had a loan in my life and have always paid cash. Not having a score keeps me from obtaining credit cards and the like, which isn’t actually a bad thing when I’m having a weak moment. It’s too bad you need to be in debt to show that you can handle it.
Kinda hard to buy a house with cash!>!> And if you use credit wisely … your can receive all kinds of freebies!!! We’ve received retail-cards, cash, free hotel nights, free flights … we NEVER rollover any balance … we always pay in full … to us it’s just a game … see what we can get for free for spending the money we needed to spend anyway!!!
MSN Money also has a story entitled “Anatomy of a Credit Score”. You might want to check it out for additional info.
Good post. You should know that the credit score you get online can vary significantly from what a lender might see when they pull your credit. I used to work for a credit reporting agency that provided reports from the three bureaus to the mortgage industry and scores on those reports were generally lower than those a consumer would get online. This is because there are different scoring models which weigh scoring factors differently from consumer reports.
The single best thing you can do to improve your credit score is to keep your credit card balances within 30% of your overall credit limit.
Motley Fool has some great articles on credit including this one.
I have a credit card account through providian.com / wamucards.com and they provided a calculated FICO score and tracking. You can even have email alerts if your score changes 20 pts or so.
I disagree about the amounts owed portion. In my experience, your debt-to-credit ratio and/or the number of cards on which you have debt matters more.
just to flesh out my last point… amount is important, only in relation to how much credit you have. not in real numbers. you can be $30K in the hole and still have a 700+ credit score.
I noticed this thread at Fatwallet on the cheapest way to get your FICO score:
http://www.fatwallet.com/t/52/601699/
I was surprised to see comments on what a ‘real’ FICO is. Some say it’s Equifax’s score and everything else is a ‘FAKO’. Others suggest they’re all more or less the same.
I just pulled all three credit reports and bought the score from each of them. I had late payments years ago, but have paid off a mountain of debt over the past 18 months. They were quite different:
– My TransUnion score was 756 which qualifies as “Fair to Good” (the scale is 400-925)
– Experian was 903 or “Super Prime” (scale of 501-990)
– Equifax FICO was 744 or “very good” (scale of 300-850)
Obviously, TransUnion has a flawed model. Or at least that’s what I’ll tell my mortgage lender. :-)
What if the world suddenly paid for everything in cash? Credit would no longer be relevant.
I have written about credit myself at my personal finance website, and while it would be great to be able to ignore credit, it simply isn’t possible. Why not? Because employers are now pulling credit scores for job applicants. It really is unfortunate, but credit is still important, even if you’re rich and don’t need it.
“Finally, establish a secured credit card. This will give you a line of credit that you can use to begin reestablishing a good credit history.”
Question, what is a secured credit card? Normally when you refer to anything “secured” related to credit it means you have put up some type of collateral against a specific amount of debt. If you default on the debt then that thing or things could be repossessed if you don’t pay your bills. That isn’t usually the case with a credit card so I wasn’t aware such an animal as a secured credit cards exists.
Your friend with the Ph.D was certainly not alone in wondering what a credit was. This post is quite detailed and explains a lot. One thing I cannot get is why I need to get even more credits cards to improve my credit score.
I looked at my credit report recently and there is some really old stuff on it. The thing I learned was that a mistake will not be forgotten, so don’t make another one.
(That ‘mistake’ really should be removed, I need to take care of that…)
Nice article.
I do not check all the credit reporting agencies at the same time. I check one, then four months later check another one, etc… this way I can check my credit three times per year instead of just once.
Also, what does someone who is trying not to borrow money do who hasn’t bought anything on credit in years? Do they automatically pay higher insurance premiums or higher rent? If so, this doesn’t sound at all fair.
When you close a credit card account, make sure you ask the bank for a permanent account closure (I suspect it costs your bank some extra money).
I had a joint card with my ex-wife. When we divorced, we cut up the cards and sent a letter to the bank to close the account. Several years later, I had a collection agency on my tail because a Blockbuster card linked to that credit card had been used by my ex and a small late fee charged to the long-“closed” credit card. If your bank does not tell Visa/Mastercard to make the change permanent, they make it good for a year only, and will reopen your account for charges made after that! Since I had moved a couple of times, I never received an account statement… This was 10-15 years ago, so things may have changed since then.
