So hot stuff, what’s your number? No – I’m not talking about your phone number or shoe size, I’m talking about your credit score. Do you know what it is and why it’s so important?
Your credit score is the number that represents your history with money. It’s how lenders decide whether or not you qualify for a loan, what your interest rate will be (based on how much of a risk you represent), and what your credit limit is.
So how do they come up with this magic number? And who exactly are “they” anyway?
Well, it’s a score of up to 850 points based on a statistical analysis of your credit files – the higher the score, the better. Think of it like a report card on how well you’ve been doing at school, except it’s about how well you’ve been doing managing your credit. There are three national credit reporting companies: Equifax, TransUnion, and Experian. These companies have statistical models based on the historic credit profiles of a large set of consumers (often more than 1 million), using common variables and weighted evaluation of those variables in order to predict future behavior.
Your credit score does not take into account any of the following: age, race, gender, religion, color, national origin, marital status, or where you live. It also doesn’t look at your employment history, salary, occupation, title, or employer– although lenders may consider this second set of information as part of their decision on whether or not to approve you for a loan.
Here’s what your credit score does take into consideration:
- Do you pay your bills on time?
This includes looking at whether you’ve had any accounts referred to collection agencies and whether or not you have filed bankruptcy. But just being on time with your regular bills really is important – and it’s an easy way to clean up your credit. - What is your outstanding debt?
Often, they’ll look at how close you are to your credit limit. Make sure you aren’t maxed out, and don’t consistently borrow at the top of your limit (even if you pay it off) because that could be seen as a warning sign that you aren’t managing your money well. - How long is your credit history?
Having a short credit history can hurt you, because it’s harder to determine how risky you will be. Got an old credit card you don’t use much? Give it some gentle exercise on a regular basis to keep that credit history alive (and pay it off in full, on time). - Have you applied for new credit recently?
If you have applied for a lot of new accounts recently that could negatively affect your score. And we’re not just talking credit cards – we’re talking any type of loan, store-specific charge card, etc. Don’t open it if you don’t truly need it! - How many and what types of finance accounts do you have?
See the last note above. There’s no magic number here, but be cautious with accounts. A good mix of installment loans (like a car loan) and credit cards can improve your score by demonstrating responsibility, but don’t go overboard.
You can find out what your credit score is for free once every 12 months. For free! (you know I love a good deal, and it doesn’t get any better than free) The only online source authorized by the Federal Reserve Board for a free credit report is www.annualcreditreport.com. You should check your credit score every year to see how you are doing and identify any incorrect information. But don’t be a stalker: checking your score too often can actually damage your credit because it will look like multiple credit applications.
Remember how there are three companies that report scores? Don’t be surprised if your score is not exactly the same with all three. It will be in the same ballpark. Having three official credit-scoring companies gives lenders better insight related to the type of loan you want since each scoring company is just a little different, and it also encourages market competition to continually develop better scoring models (which is a plus for everybody).
Having a good credit score can literally save you thousands of dollars by enabling you to get the loan you want at the best possible rate. Most credit scores fall somewhere between 600 and 750. Anything over 700 is considered good, and will usually get you faster approval and better rates. If you are over 760, you’re golden!
Not quite where you want to be? Focus on paying bills on time and minimizing what you owe. Don’t let anybody talk you into “credit repair” – nobody can magically erase things from your score or sneak information in to bump it up. Here’s a helpful, trustworthy site with information about improving your credit: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm.
Find out what you are worth to lenders, and get your worth on by polishing up that credit score through good budgeting, on-time payments, and smart decisions about your spending.