Your credit score is very important to you, whether you pay attention to it or not. Understanding and monitoring it can help you prevent or minimize financial problems.
You need to be aware of the following five facts about credit scores:
- There is No Single "True" Credit Score – Each agency and lender that is looking at your credit looks at the same factors, but weighs them differently. In addition, the three primary credit agencies (Equifax, Experian and TransUnion) do not all receive the same information, nor do they necessarily seek all the same information. As a result, you are likely to have different scores from each agency.
The FICO credit score (by Fair Isaac Corporation) is the most widely quoted and used, but it is not the only scale. With the help of the three credit bureaus, VantageScore was introduced back in 2006 to compete with FICO. Before investigating a loan with a potential lender, find out which system they use, and check your score to make sure that you won't get any unpleasant surprises.
- Credit Scores Affect More Than Loans – A bad credit score can obviously hurt your ability to get a loan for any reason, and if you do get a loan, your interest rates will be higher.
However, you may not realize that bad credit scores affect many other areas where you are being evaluated for risk, such as insurance rates. Landlords and utility companies may require a larger security deposit. Your ability to get a job or even professional licensing within your field could also be affected.
- Credit Utilization Is Important – Credit utilization, the amount of available credit you have compared to the amount you use, is an important variable in your credit score, as is the age of an active account. Having longstanding accounts with low utilization (10-30% max) shows stability. However, this can produce unintended consequences that do not always follow common sense.
Cancelling your old credit cards seems responsible, but it has a double whammy with effect to credit score. Cancellation reduces your overall available credit and also your average age of active accounts. If you have old cards, use them at least occasionally, and keep the charges low relative to your credit limit.
Just paying off the balance at the end of the month is not sufficient. Balances are determined as averages. If you max out your card but pay it off every month regularly with no carryover balance, your credit score will still take a large hit.
- Condense Your Credit Shopping – Each inquiry for credit, such as shopping for mortgage rates with lenders, results in a check on your credit. Too many checks on your credit over a prolonged time give the impression that you are trying to extend your credit, and thus you are a higher risk.
If you are mortgage or credit shopping, do it within a relatively short time. Similar credit checks that are closely grouped together are generally considered one inquiry.
- Mistakes Are Your Responsibility – The credit agencies compile and analyze information; they do not verify accuracy. Identity theft, multiple entries (such as collection agencies), clerical errors, and mangled information can be harming your score without your knowledge. Applying for credit under different versions of your name (Bob vs. Bobby vs. Robert, maiden vs. married) can easily cause muddled information. It is up to you to check and correct errors.
Did you "score" well on credit score knowledge? If not, educate yourself on credit scores, and check your credit score and information to save money and potential problems.