Mark, I would think to “maintain” a good credit score, you should probably do what is advised to do build a good credit score: buy a few low-cost items each month on a credit card (groceries, gas, etc) and pay them off in full each month. This could work to your advantage if you use rewards cards.
What I would like to see more info on is, how the credit scores of married couples mix. My wife has a low credit score and I have a high one; if we were shopping for a loan, we would have problems, correct?
Thank you for letting me know about Credit Karma. Holy buckets, I had no idea I could actually get my credit score free! I owe you one dude!
After FICO, it’s the Vantage score, not the Vanguard score that rules the credit world.
And about the scores Credit Karma gives: I’m a Credit Karma user and I do find their scores and their entire site useful. They’ve historically given users free access to a TransUnion score called “TransRisk.” I think people need to know that this score is not the same one banks and other lenders get. The credit bureaus offer one set of scores to the public and a different set to lenders. In my experience the TransRisk score is close to the one banks get, but not the same. (In another case, the score I purchased from Experian via a Discover card partner program was a whopping 65 points different than the Experian FICO score my bank got!)
So if you really want to know your score, you do have to buy the FICO score, not some other score that may be offered by the same agency.
Also, Credit Karma has recently begun offering the Vantage score for free. I hope — but don’t know — that this is the actual Vantage score a lender would pull.
Thanks for another article on credit scores….seems like this topic is over-used on financial blogs..but regardless it is good information.
The score that I got from credit karma is alot lower than what the reporting agencies have. Please keep this in mind when you get your score.
There’s a lot of room between a lousy credit score and a great credit score, where you can hang out without getting dinged much on interest rates, insurance rates, and rental applications. I’d rather stay there than wasting my time trying to improve my score. A high credit score is not evidence of moral virtue. Credit scores were created by creditors, for the benefit of creditors.
I do my own “creditor scoring”, and very few receive even a “tolerable” rating.
I’m flummoxed because to improve my score I would need to both diversify my credit and lengthen the average time–but in order to diversify the only thing I can think of is to get a new credit card, which would pull down my average time.
What if you have credit showing from the past that were closed? Ones like Old Navy, Mervyns, Home Depot….not the big credit card companies, but more retail specific credit cards. Does this show as negative if they are still sitting there? They are all paid and closed.
Thanks!
The scores from Credit Karma are not your FICO score which is what lenders look at. So it may approximate your FICO score, but is not the real thing. That is why it is free!
Why do people focus so much on a credit score? Sure, a lower score hurts your credit. But unless you are about to make a big purchase, your credit score isn’t important. Better to focus your effort on good money management. Kind of like an overweight person constantly stepping on a scale – its just a number.
I have to agree with KDB. A credit score is just a number that indicates how well you deal with debt. Do you really want to deal with businesses that simply reduces you to a number, rather than looking at what you do in real life?
The article doesn’t mention, but should, that the credit scoring models used by each credit agency are secret, and no one outside those agencies knows exactly what they are. Any other site, including credit karma, is forced to approximate those by making up their own models that arrive at similar numbers.
Similarly, the numbers that the credit bureaus will offer to sell you alongside your credit report are not the same ones they give to lenders. I’ve actually tested this personally by paying for my scores from the credit bureaus and then, the next day, having a mortgage lender run my credit. The numbers that come back are different, by significant amounts.
“A good credit score is worth its weight in gold”
I agree with this, but only because the weight of a credit score is zero.
“Lin told me a person with lousy credit might well pay a million dollars in higher interest rates and fees over the course of his life.”
He also might well pay 0 in higher interest rates and fees over the course of his life, if he doesn’t borrow any money.
Also, one more thing not mentioned in the article that should have been — negative items expire off your credit score after 7 years (and i believe 10 years for some more egregious ones, like bankruptcy), which means they no longer affect your credit score.
If our hypothetical person with a bad credit score who was going to spend an extra $1,000,000 in finance charges and fees over the course of his lifetime ruins his credit at 23, then changes his ways and stops doing the things that ruined his credit, he will be working from a clean slate by 30. I doubt he would rack up $1,000,000 in finances charges in the meantime — for something like that to happen he’d have to keep doing stupid things his whole life long, never letting his credit score recover.
@KDB:
It’s not even really like a scale — it’s like a scale that only shows you your average weight over the last 7 years, but not how much you weigh right now.
I have a friend who has a bad credit score and is determined to live without credit. I tried to explain to him that this is important to have a good credit score, he counters with “I’m not going to buy a house, I’ll buy a car in cash, etc.” Other than the employment thing, what would you recommend I tell him the credit score can influence? He’s an academic with a tenured job so that doesn’t hold much sway.
