Credit Scores and Everything You Need to Know About Them

Credit Scores and Everything You Need to Know About Them

Some people treat their credit the way I treat a scale, if they never look they never have to worry about it. Being uneducated about your credit is far too risky. Y’all need to be actively aware of what your credit score currently is and what impacts it!

Why should you care about credit?

Your credit score, and credit health in general is an indication to lenders on your fiscal responsibility and creditworthiness.

This will affect pretty much anyone you want to borrow money from. Think mortgages, loans (personal and auto), credit-cards, or any other type of lender. Good credit can afford you the ability to receive lower interest loans, or credit cards. Poor credit can cause adverse borrowing situations which in theory can cost you thousands of dollars.

The tricky part is that non-lenders may also review your credit health. For example, a future landlord may review your creditworthiness as an indication on whether you are a smart investment for a potential rentee. If you have poor credit, they may not consider renting to you even if you have a job. Future employers are also able to review your credit report, and may make inferences on your as a person based on your financial responsibility.

Credit Bureaus

There are three major credit bureaus that report on your credit. Experian, Equifax and Transunion. Each of these bureaus track of all your credit activity and summarize it in a “credit report”. These bureaus also each provide a “credit score.”

You are legally allowed to receive your detailed credit report once a year for free from each of these bureaus. Meaning, you should be checking your credit up to 3 times a year minimum. It’s free and you’re entitled to it!

A great strategy is to review a report every quarter. Effectively you’ll have constant (and free) yearly monitoring by utilizing all three of your reports. To request your credit reports head on over to Annual Credit Report.

Expect each of your credit reports to look different when comparing, as three different agencies create them. Another reason they may look different is because lenders are not legally required to report to all 3 bureaus, so they may only report to one of the three. This is another reason why it’s important to review all three credit reports.

Credit Score

What is a Credit Score?

A three digit numerical indication of the health of your credit. Compare it to a “grade” received in school. Your Credit Score essentially summarizes all the information found in your credit reports.

Each of the three credit bureaus has their own model to calculate your your credit score. Additionally, each of these models has its own range for scores, but they generally cap out around 850.

Recently a fourth model has become popular to summarize your credit, which caps out at 990.

The Four Models Are:

  • Experian 360-840
  • Equifax 280-850
  • Transunion 300-850
  • Vantage Score 501-990

What is a FICO Credit Score?

Your FICO Credit Score is essentially an average of the three credit bureau scores and it is the most commonly used. The FICO Credit Score ranges from 300-850.

What is a Good Credit Score?

Typically the higher you score, the better off you are.

For the FICO Credit Score the following ranges typically apply. Remember, these are ranges.

  • Poor < 579
  • Fair 580 – 669
  • Good 670-739
  • Very Good 740-799
  • Excellent 800 +

What Makes Up your FICO Credit Score?

Five different factors comprise your FICO score.

  • Payment History (35% of FICO Score) – This metric tracks whether you make your payments on time, or late. Late payments can drastically reduce your FICO score by 100 points!
  • Credit Utilization (30% of FICO Score) – Tracks the total money you owe lenders of your total credit limit (aka your utilization). For example, if your credit limit is $30,000 and over all forms of credit you owe $300 you have a credit utilization of 1%. However, if we were to increase the amount owed to $15,000 you would have a credit utilization of 50%. Higher Credit Utilization rates can negatively impact your Credit.
  • Length of Credit History (15% of FICO Score) – This averages the age of all your accounts, from oldest to newest. Lenders typically find comfort in a longer credit history. Excellent history generally starts at ten years. The rule of thumb is to never close your oldest credit card – even if it was that Victoria Secret Credit Card you had to get in High School. Unless you have another card that is fairly close in age, and you really don’t need that VS Card. Don’t have a credit card yet? Avoid getting a low benefit Credit Card as your first. Do your research and find the perfect first card!
  • Type of Credit (10% of FICO Score) – Diversified Credit is important. Generally lenders like to see a good mix of both revolving (credit-cards) and installment (student/car/home loan) credit. It shows that you are hopefully, responsible in handling multiple forms of debt.
  • Hard Inquiries (10% of FICO Score) – When you intentionally apply for credit or a loan, that is an example of a hard inquiry and “dings” your credit score. However, there is no way getting around applying for a credit card or loan if you want one. The dings are temporary and typically your credit score will increase again shortly so long as you maintain good credit behavior. However, too many hard inquiries in a short time period can negatively hurt your credit score. Also keep in mind, everytime you open new credit it lowers your length of credit history.

