What’s a credit score―and why should I care?
What’s so important about your credit score?
A high credit score turns strangers into friends ready to issue you a loan at a lower rate, rent you that cool apartment, and offer you a satisfying new job.
A low score, however, could taint your reputation with doubts about your financial stability and personal indulgences, costing you more to borrow money or to get insurance, and closing doors to housing and employment opportunities.
“Try renting an apartment with no credit,” says Keith Appleton, education outreach officer at STCU, a not-for-profit credit union based in Spokane. “And getting a home loan is next to impossible unless you can come up with a large down payment.”
No amount of charm, talent, or feats of strength can whitewash credit scores. This number, which typically ranges from 350 to 850, is the “truth gauge” of your financial and personal background to those keeping score.
Credit scores are an algorithm first developed in the 1960s by the Fair Isaac CorpThis link opens a third-party website that is not affiliated with STCU.., a California-based analytics software company that produces the FICO® Score, the standard measure of consumer credit risk. FICO reports that businesses ordered more than 10 billion FICO scores last year, which was used in 90 percent of all consumer lending decisions in the United States.
A good credit score would be 720 or higher; a poor score would be under 600. FICO scores predict your risk of defaulting on a loan, not your ability to pay back a loan. The number is derived from the information on your credit report, which details your lifetime of borrowing money, using utilities, paying rent, buying cars, switching jobs, and family life.
To make reliable predictions, three big U.S. credit bureaus -– Experian, Equifax, and TransUnion -– collect data on you from the moment you order your first cell phone. Apply for a credit card, and it’s reported to the credit bureaus. Get a driver’s license or a job, the credit bureaus know it. Fail to make a payment on your credit card and they’ll know that too. Upon request, the bureaus will provide your credit score to any legitimate business that may or may not have your approval.
Any time you make an application for something, your lender, insurance agent, employer, or apartment manager may be accessing your credit history and credit score. Banks use your credit score to see if you qualify for a loan; employers use it to see if you are a reliable character; landlords can use it to screen for criminals and verify employment. In some cases, they don’t need your approval.
“Some counselors even suggest that two people review each other’s credit reports before engaging in a permanent relationship,” Appleton says.
What affects your credit score?
The longer you pay your bills each month, repay your credit cards and loans on time, hold a job, and so on, the greater the chance of building good credit and a high credit score.
Here are five things FICO and experts at STCU say can affect your credit score:
- Payment history. Your payment history to companies you owe money is reported monthly to the credit bureaus, but information on you also can be mined from public records such as judgments and bankruptcies. Your payment history can include everything from library fines, cell phone payments, child support, and medical debts.
- Amounts owed. The credit bureaus compare how much of your total credit limit you borrow on credit cards and other revolving credit. A so-called utilization rate that exceeds 30 percent will drive your credit score down.
- Credit history. Your practice of consistently paying back debts over time demonstrates an ability to repay.
- New credit. Checking your own credit history will not affect your credit score, but applying for a credit card or loan may lower it, particularly if you make several applications in a short period of time. A flurry of new credit applications can signal your inability to get approved for a loan.
- Types of credit. Maintaining a variety of accounts — mortgage, car loan, credit cards, and so on — can affect your credit score positively.
If you are late making a payment one time and you quickly get that bill paid, it should not affect your credit score. But bankruptcies, delinquencies, collections, charge-offs, judgments, and unpaid tax liens can haunt your credit report for years and often account for huge reductions in your credit score. For instance, a payment that’s 30 days late may reduce your score by 40 to 110 points, but a bankruptcy may drop the score by 130 to 240 points.
Repair your credit score
Because a credit score is a prediction of your risk of default — not your ability to pay ‑‑ the surest way to repair your credit is to never miss a payment. Experts also offer the following tips for helping to speed credit repair:
- Gradually apply for new credit. Remember that the amount of debt you have relative to the amount of your credit limit will have a significant impact on your credit score. Try to borrow less than 10% of your limit on revolving accounts such as credit cards or lines of credit.
- Get a loan co-signer if necessary.
- Pay your bills before the statement date. The balance of your last statement date is typically the balance reported to the credit bureaus, so if you pay your bill before the statement date, you could lower your utilization rate (see “Amounts owed” above) and increase your credit score.
- Apply for secured or collateralized loans (car loans, for example). Applying for new credit on an infrequent basis will not affect your score. Only when you suddenly acquire many new accounts among a variety of lenders does it signal that you’re having trouble qualifying for a loan.
- Clean up your credit report. Regularly check your credit report and dispute any items in error with the credit bureaus and individual creditor.
- Offer to pay for “delete.” If you discover a late payment fee on your credit report, offer to repay the company in exchange for agreeing to delete the item from its report to the credit bureaus. If you’ve been a longstanding and solid customer, ask the creditor to delete any credit report errors you find as a gesture of good will for your loyalty.
It’s a myth that closing an account will hurt your score, unless that account was revolving credit where you borrowed heavily against your credit limit. Keep older accounts open to have a good impact on your score beyond the 10-year reporting period for closed accounts.
If you’re planning a divorce, pay off and eliminate any jointly-held credit accounts. Your divorce decree may state that your spouse is responsible for certain debts, but the lender will not recognize that agreement. Rather, the lender expects that you will pay if the “ex” does not per the original terms of your loan.
Order your free credit report
Building good credit –- and tracking it to ensure your credit history is accurate — is your responsibility. To order a free credit report online, visit the government-authorized www.annualcreditreport.comThis link opens a third-party website that is not affiliated with STCU. website or call (877) 322-8228.
Free credit scores
Free credit reports do not include your three-digit credit score. But some financial institutions, such as STCU, offer members or customers access to free credit scores.
Several websites offer a glimpse at your credit score, though these scores may differ from the FICO score used by your bank, credit union, or other lenders and creditors. For a fee, you can also purchase your own credit score from FICOThis link opens a third-party website that is not affiliated with STCU.. FICO also offers monthly monitoring service, which provides an early warning to possible identity theft.
Take care to repay your loans on time, keep your bills current, and take other steps to shore up your credit history. In time, you’ll enjoy the benefits of a higher credit score.
“If your credit is in order, you’ll have the freedom to choose your terms on a loan, not beg for approval,” Appleton says.