Adulting Archives 003: WTH are Credit Scores and Reports and Why do they Matter
Credit scores and credit reports… Oh yeah those things that no one ever taught you about growing up? They run your life now. So you should probably know a thing or two about them.
WTH Are They?
Credit scores are a number based on your credit report that determines your creditworthiness. Basically what that means is your credit score is a number that tells others how likely you are to repay loans you take out or keep up on your bills. And how do they figure that number out? Well, it’s based on your credit report that keeps track of if you keep up on your car payments, credit cards, and other bills every single month. Wait for it… for your WHOLE life. Holy ish, yes they keep track of that! And those payments are what decide where you fall on the scale of 300-850 points — higher scores being better.
Why are they such a big deal?
So other than feeling kind of invasive, why do they matter so much and who can see them? Well, you’ll have to agree to having your credit score checked because they need to use your social security number but here are several instances where they’re used:
Getting a credit card
Renting an apartment
Buying or leasing a car
Getting car insurance
Getting a new cell phone
Getting a loan
Buying a house
Even getting a job in some cases
And here’s the thing, where you fall on that scale will determine the interest rate you receive (higher score, lower interest), rates you may pay for services and it can even be the deciding factor on if you are able to move into that new apartment you want or even get hired. Yeah, I think you’re starting to feel the magnitude of how important they are now, huh.
Who Decides these suckers?
So who gets to slap that number on your back? Well, there are three main credit bureaus who keep track of your credit reports Experian, TransUnion, and Equifax. Then there are two different credit score calculations, the FICO and VantageScore models. Yeah, there are a few players in the game. Here’s the thing too… your score may be a little different on each scale because different factors are weighted differently. You also won’t get to pick which model a lender or rental company goes off either (although in my experience FICO has been used more often).
Okay, okay so what affects my score?
So yeah, there are a few players in the game and it feels a little wishy-washy explaining it but here’s what you really need to know. The things that impact your score! Like I said, they are weighted a little differently for the FICO and VantageScore but both take these things into account (starting from most important to least):
Payment History (this is the biggest chunk!): This tracks when your accounts are paid on time, late payments, and if things go to collections.
Credit Utilization Ratio: This one took me a min to wrap my head around. Basically, lenders don’t want to see you maxing out cards or loans. So say your credit card has a 10,000 limit. Your credit score will be better if your average balance is 1,000 out of that 10,000 rather than 8,000/10,000. They want to see that people have given you credit but you don’t use all of it. You can see this one affect your score on a monthly basis too.
Length of Credit History: I’ll be honest, this one bugged me when I was younger. Luckily, I got on my credit score knowledge early on so I’ve always had a good score but one of the factors is how long your accounts have been open. So when I was 20, obviously my credit history was a whole lot shorter than now at 31. Meaning my score could only go so high there. It’s not just your age though. It goes off the age of the accounts. This is why having accounts open longer (even if you have a zero balance) can actually be more beneficial than closing the accounts. If you close a bunch of accounts, that also affects your overall average which can affect your score. In sum, showing that you have long-term accounts you pay on time each month has more benefits.
Credit Mix: This has to do with what type of accounts you’ve had — car loans, home loans, student loans, credit cards, etc. Lenders like to see you can be responsible with a variety and that you’ve been given credit in different areas.
New Accounts: Get this, pulling your credit score or getting new credit can also affect your account because it can be looked at like you’re in financial trouble. So your credit score also takes into consideration how many credit inquires you’ve had recently — considered “hard pulls”.
How do I make sure I’m on my Ish
Okay, okay. So how do you stay on top of your ish? Being responsible with your moolah and paying bills on time is number one, but you already know you should be doing that. If you run into probs don’t just ignore them either… call them and see what you can work out because non-payments will plunge your score fast! This is definitely one of those things that it’s easy to plunge your score fast but tougher to improve it. Here are two things you should be doing to keep up on where you’re at though:
Download your Credit Reports Every Year: Everyone is allowed to download their credit reports from all 3 bureaus once a year. DO THIS! Here’s the link that guides you through getting them. It’s totally free and it’s important to review them each year to make sure they are accurate and only include accounts you have been affiliated with. With cyber-crimes and identity theft on the rise, this is one of the top things you can do to make sure your ish is in order. If you do find an error you can also file disputes. I try to download these each year around my birthday just because it’s easy to remember.
Monitor your Score: Next up, monitor your score. There are so many services that allow you to do this now that only do “soft pulls” on your credit. Because remember, actually having your score pulled by a lot of people can decrease it… complicated right?! Doing this won’t though. I’ve used Credit Karma for years and really like it. I check it once a month and I’ve found it’s pretty accurate (I always compare my actual score to the hard checks I’ve had done). A lot of banks and my budgeting app Mint.com does as well — so you have options.
The key here is to stay on top of things, make sure things are accurate and know where you stand so there aren’t any surprises when you’re trying to make some adulting moves!
