{"id":235293,"date":"2018-01-11T05:00:52","date_gmt":"2018-01-11T13:00:52","guid":{"rendered":"http:\/\/getrichslowly.org\/?p=235293"},"modified":"2023-10-02T15:48:50","modified_gmt":"2023-10-02T21:48:50","slug":"credit-score","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/credit-score\/","title":{"rendered":"Your credit score \u2014 and why it matters"},"content":{"rendered":"
For today’s edition of “back to basics” month<\/a> at Get Rich Slowly, we’re going to talk about credit scores. What is<\/em> a credit score? Why should you care?<\/p>\n 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.<\/p>\n 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<\/em>). Each agency collects this info into a file called a credit report.<\/p>\n Your credit report is a history of how well you’ve managed your credit.<\/strong> 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.<\/p>\n The credit bureaus — Equifax<\/a>, Experian<\/a>, and TransUnion<\/a> — 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.<\/p>\n Credit reports may be boring, but they’re vitally important because they provide the basis for your credit score<\/em>.<\/p>\n How to Get Your Free Credit Report<\/strong><\/em> 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.)<\/p>\n 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.<\/p><\/blockquote>\n While your credit report<\/em> collects info about your debt history, your credit score<\/em> is a single number that summarizes all of that data.<\/p>\n Credit scoring has been around for decades<\/a> 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<\/em>. The mortgage industry recognized the usefulness of credit scores, widely adopting them in the mid-1990s. Other industries followed suit.<\/p>\n 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.<\/p>\n Note<\/strong><\/em> Take a company like Credit Sesame<\/a>, for instance. Credit Sesame offers a variety of credit-monitoring tools including a free credit score. But Credit Sesame does not<\/em> 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.<\/p>\n 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<\/em> credit scores.<\/p><\/blockquote>\n “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<\/em><\/a>. “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.”<\/p>\n A high credit score will get you the best interest rates on credit cards and loans, including mortgages.<\/strong> With a low score, you’ll pay higher fees and interest rates.<\/p>\n Here’s an example from FICO:<\/p>\n <\/p>\n Bad credit can cause a downward spiral. One money mistake<\/a> 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.<\/p>\n 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.<\/p>\n <\/p>\n 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:<\/p>\n 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.<\/p>\n 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”<\/a> booklet from FICO.<\/p>\n How to Get Your Free Credit Report<\/strong><\/em> 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.<\/p>\n And, of course, there are now companies like Credit Sesame<\/a>, 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.)<\/p>\n <\/a><\/p><\/blockquote>\n 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:<\/p>\n 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.)<\/p>\n 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.<\/p>\n “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.”<\/p>\n “It is?” I asked.<\/p>\n “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!”<\/p>\n Although income is not a direct factor in computing credit scores, there is<\/em> a strong correlation between household income and credit scores<\/strong>. The more a person earns, the higher her credit score is likely to be. Age is also a factor<\/a> (which isn’t surprising since you have to build a credit history to have a good score).<\/p>\n <\/a><\/p>\n Simply knowing your credit score doesn’t do you a lot of good. If you’re not happy with your score, you can<\/em> 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<\/a>. From my reading, these five factors are important in giving it a boost:<\/p>\n Here’s a final word of advice: Don’t obsess over your credit score.<\/strong> 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.<\/p>\n 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.<\/p>\n If you struggle with compulsive spending<\/a>, it’s far<\/em> better to cancel your credit card<\/strong> 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.<\/p>\n Next Steps<\/strong><\/em> 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<\/a>.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"
\nThe U.S. government has mandated that consumers be allowed to view their credit reports<\/a> from each of the three major reporting agencies once every year. This is easy to do via the free AnnualCreditReport.com<\/a> website. (Beware of scammy lookalikes. This one is the official government-sanctioned site.)<\/p>\n<\/span>Your Credit Score<\/span><\/h2>\n
\nAlthough the FICO score is the most widely used credit score — used in over 90% of U.S. lending decisions — it’s not the only<\/em> credit score. Other companies offer competing credit scores, and FICO (the company) offers a variety of specialized scores<\/a> to measure things like how likely you are to declare bankruptcy, close an account, and so on.<\/p>\n\n
<\/span>The Anatomy of a Credit Score<\/span><\/h2>\n
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\nEven 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.<\/p>\n<\/span>What is a Good Credit Score?<\/span><\/h2>\n
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<\/span>How to Improve Your Credit Score<\/span><\/h2>\n
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\nIf credit scores are important to you or interest you, I recommend Liz Weston’s Your Credit Score<\/em><\/a>. 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.<\/p>\n