Having a good credit score is something that will help throughout your adult life. Unfortunately, many people don’t understand how credit works, and this could be causing you more problems than you realize. Below, we'll look at the top 10 things you need to understand about credit scores to help you better manage your finances:
1. Credit Reports Are Different Than Credit Scores
There's a relationship between your credit scoring and your credit report, but they aren’t the same. While credit reports document financial history, credit scores are a number that provides a snapshot of your creditworthiness.
A credit report will keep a record of your applications for credit, the number of accounts you have, the debts you have, as well as any liens and bankruptcies. Basically, anything that you have done financially will be shown in the credit report.
Credit scores take the financial choices you make and the things that happen and turn that into a number. Things like paying your bills on time will boost your score. Missing payments and not paying at least your minimum monthly payments on your credit card will reduce your score.
Many things contribute to your credit score, and lenders might only look at this number when considering your credit application. Having bad credit makes it much harder to get a mortgage to buy a home. The effort to improve your credit score before making a home purchase, or even landing an apartment, will be well worth your time and energy.
2. What Makes Up Your Credit Score?
Five main factors contribute to your score. They are:
Your payment history: The most important factor that makes up your score is your payment history. If you have missed payments, it will be part of 35% of your score, and this really makes a difference.
Credit utilization: The amount of available credit you are making use of accounts for 30% of your score. It is recommended that you don’t have a balance of more than 30% of your credit limit. Though this is all of your credit combined, going way above this figure on one account isn’t going to matter if you have many other credit sources.
Account age: How old your credit accounts are is a less important factor, making up around 15% of your score. This makes it better to hold onto your old accounts even if you don’t plan to use them anymore.
Credit types: The mixture of credit types, like credit cards, car loans, and more, is better than only having one type of lending in your report. Different credit types can make up 10% of your credit scoring.
Credit inquiries: When you apply for credit, lenders will normally make a hard inquiry on your records. This pushes your score down temporarily, accounting for about 10% of your number.
3. Free Reports and Scores
The three major bureaus that carry data on you have to provide you with a copy of your credit report each year. Since there are three bureaus, you can do this three times a year, choosing a different bureau each time. By doing this, you can pick up on any problems in your report before they cause you issues.
It is also possible to get your credit score from a few different places. Your credit card provider might offer you access to your score, or you can go to Credit.com for your score from Experian. For some of the best ways to get your free credit report, click here.
4. Checking Your Score Does Not Reduce Your Score
Although hard requests on your credit report reduce your score, just checking your score isn’t the same. You also won’t get additional hard requests on your account when applying for the same kind of loan from different lenders.
5. Not All Scores are the Same
The three main credit bureaus—Experian, Transunion and Equifax—all use different score ranges. VantageScore uses a different range as well, and while FICO is the same as Transunion, they won’t necessarily give you the same score.
- VantageScore: 501 - 990
- FICO: 300 - 850
- Experian: 360 - 840
- Transunion: 300 - 850
- Equifax: 280 - 850
6. Low Credit Scores Can Be Expensive
If you don’t have the best credit score, you will be paying more interest and extra fees than someone who does. If you can improve your score, you could save yourself thousands of dollars on the credit you get. Given how much your credit score matters when it comes to getting the best mortgage terms, it makes sense to work on boosting your scores. There are a few companies that can help, including Credit Karma and Credit Sesame.
Both of these firms help you increase your credit scores by providing solid credit advice. You can see a comparison of them in the article Credit Karma vs. Credit Sesame. The best thing about these credit improvement services is they're free!
7. Credit Scores Are Individual
Even if you are married, with joint accounts and shared credit cards, your credit score isn’t jointly shared with your partner. If your partner does have bad credit, it shouldn’t negatively affect your score directly if you add them to your credit card.
Once they do share a card or account with you, however, there can be problems if they don’t make payments. If they run up a large balance, it can affect your score since it is also your account. If you're going to share an account, everyone needs to be clear on who is responsible and the effects of missing payments.
8. Avoiding Fraud
If you monitor your credit score and get credit reports, you will notice problems before they have the chance to impact your finances negatively. Checking this information will show you if you have become the victim of identity fraud. If your score falls unexpectedly, it could be because someone is using your information to open an account.
9. Credit Mistakes Don’t Last Forever
If you have made mistakes in your credit history, they aren’t going to follow you around forever. If there are some problems, they will fall off your report if you make sure you do more of the correct things in the future.
Once you have spent time on fixing your credit problems, your job is to make sure it stays that way. Maintaining a good credit score can be just as challenging as the work put in to improve it—you need to make an effort not to fall into old bad habits.
10. Lenders Look at More Than Just Credit Scores
Though your credit score is important to get the credit you want, lenders also consider other things. So even if you don’t have a great score, there could be a way around it. Appealing to the lender to explain why your score is low could sway them and help your credit application. Unfortunately, this is less likely to work with larger financial organizations. However, if you're looking for a loan from a credit union or a local bank, they might be more accommodating of your less than good credit score.
Final Thoughts
When you have a strong desire to become a homeowner, having a solid credit score is essential. It takes determination to scratch, claw and do everything you can to dig yourself out of a financial hole. In the end, your efforts will be rewarded, not only with the purchase of a home, but any other time you may need a loan. By now, you should have a much better understanding of the importance of your credit scoring.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 33 years. He has been one of the top RE/MAX REALTORS® in New England for the past decade. Gassett works for RE/MAX Executive Realty in Hopkinton, Massachusetts. In 2018, he was the No. 1 RE/MAX real estate agent in Massachusetts.