As a previous loan underwriter, one of the most frustrating (and common) things was to get called up by the dealership, and have them argue with us over the client’s credit score. Because, inevitably, the client had gotten their score off of some website, and they didn’t realize that every.single.financial services industry weighs things differently. We had a different way of coming up with a credit score than, say, a mortgage lender might, because motorcycles carry different risk indicators than mortgages…
It was incredibly annoying to try and battle a confident consumer who was adamant about not getting “screwed” because they were “informed” and they knew their score. Um, no. You got a random score off of a random website and it has nothing to do with our risk calculations. It is a good approximation, but honestly the best thing these websites can do for you is to make you aware of potential inaccuracies on your report so that any mistakes are taken off of your report. If you want to pay the money for your score, go for it, but please do be aware that that is not the score that a lender is looking at. We were often unfairly cast as screwing over customers because they had just enough information to be dangerously uninformed as to how lenders manage risk and score potential clients.
An important topic and one I think more financial advice should be directed toward. My favorite site for getting answers is myfico.com – their forums are GREAT for help!
Here are some answers to questions brought up already:
@chett: yes, it is somewhat like a debit card, but after using it correctly, you can get it unsecured – ie, it can become a regular credit card. Also, it does not come out instantly, like a debit card – instead, you must pay the bill each month, like a regular credit card.
@#4: you can build a credit score with other instruments (ie loans) – and you NEVER have to pay interest for a good score, just pay before the statement cuts in full and you’ll be fine.
@#5 Everyday: you can “goodwill” a mistake – ie, send a letter to the company asking them to remove it – they must report correct information, but they don’t have to report all information and that can improve your score by removing “baddies”
@Mark: Good tip! Also, some states allow more than one free report (ie, CO, GA, etc) so if you live in one, you can pull and should pull more often. And yes, if you have a low or no score because you have no loans or CC then you can potentially pay more – that’s where a human can come in handy instead of a computer assigning costs.
@8:Lonnie – they do NOT mix – your credit score and report are yours alone. However, if you jointly buy something (ie a house) or jointly apply for a CC, then it shows on both your reports and if one person doesn’t come through, both of you suffer. However, if you have a high score and your husband a low one – as long as you keep your cards, house, etc separate, it won’t affect you (of course, if you rent, get joint insurance, etc, those are JOINT and it will affect you)
@14: diversify means loans, CC (both bank and store), mortgage, etc – and yes, adding will bring down the score a little because it’s new, but once you let that age, it will go back up – a good score takes time!
@15, Karla: once closed, a CC will stay on you report for 10 years – that’s ok, it makes the age higher! If you have “baddies” (ie, a late payment), they will stay on 7 years – EVEN IF THE ACCOUNT IS CLOSED.
Hope that helps a little, again, I suggest going to the myfico forums for more help, they really are great.
Finally, remember, even though Credit Karma, Quizzle, etc give a report and a score, the only real score must be bought from MyFico.com (although they do have coupons!).
Good luck with building your credit and remember: YOU NEVER HAVE TO PAY INTEREST FOR A GOOD SCORE (although if you never pay interest on a mortgage, you are better than me!)
@Ris:
I ruined my credit score 7 years ago. I have survived *just fine* in the interim by not using credit cards, buying a car in cash, not buying a house, etc. The lack of a credit score caused my almost no problems whatsoever except for a couple hassles trying to rent apartments, and even then I still managed OK.
Your friend will be fine. Leave him alone.
I understand using your credit score in order to easily obtain more debt. I don’t understand using it for anything else.
Currently my husband and I have great credit scores. A few years ago, they were even higher, as we had quite a few loans and credit cards that we paid every month.
In the future, our credit score will continue to plummet, I’m sure, until all our closed accounts fall off and we become marooned in the land of “no credit score”.
I’m not worried, though, because we’ve become debt free in the past two years, slowly paying off loans and accounts, and then closing them. So for us, the lower the credit score, the better off we actually are in real life. No car loans, no student loans, etc. What will we do with no credit score, you ask? (Besides celebrate, you mean?) Well, I’ll tell you what we won’t do: We won’t open another credit card, because we have the money to pay for things today. We won’t obtain a car loan, because we have the cash to buy a car. Before an insurance company or potential employer even runs our report, we will be honest about our (smart) life choices, and if they turn us down, that is their loss, because we are (arguably) more responsible than many people with high scores. And I know this is outrageous and unbelievable, but its true: Our next home will be bought with cash. No mortgage needed.