Where Can you Find your Credit Score?

It is often a common misconception that your credit score can be found on your credit report. However, the credit report is just a detailed analysis of the score. There is an option to “purchase” your credit score from the bureaus, however there are free alternatives.

Most credit-card companies such as Chase, Capital One and Discover (etc.), provide free Credit Score Monitoring. You simply need to enroll in the respective programs and receive your updated score each month. If you don’t have a credit card yet, but do have an account with a financial institution you may still be able to obtain your credit score.

Lastly, there are various websites such as Credit Karma that can provide you with your score for free. I always recommend to ensure you are using a website you trust fully before entering personal information.

Credit Report

What is a Credit Report

Think of a credit report as a transcript. It details every item in your credit history, over all types of credit that affects your credit score.

Checking your credit report will not impact your credit score, as it is not a hard inquiry.

Why is it important to review your credit report?

Detail Overview of Credit

It is important to review your Credit Report because it gives you a detailed analysis of how your score is computed.

It contains basic personal information such as your SSN, address etc., along with credit behavior.

Expect to see open and close dates of various forms of credit, outstanding balances, credit limit, utilization rates and history.

Negative dings, such as late payments, bankruptcies and accounts in collection are also reported on your credit report. However, while they do eventually fall off, it takes at least 7 years. Is forgetting to pay your credit card bill really worth 7 years of negative credit history?

While a credit score gives you a snapshot of how your credit is doing, your credit report tells you why your credit has dropped/increased. This is extremely useful in identifying issues if you’re trying to improve your credit.

Identity Theft and Fraud

It’s also important to review your credit report because you can easily spot if you’re a victim of identify theft, or a simple error.

If you see an account with thousands of dollars of debt that you know you didn’t open, you identity very well could be compromised. You would have no way of knowing this until your personal card declines, and at that point it may be too late to reverse the damage done.

Additionally, you may identify errors due to the credit bureaus. A simple typo on your credit limit can drastically affect your credit if it adversely affects your utilization metrics.

Always, always, always check your credit reports and be aware of what’s on there! Especially if your credit score suddenly drops out of nowhere.

How to Correct Theft and Errors

If you do unfortunately come cross identity theft and errors on your credit reports you will need to report it to the credit bureaus. You also need to report it to the company where you opened the credit.

General advice says you should notify both parties via writing, so that there is always a paper trail of your notification.

How to Build Credit When You Have None

Secured Credit Card

Consider a secured credit card if you’re looking for your first, or struggling with approval.

It’s geared towards those with either no credit such as students, or poor credit. It is a great tool in building/improving credit. With low credit limits, practicing good credit behavior on these credit cards can help build the credit foundation needed.

Authorized User

An additional method you can implement in building credit history is the use of Authorizes Users. Essentially an authorized user is someone you authorize to use your credit card.

For example, if I add James as an AU to my credit card, my “good” credit history will boost his. However, my credit can be adversely affected if James uses my credit card a lot and skews my utilization ratios, or misses payments.

How does this relate to a Travel Blog?

Well – if you want to travel the world, and want to do it on the cheap, credit card hacking is a GREAT way to do so. However, in order to get into the credit card hacking game – you need to have good credit. Also I think in general, you should have good credit. It will only help you!

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