The Importance of One Simple Number
This post may contain affiliate links. Please read my disclosure page for more info.
What’s that simple number, and why is it so important? We’re talking about your credit score (surprise, it’s not your net worth!), how it can save you thousands of dollars, why it matters, what a good credit score is, and how you can use your credit history to safeguard yourself against identity fraud.
It’s a mistake to think your credit score doesn’t matter. A majority of people will need it to obtain financing, and it can also be a factor in job searches, apartment hunts and more. Most people will be affected by their credit score one way or another at some point in their lives, and it’s a basic tenet of financial literacy.
What’s the Purpose of a Credit Score?
A lot of people don’t realize what their credit score can do for them. It affects so many more things than whether or not you’re approved for a loan. Let’s go back to basics for a second.
Simply put, your credit score is an indication of how well you manage your money and use your credit. If you have a lower credit score, lenders might assume you’re not responsible with credit and deem you too risky to lend to. If you have a higher score, lenders might assume you’re less of a risk because you have a good track record with how you handle credit.
Of course, it’s not that black and white, but for the sake of simplicity, we’ll go with that. Most lenders use your FICO score to determine whether or not to lend to you, but landlords, employers, banks and others use it to assess how good you are with money. That’s right – your credit score can get between you and an apartment, a job or a new bank account.
You have more than just one credit score, too; each credit bureau has a different “grading” system. Along with that, there are different FICO scores for different loan purposes. For example, the score auto lenders look at isn’t the same score a mortgage broker looks at. Don’t worry, it’s not as overwhelming as it seems!
What’s a “Good” Credit Score and How Does it Help Me?
Now that you know what a credit score is useful for, what is a good score? Each lender has different criteria, but here’s a general rule of thumb from credit.com:
- Excellent credit: 750+
- Good credit: 700-749
- Fair credit: 650-699
- Poor credit: 600-649
- Bad credit: Below 600
Ideally, you want to stay above 700 to receive the best rates and have the best chance of approval. In case you weren’t aware, your credit score also influences the interest rate you receive on loans. Being eligible for a lower interest rate could save you thousands of dollars in interest over the life of your loan. It really pays to keep your credit score polished!
Does your score need a little work? Perhaps you’ve had a bumpy credit history. That’s okay! Your credit score is just one piece of the puzzle lenders use; it’s typically not the end-all-be-all. It’s also based off of one specific point in time. Your score today could be different from your score 30 days ago. Plus, there are plenty of organizations out there to help you repair your credit score and get it headed in the right direction. Just make sure to do your homework and select a reputable one. CreditRepair.com and others offer tools and advice that can help you build your credit score up.
- Payment history (35%): Do you always pay your bills on time? (Make timely payments!)
- Amounts owed (30%): What’s your debt-to-income ratio? Are you maxing out your lines? (Lower balances are better.)
- Length of credit history (15%): How long have you been borrowing money? (Longer is generally better.)
- New Credit (10%): Have you applied for any new lines of credit recently? (More inquiries can represent greater risk.)
- Credit Mix (10%): Are the types of credit you have diverse? (As always, diversity is a good thing.)
The importance will vary from person to person, and it’s unlikely any of these will “make or break” a lender’s decision, but it’s worth honing in on an area you’re having difficulty with to improve your score.
Also, in some cases, you may not have a credit score because your history isn’t established enough for one to be calculated. A secured credit card may be a good solution to fix that.
How to Find Your Credit Score
All right, enough about credit scores, you’re probably itching to find out what yours is if you haven’t checked it!
You can use free tools to find your score, but be aware of a few things:
- These companies earn revenue through advertisements. They’ll make recommendations for certain products as a result. Do your own research as to whether or not these products are a good fit for you. There’s no reason to apply for a new credit card if you weren’t planning on it!
- These companies don’t use the standard FICO score most lenders look at, which means it’s a rough estimate of your score. Some use what’s called a VantageScore, and others use scores from one of the three bureaus. In most cases, the discrepancy isn’t enormous, but a select few have found their score varies by 30-50 points. Use this as a starting point.
Okay, here’s a list of places to check for a free score (you don’t need a credit card to sign up, and it won’t affect your credit score):
As a bonus, if you have a credit card with a major lender, it may provide you with your score as a perk. For example, my Barclay card updates my FICO score monthly, and I can view it alongside my monthly statement online. Convenient!
Don’t Forget to Check Your Credit History
Knowing your credit score is great, but monitoring your credit history is also a must. Just like online financial tools like Personal Capital and others help you monitor your net worth, your credit history is something worth keeping close tabs on and checking often. While your score simply tells you how well you’re doing, your credit history shows you why.
Some people may get the two confused, but they’re not the same thing. Your credit history shows all of your accounts, their standing (good, past due, default, etc.), balances and more. If you’ve lost track of how many open accounts you have, or want to check to see if a balance has been satisfied, your credit history will tell you.
You can use the information on your credit history to work toward improving your credit score, too. If you see that an account is past due, then that’s negatively impacting your score!
The biggest reason to check your credit history is to ensure there are no false reports on it. Creditors aren’t perfect. Many report erroneous information to the bureaus, and it’s up to you to correct it. If you want to dispute information on your credit history, follow the steps provided by the FTC here.
Reviewing your history is also great way to safeguard yourself against identity fraud. There could be accounts open in your name that you’re unfamiliar with – that’s not a good sign!
How can you obtain a copy of your credit history? You can order a report from each of the three major bureaus once per year from annualcreditreport.com for free. Many people order one report per quarter to check up on things throughout the year. Don’t be fooled into thinking you have to pay! Everyone is entitled to this benefit.
Updating yourself on your score and history is an important piece of the financial puzzle. Don’t leave it unsolved!
Have you checked your credit score or history recently? Did you find anything surprising? Were you aware of the factors that influence your credit score?