Worshiping the FICO is no longer on our agenda. Living within our means and according to our own priorities is. (And before you ask, we make less than $70k/year household gross, so we don’t fall into the “you’re rich so you don’t need a score” category.)
So up until this point in my life I have completely ignored the concept of a credit report. After reading this article I decided to check my credit report…
I just got done checking my credit score using TransUnion. What I found was that they force you to imput your credit card info, even for the “free-trial” and then make it next to impossible to figure out how to cancel your “free-trial” online afterward. I was on the phone with customer service for 25 minutes while they looked for my account (total phone time was 40 minutes!). I’m guessing this may have been because I canceled immediately after opening my account (but if you don’t will you remember to cancel within the 7-day trial window?). I would venture a guess that the other two credit bureaus would have similar “must imput credit card info for a free-trial” and then canceling difficulty?
I also have a question about what constitutes a “good” to “excellent” score. Sierra says in her article that a score of 750-850 is considered excellent. My score falls in this range (the top end actually) but the credit report gives my score a “B” rating. Is that just to motivate me to pay for the various credit managing tools offered on their website? What is the effective difference for a score in the mid 800s compared to a score in the high 800s to 900s?
@Ris:
The price you pay for insurance, especially auto insurance, is based on your credit score. The better your credit score, the lower your insurance premiums.
You can’t make a habit of this, but having a good credit score can also give you some leeway to tell bad business practitioners to go to hell.
I did this to Sprint. They really made me mad and weren’t treating me the way I felt they should treat a long-time customer. I canceled my phone account with them and told them to take the last month’s bill (the item under dispute) and shove it. They slapped on an ETF fee and sent it to collections.
Collectors called, I told them I don’t owe them a dime, I’m not giving them a dime, and to send me something in writing. Once they did that, which they are legally required to, I sent them a cease calling letter. I pulled my credit reports and tagged on explanations for that negative item (yes, you can do this).
That was over a year ago, and since then no collectors have called me and I just got a Capital One rewards card which gives 2% cash-back for gas and groceries and has no foreign transaction fees. It feels good to have had the freedom to tell someone who’s billing me for bullshit that they’re never going to see a dime. :)
Edit: I also already own a home and have enough emergency savings to outright buy a used car should mine break down catastrophically. Otherwise I wouldn’t have been so courageous. But that’s kind of the point – if you’re in good financial shape, you have the freedom to take a small hit once in a while without any repercussions. And I mean a small hit – in the low hundreds. If it was a large amount I would have thought twice and/or taken matters to another level such as the authorities or a court.
@Joe
My premiums might be higher because of what I did, I’m not sure, but they seem the same. Even if I ended up paying the amount twice over due to higher premiums, that’s fine with me because it’s still not going to Sprint. I refuse to pay them on principle. It’s a punishment. Sure enough, the government has started to regulate how much they can swindle people for ETFs, but a little too late to help me.
Katelyn, try using the creditkarma link in the original post for an initial credit score.
annualcreditreport.com is THE federally approved portal for getting FREE credit reports for the three major credit bureaus. You do not have to enter your CC with Experian/Equifax/TransUnion if you go through annualcreditreport.com.
@Everyday Tips
A mistake will be forgotten. Any negative item over 7 yrs old on your report should be removed, by law. You should be able to flag those items for removal to each of the credit agencies when you check your reports.
What if you have good credit (at least have never had debt, paid a bill late, etc) but keep getting told that your credit score doesn’t qualify you for things?
That’s vague, but the specifics are that the above characterization describes my boyfriend — who can’t get a credit card (though he had one before that he paid in full, on time, all the time) and can’t open an ING checking account because of “a problem with his credit”. We’ve tried calling all the agencies but no one will tell us anything and his credit report doesn’t show anything. The banks won’t tell us anything either. It is incredibly frustrating.
@Ris You should know you can’t tell an academic anything :)
People who just don’t want to use credit should be aware that some mortgage lenders will use “nontraditional credit” for making loans approvals.
What is nontraditional credit?
It’s providing proof that you pay other obligations on time even if they aren’t conventional debt–examples include your rent, utilities, car insurance etc.
