What’s a credit score and how much does it really matter?
A credit score is a number given to an individual that represents their ability (based on previous payment history) to repay a loan. And yes, it REALLY matters - a lot.
Do you have a credit score?
- As stated above, a credit score is based on history. So, if you have never had a credit account, there is no history to create the score from. This does not mean you have a score of 0, it simply means you just don't have a score at all.
- If you have a credit card, but it is a joint account with your parents, that won't provide a history for yourself.
The two major US credit scoring companies are FICO and VantageScore. Quick breakdown of rankings:
Credit Score Rankings
Excellent: 800-850 Good: 700-749 Poor: 600-649
Very Good: 750-799 Fair: 650-699 Very Poor: 300-599
What affects your credit score:
# 1: Payment history
- AARP states that just one late payment on a credit card can drop your credit score 100 points. Yikes.This is true even if you have a long credit history and have never missed a previous payment.
# 2: Credit Utilization Rate: percent of total credit limit that you have as a balance. Most sources recommend staying below 30% utilization of your credit limit. Meaning, you need to make sure you are paying off your credit card every month don't have an outstanding balance of more than 30% of your available credit.
So - if your credit limit is $5,000, try to stay below $1,300 each month
Other factors: how long you have had credit and what kinds of credit have you have had?
What your credit score affects:
- Ability to get a credit card
- Ability and rate for a car loan or mortgage
- If you can rent the apartment you want to rent
- The article below describes how credit scores can be used to determine risk for car insurance,
https://wallethub.com/edu/car-insurance-by-credit-score-report/4343/
How to keep/build a good credit score:
- Pay your bills on time- all the time!
- Keep your credit utilization balance below 30%
- Don't open too many credit cards. Store cards may cause your FICO credit score to drop. Resist the temptation of store clerks offering to help you “save extra money today”.
- Taking a small car loan can help build up good credit as well
- Save separately for emergencies to avoid having to put the money on credit cards
- Check your credit at least once a year at all 3 bureaus to make sure there are no errors or fraud
- Credit builder loan to help build credit as well as build your savings (use as a last option because it ties up your money while you pay off the loan)
UltraFICO score
- Currently in the pilot phase for consumers, estimated full launch by mid-year
- FICO states that the UltraFICO score gives you the ability to enhance your credit score by choosing to securely link your checking, savings, and money market accounts
- Has potential to be a good option for those with no credit score or a low credit score
Where to find your credit score?
This is the only actual free site to check your credit score authorized by Federal Law. Be sure you’re on the right site – many have very similar sounding names:
http://www.annualcreditreport.com
- Free once a year from each of the three major credit bureaus - it's a good idea to check your credit score 2-3 times per year by checking once a year each
You work hard for your money – don’t lose the benefits of keeping that good credit score!