Your credit score affects almost every aspect of your financial life — not only the rate you will pay on a mortgage or car loan but also the cost of your auto insurance and even your prospects for getting a job.
Your credit status reveals quite a bit about your sense of personal responsibility. So it’s important to understand how credit scoring works.
First, there is no one score that is used by all credit grantors. There are actually several dozen scores, but the two that are most widely used and best known are the FICO score (named after Fair Isaac and Co., which created it years ago) and the VantageScore (created more recently by the three major credit bureaus). Each lender, or user of credit data, may choose which score has the best history of representing risk for their business purpose.
Second, your credit score is not your credit report. Your credit report is an accumulation of information sent to one or more of the three major credit bureaus by the companies to which you make payments. This history of on-time payments and credit balances in your credit report is used in a proprietary algorithm to create a credit score.
A new survey by CreditCardInsider.com reveals some of the many misconceptions about credit scores:
—Sixty-one percent of Americans think income plays a role in your credit score. (It doesn’t. You can have a high score on a relatively low income, as long as your payment history is stellar.)
—Forty-two percent think that using a debit card (or selecting “credit” when using your debit card) helps build your credit score. (It doesn’t. A debit card is always treated as a cash payment, which doesn’t build a credit history.)
—Seventy-nine percent of those surveyed think that your credit score is listed on your credit report. (It isn’t. You’ll have to get yours separately.)
Getting Your Score
It’s relatively easy these days to get your credit score at no cost. And since most scores are similar, you only need one of the major scores to get an idea of where you stand. CreditKarma.com offers instant secure online access to scores from Equifax and TransUnion. And they will send you emails whenever your score changes. At Discover.com you can see your FICO credit score free even if you are not a customer. And many banks now offer your credit score for free at your online account. There is absolutely no need to pay to get a relevant and timely credit score.
Most credit scores fall in a range of from 300 to 850. A score above 700 or higher is generally considered good, but a score over 800 is excellent. A high score will save you money on interest or finance charges.
For example, someone with FICO scores in the 620 range would pay $65,000 more on a $200,000, 30-year mortgage than someone with a FICO score higher than 750, according to Informa Research Services.
Changing Your Score
Factors including payment history, length of credit history, number of cards outstanding and percentage of use of your open lines of credit determine your credit score. So here are a few tips to increase your score.
—Nothing improves your score faster than paying down outstanding balances. Payment history makes up about one-third of your credit score, and percent of open credit used also has a big impact.
—Keep your balances to below 30 percent of your total lines of credit.
—Don’t apply for new cards or show a history of balance transfers if you’re about to apply for a big loan. (Routine inquiries from existing lenders do not impact your credit score,; only “hard” inquiries for new credit do.)
—Be sure to keep your longest-held credit card active, paying down the balance monthly. This demonstrates longevity of credit history.
Always remember that even if you aren’t watching your score, someone in the financial services industry is. And that’s the Savage Truth.