Not all mortgages allow nontraditional credit but it’s worth looking into. I’ve helped some immigrants who don’t have the borrowing mentality to get mortgages using nontraditional credit.
It’s harder to get around without credit cards but not impossible.
Credit scores are a ridiculous marketing scheme and an unfortunate consequence of the “information age”. Look no farther than the real estate bubble and record foreclosure rates for a good indicator they are basically useless.
Example, my Chase card doesn’t report a credit limit to the bureaus, which hurts my score. I pay my balance every month, but to them, even $1 charged on it shows a credit utilization of 100% for that card.
I have written repeatedly on my site about how important it is to be honest with yourself about your financial starting point (your baseline) before setting new financial goals. The credit score is a sure way to keep us all honest with ourselves! Thanks for this review of a very important “basic.”
I’m always a bit confused by the idea of gaming the system (taking out extra credit cards etc.) to get a higher credit score. This tells me that the score has become the point rather than that the score is measuring something real, like how credit worthy someone is.
My husband and I have no debt, other than credit cards that we pay off every month. Like many near retirees, we’ve been working to get our debts to zero and our savings to a point that we can buy things like cars (as needed) without credit.
Is there any reason that we should be very worried about our credit score? Other than that it be at a reasonable level in case we need to rent – or borrow for some catastrophic need in the future?
@26: the score you got for free isn’t real. Thus you can’t use the range in the article. You have to buy your real score.
One thing to remember … those dings or negative marks that “fall off” after 7 years, they don’t necessarily fall off automatically. In a perfect world they do, but one of the reasons you should monitor your report is to make sure any lates payments, charge offs, etc that are legally too old to impact your report have been removed. If they haven’t, then you’ll need to contact the credit report to make sure they are taken off. Other than that, just a matter of monitoring for identity theft type stuff and mistakes.
I’m not a fanatic about my credit report, but I keep an eye on it. I figure if the report is good and I keep my financial house in order, then the scores take care of themselves. I keep 2 credit cards, paid off each month and two loans (house and student). No other debt than that and always keep my utilities paid on time. That’s it. When I went to buy my house last year, the loan officers I was shopping just about fell over themselves complimenting my credit score. One said he’d only seen 2 other people with all 3 scores over 800 (mine were just barely, like 802). *shrug* I think it helps that while I’ve racked up credit card debt before, I’ve never really been in trouble financially. No late payments, no bankruptcies, etc. I would be interested to see how much my home loan impacts my score since my income hasn’t grown, but since I’m not planning on needing a new loan anytime soon I don’t really care that much.
In addition to the “Big 3” credit bureaus, there is a fourth credit bureau and other “consumer reporting agencies” that compile data on consumers and sell it to corporations.
The fourth credit bureau is called Innovis. According to Wikipedia:
“Innovis began as ACB Services – founded by Associated Credit Bureaus (ACB), in 1970. In 1989 ACB Services was purchased and renamed Consumers Credit Associates (CCA). First Data Corporation purchased CCA and renamed it Innovis, Inc. in 1997. Most recently, CBC Companies purchased Innovis, Inc. in 1999.[4]
As of 2008, CBC Companies claims it has provided consumer credit information through its credit bureau organization for over 55 years.”
To order your Innovis credit report go to: (https://www.innovis.com/InnovisWeb/pers_orderCreditReport.html) and follow the instructions on the website.
Consumer reporting agencies include PRBC and Choicepoint. PRBC started in 2002 as means for consumers to establish credit by reporting bill payments such as rent and utilities. LexisNexis (formerly choicepoint) sells data regarding your employment history, residence history, and insurance claims data. I’ve e-mailed PRBC for instructions on how to receive a free copy of my report, however Lexis makes it easy; simply go to this site (https://personalreports.lexisnexis.com/), follow the instructions, and fire away.
Although the Big 3 dominate the credit world, they’re not the only act in town when it comes to keeping databases of information that may negatively impact you if there are errors in your file. Errors in any one of these databases can end up affecting your career, the price you pay for insurance, or whether or not an insurance company will underwrite a policy for your home. Be prudent, and keep tabs on these guys, because I’m pretty sure if you’re not then nobody is!
LOVE the link to creditkarma. Even if it is not the “real” score as others have said, it is SOOO helpful for me to play with the calculator tools and see how proposed actions would affect the score. Some actions like paying off more debt had relatively little impact (10 points) while other actions like missing ONE monthly payment had a huge impact (50 points!!) LOVE knowing what is going on behind the curtain.
One super easy thing I did a couple years ago to improve my score was call my credit card company and request an ‘increased credit limit’. I have never charged more than $2,000 in a month. But I read once that keeping your usage under 10% looks the best. So I asked to up my limit from $3000 to $12000. Suddenly, that part of my score rates A.
I’ve never had a credit card in my life, I pay all my bills on time, paid off my mortgage, and I have over 100,000 dollars in various securities and cash. In fact, I lead a “zero debt” lifestyle. Yet, my credit score is somewhere between “Good” and “Poor” according to the various rating agencies.
These scores seem pretty bogus to me. Who is a better credit risk: a guy with loads in savings and investments, or a guy who has three credit cards and a high limit on all of them?
It is sad employers look at this and if I want to look for a job, I may have to game my score up.
Is there any chance that you all would have an article on the agencies’ algorithm for conjuring up these questionable scores?
I think that pulling your credit report and scores on a regular basis is a good thing. For me, it took something happening, or needing something, to force me to do it. Typically, I never cared. I have excellent credit, but I think your advice of pulling it regularly and staying on top of it is great advice.
Thanks!
Credit scores can be a hard thing to understand sometimes. Just because you pay all your bills in cash and have no debt does not mean you have a good credit score. Banks want to see that you can pay back a loan, so if you have never borrowed money then the banks have never seen you pay it back either, hence they give you have a bad credit rating.
I think its best to not have credit in the first place
I disagree you should have credit because it will help you to by important things you need in life such as cars, loans, houses. Having credit is a much bigger thing then you really think.
credit cards suck
What’s your opinion on a zero credit score?
That’s an interesting question. I’m not sure I have an actual opinion on a zero credit score.
Obviously, going without a credit score means you don’t have access to much of the modern financial machine. But if you don’t need access to the modern financial machine, that’s no big loss, you know?
The tough part comes when you don’t have a credit score and you actually decide you want to access something like a loan or a mortgage or a credit card. Then you’re screwed and have to find ways to build credit.
I suspect a couple of my friends are going through this right now. They operated without credit for a long, long time. Now they’re getting a divorce. At least one half of the couple wants to take advantage of everyday financial products — but can’t. No credit score. In this case, it’s an issue. But not in all cases.
A 0 credit score only removes options, as JD mentioned above. Having no credit score does nothing to add to your financial stability, and if fate declares it, it could actually upset it.
On the one hand, I understand people who want to protect their privacy as much as possible and/or who want to opt-out of “the system” for various reasons.*
On the other hand, at some point in your life, unless you have at least $250k in cash handy, you will probably have to show that you have financial trustworthiness beyond “I’ve never bounced a check or overdrawn my bank account.”
I suggest that the average person get two (rewards) credit cards and treat them as if they were debit cards. Use one for in person purchases, and one for on-line and travel. (That way if the wrong kind of purchase shows up on a card, you’ve got your own red flag, and your cc company, who monitor patterns like this, may spot the problem before you do.) This will get you rolling on having a credit record.
*I have a friend who doesn’t trust “the system”, for whom I make all on-line purchases in exchange for 1/2 cash up front and the rest upon delivery (items come to MY address; they’re that paranoid!). Earns me points on my card.
JD, I found the point about missing a payment dropping your score by up to 100 points curious and wonder if it’s potentially misleading. I think of “missing a payment” in terms of what is most likely to happen, i.e. forget to pay a credit card. But I assume this point is about more if someone with great credit is more than a little late with their mortgage payment, and their mortgage is a huge portion of their total credit score. This isn’t the sort of thing someone would do accidentally and if you’re making the decision to not pay your mortgage I think your credit score is the least of your worries at that moment.
I think a follow up of “my credit is bad, what options do I have?” could be really interesting. Not about rehabbing credit (which is actually pretty straightforward), but about how to approach it in the most frugal manner so you’re not paying those thousands of dollars in the process. I’ve been working with my sister on this since they had a short sale on their house a number of years ago including what her options are to buy another house or how long they’d have to rent, should they have to move.
There’s no way you should have a 0 credit score unless you’re underage, then that would be ok, right?
Radio host Bill Ramsey promotes a zero credit score, achievable, presumably, if one doesn’t use any credit for 6 months. Nothing. Zero. Nada.
I think that’s ill advised, for the reasons you outlined perfectly.